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If you’re having trouble paying your tax debt, you should set up payment plan to break the amount down into manageable monthly chunks.
There are immense benefits to a payment plan. However, be aware that it can be complicated based on your financial situation.
Some obstacles you might face include:
- Preparing financial statements,
- Calculating how much you should offer to pay per month,
- Choosing a payment method that’s right for you,
- Appealing a rejected application.
My advice is: start applying early.
Don’t wait until the IRS freezes your bank account or collections agents are knocking at your door. Save you and your family the stress of having the IRS hound you for payments by taking action now.
If you’ve already left it a bit late, being lost in the dark can waste valuable time. That’s why I wrote this article – it covers the basics to get you started.
Still, these are merely basics. I can’t guarantee that you won’t be spending weeks just trying to set up a payment plan with the IRS. You might even have your application rejected, bringing you back to square one.
A tax relief expert can cut through the fog and set up your successful payment plan quickly. This option costs money, but it’ll save you so much time and money if you just choose the right tax relief company.
Read my article on what to look for in a tax relief company.
In any case, the important thing is to get started. Even if you decide to consult with a tax relief company, read this article to prepare yourself before setting up a payment plan with the IRS.
Step 1: Find out how much tax debt you owe
Your monthly payment depends on how much tax debt you owe. There are several ways to check your IRS balance:
- Refer to your tax notice or tax return,
- Call the IRS at 1-800-829-1040,
- If you don’t like calling, then use their online portal.
Step 2: Pay what you can on the overdue balance
When you receive your tax notice, pay as much as your can afford to reduce the outstanding balance due.
The IRS recommends this move whenever you owe them money. Yes, they have an ulterior motive, but I agree with them wholeheartedly.
Paying what you’re able to afford will drastically reduce the late payment penalties and interest that would accrue if you left the full tax debt dangling.
Step 3: Decide which Installment Agreement to target
The IRS offers 4 payment plans (also known as installment agreements.) Each installment agreement has its own requirements and benefits.
Targeting means that you pay off your tax debt to meet the requirements of a particular type of installment agreement. Doing so will allow you to reap its unique benefits.
You can read our article on the benefits of each installment agreement, but we’ll repeat the requirements here for convenience:
|Installment Agreement Type||Requirement (Amount of Unpaid Tax)|
|Guaranteed Installment Agreement||<$10,001|
|Streamlined Installment Agreement||$10,001 – $25,000|
|Non-streamlined Installment Agreement||$25,000 – $100,000|
|Partial Payment Installment Agreement||use if you can’t pay monthly payments in full|
Step 4: File an Installment Agreement Request
After all that prep, it’s time to actually pull the trigger. There are several options for requesting for an installment agreement:
- Mail in Form 9465 (Installment Agreement Request) – this is a hardcopy document that you need to download here and print out.
- Call the IRS at 1-800-829-1040 or the number included in your tax bill.
- Go through an Online Payment Agreement Application (if you owe less than $50,000)
My advice: use the Online Payment Agreement as it reduces the user fee that you have to pay. We’ll go through user fees at the end of this article.
Step 5: Decide how much you will offer to pay a month
How much you pay per month is up to you, so long as it is at least:
Your remaining overdue balance divided by 72 months*
Now this might feel like a punch in the gut. You’re probably saying,
“That’s not fair! I don’t really have a choice about how much to pay per month.”
I hear you.
If you’re unable to make the minimum payment per month, there is another option: the Partial Payment Installment Agreement (PPIA). This allows you to pay less than what you owe.
In this instance, it’s best to hire a tax relief professional to look at your income and living costs. They’ll come up with an acceptable offer and fight for a PPIA on your behalf. Experts have years of experience in fighting the IRS, so you’re more likely to be successful by having one in your corner.
Read my article on how the pros create successful installment agreements
* For Guaranteed Installment Agreements you’ll divide by 30 months.
Step 6: Provide Financial Information
This step is very important if you want to pay less than your minimum specified payment. It applies if you’re:
- Targeting to get a PPIA, or
- If you have tax debt over $50,000
In these instances, the IRS requires financial information to assess your ability to pay.
If you’re submitting Form 9465 (Installment Agreement Request), you need to attach form 433-F (Collection Information Statement).
If you’re using an Online Payment Agreement Application, then the online form will prompt you for financial information.
What kind of financial information do you need to provide?
Some items for which you must reveal details are:
- Credit cards that you have – amount owed, credit limit, minimum monthly payment etc.
- Assets that you own – value and monthly payment of your property, vehicles, insurance policies etc.
- Employment information – how often you’re paid, details of your employer etc.
- Monthly necessary living expenses – Food, Rent, Utilities etc.
Agreed, there is A LOT of information to include. Expect to take hours (even days) to complete the form, especially if you don’t have the information readily on hand.
Here’s something to complicate matters further: there are ways to fill out the form in your favor.
I would recommend getting an expert to help when applying for installment agreements. Some tax relief professionals are exceptionally well versed at the art of painting your financial situation in a light that will get you what you want.
Whether you’re doing it alone (free, but costs you hours of headaches), or hiring professional help (painless, but costs you money), your investment to get this part right can make your tax debt payments a breeze.
Step 7: Decide on your payment date
The IRS payment plan allows you to choose to pay on any date between the 1st and 28th of every month.
*Yawn* So what?
This is a great way to manage your cash flow.
You can use this option to make sure that your bill payments don’t clash. It will ensure that you have cash on hand come payment time. For example, if you:
- Are paid a weekly salary, and
- Have bill payments on the 1st of the month,
- Then set up a direct debit payment on the 15th.
That way you have two weeks to build up funds in your bank account to make the monthly payments.
Step 8: Decide on your method of payment
The IRS gives you several methods of paying your monthly installments, namely:
- Payroll Deduction
- Direct Debit from Bank Account
- Credit Card
- Electronic Federal Tax Payment System (EFTPS)
Surprising but true: the IRS allows you to with credit cards. However, be aware that there are many dangers to doing this. Read my article on why you should not pay federal taxes with credit cards.
There are hidden benefits and risks to each payment method. For example, a Direct Debit arrangement automatically takes monthly payments out of your account, so you can set and forget. However, this runs the risk of you not having sufficient funds in your account to settle your other debts.
You should consult with a professional regarding what payment method is right for you. A correct payment method can lead to success with installment agreements. Read my article on how tax professionals can help with installment agreements.
Beware of differing User Fees
You have to pay a user fee to set up your payment plan. The two factors that affect how much you need to pay are:
- Application Method – did you use the Online Payment Agreement Application tool?
- Payment Method – did you use the Direct Debit Installment Agreement?
The resources about user fees are currently quite confusing, in my opinion. So I’ve summarized them in a User Fee Matrix below:
|Used Online Payment Agreement Application?|
|Used Direct Debit method of payment?||Y||N|
Setting up a payment plan is a complicated and long process with no guarantee of success. However, if you’re able to secure an installment agreement, it could make your life much easier.
Under a payment plan, you would have more manageable payments, and can stop IRS actions like federal tax liens on your home, or levies on your bank account etc.
A tax relief company can make a huge difference in your success when applying for an installment agreement because they know the ins and outs of dealing with the IRS. Read my article on how tax relief companies help in installment agreements.
If you’re already thinking of hiring a tax relief company, check out my article comparing the best tax relief services on the market today. In that article I found that Community Tax is one of the few that actually deliver on their promises.