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How to Set Up an IRS Tax Payment Plan – 8 Steps to Consider

By Claire Moore

pay to irsIt’s always nice to receive a tax refund – it can feel almost like finding free money. Unfortunately, sometimes you end up owing Uncle Sam money, and even if you can’t afford to pay what you owe, you still have to file your tax return by the filing deadline. Sooner or later, you must work out an agreement with the IRS to pay the remainder. You might be tempted to just ignore the whole issue in the hopes that it will just go away, but that would be a major – and costly – mistake.

If you find yourself in this situation, do not delay. Make it your top priority to contact the IRS to find a solution to your problem. Though you might not believe it, the IRS is willing to work with you to help you pay your tax bill.

What Happens If You Don’t Pay

If you don’t take steps to set up a payment plan, the IRS can use its massive powers to extract the money from you any way that it can. Typical collection methods include:

  • Putting a lien on your home
  • Freezing your bank accounts
  • Seizing tax refunds you would otherwise be eligible for
  • Garnishing your wages

If the IRS carries out any of these collection methods, your credit score will take a big hit. A drastic drop in your credit score can cause your insurance rates to increase, as well as your loan and credit card interest rates. The best defense against having your finances damaged is to take advantage of IRS programs for paying your taxes.

Tax Payment Plan Options

By law, the IRS has to collect taxes due within 10 years from the date the tax return is filed. If you negotiate a payment plan with the IRS, then the payment amounts are structured to make sure that your entire tax bill is paid off by the end of the 10-year collection period.

Here are steps that you can take to make sure your tax bill is paid:

1. Determine Your Total Due
It is important to determine exactly how much you owe, as there are numerous collection procedures and payment options which depend upon the amount. For example, the IRS recently changed many of its procedures for filing liens, raising the threshold from $5,000 to $10,000 in taxes due before it will file a lien.

If you owe $10,000 or less and you are up-to-date on all of your income tax filings and payments from previous years, then the IRS will likely accept your proposed payment plan – unless it concludes that you actually can afford to pay the tax bill in full now. The fees you pay for setting up an installment agreement range from $43 to $105 depending on the amount you owe and type of agreement you enter into (direct debit, payroll deduction, or installment payment).

2. Consider an Offer-In-Compromise
An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the tax debt for less than the total owed. Under new rules, the IRS raised the maximum income level from $50,000 to $100,000 making it possible for more taxpayers to qualify. The maximum tax owed was also raised from $25,000 to $50,000. The offer-in-compromise requires the filing of Form 433-A, Form 656, a $150 filing fee, and an initial tax payment.

An offer-in-compromise is a last-ditch effort to reach an agreement with the IRS, as the agency expects you to exhaust all other possibilities before applying. The IRS determines if you qualify for the offer-in-compromise by examining several factors, including your:

  • Ability to pay
  • Income
  • Expenses
  • Asset equity

The IRS generally approves an offer-in-compromise if it determines that the amount that you have offered to pay to settle your tax debt is the most that they could expect to collect from you within a reasonable period of time.

3. Pay by Credit Card
When you pay the IRS over time, you are charged interest at 3% plus penalties, which continue to accrue until the balance is totally paid off. You might prefer to owe your credit card company instead of the IRS, if for no other reason than to stop the penalties.

If you choose to pay your tax by credit card, your American Express, Discover, MasterCard, or Visa payment must be processed by one of the three approved providers: WorldPay US, Inc., Official Payments Corp., and Link2Gov Corp. These agencies charge a “convenience fee” of about 2% of your bill. Then you make payments to your credit card company, which will charge you interest as it does on any other purchase.

irs cash

4. Get a Fresh Start
If your tax problems stem from not filing your return at all, then you can expect to be charged a failure-to-file penalty which must be paid in addition to your back taxes. Currently, the failure-to-file penalty is 0.5% per month up to a maximum of 25% of your tax bill. The IRS has a program called Fresh Start, by which you can apply to have the failure-to-file penalty waived for up to six months. To qualify, you have to owe less than $50,000. You can apply by filing Form 1127-A.

5. Request an Installment Agreement Online
If you owe $50,000 or less in combined tax, penalties, and interest and are up-to-date on filing your tax returns, you can go to the IRS website and use the online payment agreement (OPA) application process. If you owe less than $25,000, under this plan you can decide how much your monthly payment will be. However, you must pay off your balance within five years.

If your balance owed is more than $25,000, you must complete Form 433-F, the Collection Information Statement Form, to apply for participation in an installment plan. The IRS uses the information on the form to place a lien on your assets and then determine the amount of your monthly paymens. A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. If you don’t pay your taxes, then the IRS’s next move would be to issue a levy and take possession of your property with the intent to sell it.

6. Request an Installment Agreement for a Large Balance Due
If you owe more than $50,000 and you want to apply for an installment agreement, you need to complete and mail Form 9465-FS and Form 433-F, the Collection Information Statement. This application cannot be done online. The IRS reviews your financial information and makes a decision as to whether you qualify for an installment plan. If the IRS approves your request, the agency asks for a fee ranging from $43 to $105 depending on your income and the type of payment plan for which you qualify.

