Every year, there are millions of taxpayers who find themselves unable to pay their taxes in full to the IRS. The IRS knows there will be some taxpayers coming up short. The good news is the federal government is happy to work with you. The bad news is, they’re relentless in their collection of back taxes and if left unattended, they can levy your bank account, garnish your paycheck, or put a lien on your property to settle your tax bill.
However, their cooperation comes at a price, called penalties and interest. Here are the steps you need to take if you wish to pay your federal income tax with installment payments.
Here are some steps you can take to get on an IRS payment plan if you can’t pay your taxes in full.
File Correctly and On Time
Trying some fancy 1040 shortcuts or inputting fake numbers on your tax return software to bring your tax bill down is not a solution. In fact, it will land you in deeper trouble. First, if you are going to owe tax and be unable to pay, your return will already face higher scrutiny as soon as you request a payment plan. Making deliberate attempts to file a fraudulent return will only compound your problem, and will lead to more serious consequences.
Waiting until after April 15 to file is also a poor plan because you will only accrue more penalties. Also, filing an extension does not mean you have more time to pay. It simply means you’ll end up paying more with penalties and interest, sinking you deeper into a hole.
So make sure you file on time!
Attach Form 9465 Installment Agreement Request to your 1040 If You Need More Than 120 Days To Pay
This is the crucial step. If you have a reasonable reason for the delay in paying your taxes, the IRS can work out a 72 month payment arrangement. However, the late filing penalty can be as much as 5% per month of the outstanding tax debt, for each month or part thereof the tax is owed. The penalty is capped at a whopping 25% of the original tax owed. The failure to pay penalty is one-half of one percent (0.5%) each month up to a maximum of 25% as well. The interest is compounded daily, much like a credit card. The IRS charges interest on top of penalties and interest. There is also an administrative fee to set up the monthly payments, depending on how you intend to pay. When you take into account the penalties and interest the IRS can assess, an IRS tax debt doubles every several years if you don’t address it head-on.
Applying for an Installment Agreement Online:
Your specific tax situation will determine which payment options are available to you. Payment options include full payment, a short-term payment plan (paying in 120 days or less) or a long-term payment plan (installment agreement) generally 72 months.
You may qualify to apply online if:
Long-term payment plan (installment agreement): You owe $50,000 or less in combined tax, penalties and interest, and filed all required returns
If you are a sole proprietor or independent contractor, apply for a payment plan as an individual.
- Long-term payment plan (installment agreement): You owe $50,000 or less in combined tax, penalties and interest, and filed all required returns.
- If you are a sole proprietor or independent contractor, apply for a payment plan as an individual
Wait 30 Days
For a Reply (if by mail) and Make Sure the Installment Agreement Is Your Best
It takes the IRS at least 30 days to process an Installment Agreement Request form. Understandably, after March 31 of each year the processing time is a little longer. During these 30 days, it would be a good idea to pursue other payment options. Plan on paying the late fee penalty and interest when you are comparing the full cost of an IRS Installment Agreement or another loan, such as through a bank or other avenues of credit.
When bank loan interest rates are higher than 6%, the IRS Installment Agreement looks like a fairly good deal. However, tax payers in true financial dire straits due to job loss or other issues need to take pause.
Defaulting on an IRS Installment Agreement is not the same as failing to pay your credit card bill one month. The collections process by the IRS is backed by the federal government, and includes the ability to apply a tax lien against any property owned by the taxpayer.
A delinquent taxpayer should also consider his or her ability to pay next year’s tax bill. If the root cause of an inability to meet your tax obligation is recurring, for example related to a small business loss, certainly consider if the business is likely to weather a similar financial situation next year. After all, you can’t secure another Installment Agreement if you are already paying one to the IRS. It may be prudent to pay this year’s tax with a loan at a higher interest rate if you have the credit available and save the request for an Installment Agreement when you truly have no other option to meet your tax obligation.
Always Keep Careful Records of Forms Filed and Any Correspondence with the IRS
the entire process of requesting an installment agreement, it is vital a
taxpayer keep complete records. If there is communication by telephone, write
down the time, date, and the person you spoke with in a log. It is also a good
idea to briefly summarize the conversation, especially if there were any
specific guarantees verbally given. Save all letters and notices from the IRS
with your tax information.
Our firm specializes in tax resolution, even if you have years of unfiled tax returns, we can help! You may qualify for the IRS’s debt settlement program called an Offer in Compromise, which can be more advantageous to you than a payment plan. We may be able to settle your entire debt with the IRS for up to 85% off the original amount owed, including penalties and interest, if you qualify. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options in full to permanently resolve your tax problem at 1-855-605-1500.