If you have tax debt, getting it paid off is your first priority.
Paying it off is important no matter how it’s done. Whether it’s in a one-time lump sum payment, or with a payment plan involving multiple payments, back tax debt should be paid however possible.
If you’re unable to pay it off immediately with a single payment or with your credit card, paying it off over time is a good option. This can be done by obtaining an IRS installment plan.
They take a fee and a small interest charge, but can be really convenient for back tax debtors. The fee runs $52 for debtors who sign up for a debit plan, and $120 for those who want the payments deducted from their paychecks. Which one to pursue should be decided by you.
Also, your future tax refunds will be applied to the back tax debt until it’s paid off. That may be a small price to pay to avoid having to pay a one-time, single payment that drains your bank account.
The IRS expanded the use of installment agreements with its 2012 Fresh Start initiative. It streamlined the installment agreement process to give more taxpayers more time to pay off back tax debt.
Also, the IRS raised the maximum tax debt that can be paid off via an installment plan from $25,000 to $50,000. It also increased the amount of time for paying down the balance from five to six years maximum.
You can also pay your tax debt over time by requesting additional time when filing your tax return.
Obtaining an extension is simple. An automatic six-month extension to file your tax return can be obtained by filing Form 4868 by April 15. That way, you’ll get some extra time to save money and pay your tax bill.
If the IRS grants you extra time to pay the tax debt completely, you’ll be able to pay less in interest and penalties compared to paying via an installment agreement over a number of years.
But if your tax debt is significant, obtaining an installment plan is probably the smarter option.
If it’s more than $50,000, you’ll need to file Form 433. If your total tax debt exceeds $50,000, you may be able to pay it down a bit to get it under this amount so you can get an installment plan.
One thing about paying your tax debt over time with an installment plan: you may pay less with all the penalties, but the interest won’t go away. In fact, it accrues. One way you can minimize added cost is by paying your total tax debt over a four-month period, as doing so waives your installment fee.
A total tax debt less than $10,000 will generally be given a three-year period to pay, with no minimum payment amount. If your total back tax debt is greater, the minimum payment will be the total back tax debt divided by 72.
If your total back tax debt is large enough, you might be able to pay it off over time. Doing so will require a bit of work, so make sure to work with a tax professional to cross your T’s and dot your I’s.
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