7. Consider Hiring a Professional
You should be able to handle the paperwork and negotiations by yourself, but if the very idea makes you nervous, then consider hiring a CPA, an enrolled agent, or a tax attorney to negotiate on your behalf.

8. Stay Up-to-Date on Current and Future Taxes
While you’re paying off what you owe for previous years, be sure to keep up-to-date on the current year’s tax payments. If you don’t have enough tax withheld from your salary or wages, or if you are self-employed, you can make estimated tax payments directly to the IRS using Form 1040-ES.

Final Word

The IRS has a reputation for being heavy-handed in dealing with taxpayers – a reputation that is deserved. However, policy changes in the past two years indicate that the agency is taking into account the devastating effects of the recession, and is considering that many taxpayers simply owe more than they can afford to pay. If you find yourself falling behind in your tax payments, it’s time to give the IRS payment plans another look.

What strategies do you use to make sure that you don’t owe more than you can afford to pay in taxes?

(photo credit: Bigstock)

Claire Moore
In addition to her writing, Claire teaches business and computer skills for several universities in Northern California. In 2009 she published her first book, "Jumpstart Your Bookkeeping Business" which provides a step-by-step plan for starting a bookkeeping business based on her experiences as a professional bookkeeper and tax preparer.

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  • http://www.joetaxpayer.com JoeTaxpayer

    Perfect timing, just finished a return when she asked “now how can I pay this over time?” Ouch.

  • http://madsaver.com Mac

    Good explanation on how taxpayers can pay in installments, but really, if someone does owe a lot of money, they really should have figured that out before mid-April. At least, I hope they would put *some* effort to determine their tax status by then. These days tax software companies make it so easy to complete your taxes immediately after receiving all of your tax-related info in early February. At least there are options for those stragglers who wait until the last minute, but I hope the add’l fee will dissuade them this time next year.

    • IAMNONE

      try running multiple businesses with the quality of help that is available on todays market. Oh wait you dont have a clue! Getting your taxed done on time by a so called professional. you must work for the irs, MORON

  • http://www.yourfinances101.com/blog David/Yourfinances101

    This is great advice. I would only add to it to not run away from your debts, and to be honest with the governement about it.

    You are much more likely to be able to work something out with them with that in mind.

  • gina

    It is scary to owe the IRS money. This is one creditor you can’t run away from! It is so much better to work out a payment plan than to stick your head in the sand. If this happens to you better take a closer look at what went wrong this year, and correct it so that you don’t owe so much the next year.

    • Winston

      I wonder if you file bankruptcy, do you still have to pay the taxes that you owe to the IRS?

      I find it a bit ridiculous that our taxes are so complex that an average person needs to enlist professionals to file tax returns.

      • Telli

        Yes, if you file bankruptcy you still have to pay taxes unless the taxes owed are 3 years old. I know because I filed chapter 7 recently; and
        I owe and I still have to pay because the taxes owed are from 2009 and if they were from returns filed 3 years ago I could get them discharged. Note the return must have been filed and money owed for 3 years in order to be eligible in a discharge. It can’t be a return that you didn’t file for 3 years and just filed and now owe.

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  • philip M

    my question is we want to set up a payment plan to pay back some taxs from last year and we already have done so….Is it possible to stay on that plan with out having our refund touched as long as we cont. to pay each month to them(IRS) the only reason for this ? is that we our living with inlaws with no car and I was on out of work or still am…and we need the refund from child tax credit,eearned income and whatever my wife made this year at 10 per hour not alot will the irs just take it even if we have an agreement with them to pay each month? is ther a way t okeep the payments active and get our refund is the question thank you so much sorry for any confusion!!!!Phil M RI 02889

    • not given

      They will probably take your refund. If you didn’t want them to you should have adjusted withholding so there would be a much smaller refund and put the extra money in a savings account. There is a form you can fill out to get the earned income credit in your paycheck.

    • Cmoorewriter

      With the IRS you never know…. but I would think that if you stick to your payment plan that they would not be as likely to take your refund. To be sure, you should ask the IRS directly.

    • http://www.facebook.com/becky.neilson.18 Becky Neilson

      I have found that over the few years the IRS has taken all of clinets refunds and applied it to past due balances. It only stand to reason that they want to be paid and untill they are paid off they are going to keep your refunds.

  • Polaca71

    If I’ve already set up a pay plan with them and circumstances have changed and I now cannot afford the monthly payment, can I now make an “offer in compromise”?

    • Cmoorewriter

      Every circumstance is different so I suggest that you contact IRS and see if you can modify your payment plan.

  • http://christianpf.com/ John

    I recommend that people have a professional do their taxes. The consequences of not paying your taxes accurately can be devastating, as you outlined. It’s always good to make sure you’re on track and keeping up the books and payments to the IRS!

  • http://www.facebook.com/becky.neilson.18 Becky Neilson

    Well written article, follow the steps outlined and you should be able to work with the IRS. Key thing is once you receive a letter from the IRS respond and take action immediately. The longer you wait, the fewer options you will have. If you wait beyond the response time noted on your letter you may have no recourse or choice in the actions you will have to follow.

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