Digging your way out of tax debt can end up becoming the challenge of a lifetime. Seriously, thousands of normal, hardworking people spend years upon years struggling with tax debt. And sadly, often to little or no success. Without a proper strategy in place for getting out from under their tax bill, regular Americans of all walks have life have experienced wage garnishments, tax liens, and even lost their homes. Your best laid financial plans and hopes for the future can fade away with a single IRS notice. Because when the IRS comes after you for a tax debt, they bring the full force of the tax code and a whole lot more. And in many cases, there’s only one good way out: IRS Payment Plans.
Unfortunately, tax debt has a way of ballooning without you even realizing it. Simple mistakes in withholding can result in an unexpected tax bill come April. And that tax bill can end up larger than you can pay all at once. Add in tax penalties and interest and you have a recipe for disaster. Payment plans can help you get out from under your tax debt in a manageable way.
At StopIRSDebt.com, we’ve helped literally thousands of clients deal with the IRS and get out from under their tax debt. We’ve negotiated IRS payment plans, dealt with audits, and helped clients file their taxes. And after nearly 20 years in business, we keep returning to one point over and over again. People rarely know enough about tax law to adequately fight the IRS and get the outcome they deserve.
And we get it! Not everyone can (or should!) spend years studying federal and state tax law. Does that sound fun to you? Fortunately, it’s fun for us, and we love using it to help people every day. So, we decided to help clear up some of the biggest misconceptions we hear about IRS payment plans so that you can better understand—and negotiate—your tax debt solution. We will walk you through everything, from the basics of IRS payment plans to how you can negotiate the best terms on your installment agreement. We’ll cover reasons for seeking out a payment plan, cover common issues, and answer payment plan FAQs.
We’ve got you covered.
IRS payment plans, also known as installment agreements, allow taxpayers to resolve their tax debt over time rather than paying in a lump sum. Let’s look to the IRS for their definition to get the ball rolling:
A payment plan is an agreement with the IRS to pay the taxes you owe within an extended timeframe. You should request a payment plan if you believe you will be able to pay your taxes in full within the extended time frame.
Essentially, with IRS payment plans, you agree with the IRS that you’ll pay down your debt over a set period of time at a certain rate. Try thinking of it like a mortgage. When you take out a mortgage to purchase a home, you immediately accrue a serious debt. But a portion of your mortgage agreement with the bank explains that you’ll repay that debt over a set period of time. They don’t expect you to pay it all at once.
Similarly, with an IRS installment agreement, you acknowledge with the IRS that you can’t pay the full some all at once. So, instead of paying your $10,000 in full today, you set up a payment plan with the IRS to pay your $10,000 down in more manageable chunks. Perhaps that payment sits at $200 a month, which would be a lot more manageable to your finances. IRS installment agreements help those burdened with unmanageable tax debt slowly pay down their total and make things right with the IRS. And at the same time, they signal to the IRS to your compliance. Essentially, an IRS payment plan calls off the dogs.
Just about any issue with the IRS could lead to the kind of tax debt that requires an installment agreement to get out of. But the causes of tax debt usually fall into a few buckets. Let’s walk through them one by one.
Quite a large number of tax issues stem from simple errors made on your W-4. When you start working for a new employer, you need to fill out a tax form to indicate how much of your income you would like to be withheld on your behalf. When you withhold too much, you can probably anticipate a tax refund. But when you withhold too little, you may end up with a tax bill.
And if you find yourself in a similar position to many Americans these days, a sudden bill of a few hundred dollars or more may not be something you can immediately cover. In this case, an IRS installment agreement may end up being an attractive option for resolving your tax debt.
The IRS requires that you report all of your income, all of the time. And whether or not you intentionally neglect to report some of it—or simply forget—the IRS will almost always find out. And it’s not a matter of if, but rather, when. When the IRS discovers underreported income, they will assess your tax obligation and may apply penalties and interest to it.
Depending on how far back your newly assessed debt stretches, you could end up on the hook for thousands or tens of thousands of dollars. And do you have that money just lying around? For most people, the answer is no. In that case, IRS payment plans may provide a suitable option for settling your debt with the IRS.
Yes, the IRS will likely confirm your underreported income through an audit. But we still think that tax audits deserve to be listed separately. After all, underreported income is just one of the many ways that an audit can leave you saddled with a tax bill you just can’t pay. To determine your taxes, a couple of basic factors apply: How much you earn, how much you can deduct, and the basic life situations (children, marriage, etc.) that you fall into.
When the IRS audits you, they may not look at your underreported income. Instead, they may discover you unintentionally listed two dependents when you only have one. Or they may check on your “home office” and discover it doesn’t meet the guidelines the IRS has set out for it to qualify as a tax deduction. Audits can certainly lead to unanticipated tax bills. And if you can’t pay that total right away or all at once, IRS payment plans may serve as your best option for resolving your tax debt.
Installment agreements carry a host of benefits. If you are actively considering a payment plan, you should keep these benefits in consideration.
When the IRS can’t get you to pay a tax debt, they’ll take just about any avenue they can to get their money. And as you probably know, that can get scary. You start receiving regular letters, for instance. Or, you might end up on the receiving end of a wage garnishment that takes 30% of your biweekly paycheck. Perhaps a tax lien is placed on your phone or you begin receiving calls from a private collection agency.
The moral of the story here? When the IRS thinks you owe it money, it works harder than anyone you’ve ever met to get that money.
Fortunately, you can stop many of these drastic and scary IRS actions by simply responding and setting up a plan to make things even. In fact, most of these infamous IRS actions only take place after many, many notices have been ignored. So, if you want to put a stop to this IRS harassment, one way to do so is to contact the IRS and set up an IRS payment plan. This will signal that you’re ready to play ball and pay them, which means they don’t need to continue garnishing your wages or levying your house to get the money they believe you owe them.
We’d be remiss if we didn’t mention how relieving it is to finally get the Tax Man off your back. Seriously. After months or years of IRS letters, sleepless nights, and worries that you may never get out from under a mountain of tax debt—setting up a plan to do just that feels nice. To say the least! To be clear, setting up a plan to eliminate your tax debt and get your family back on track to your financial goals feels incredible.
How do we know this? Our tax relief clients tell us all the time. It’s one of the best parts of the job. Tax debt brings stress, and there’s no two ways about it. But tax relief feels—well—relieving! And when you unlock a solution to your tax issues, you may just find you get the best night’s sleep you’ve had in a while. Or at least we hear. Yes, the payment plan may take several months or years. But knowing you don’t have to hide from it anymore? Priceless.
Much like your tax debt, your exact installment agreement can vary. Fortunately, the differences between the different types of IRS Payment Plans are fairly easy to draw out. We’ll help you get a good idea of what each type of IRS payment plan entails and what you can expect.
We know you probably didn’t read this article to learn about the ‘Pay Now’ option. But if the IRS considers it as one of its possible payment plans, we need to include it. Because in some cases you can totally pay your tax debt in one lump some! And if that’s on the table for you, we highly recommend it.
When you owe the IRS money, you advantage yourself by paying it on time—or ASAP. And in some tax situations, you may find that the option for paying now benefits you more than any of the additional payment plan options. For example, small totals of a few hundred dollars might actually be doable, even if they don’t seem that way at first. If you can move around some funds without breaking the bank or going into further debt, perhaps you should try eliminating your tax debt with one payment instead of several.
The greatest advantage of paying off all your tax debt in one fell swoop is that you will eliminate future penalties and interest. However, if that doesn’t seem like a good option to you, you can always go with one of the other payment plans!
How short does “short-term” mean? 120 days. So, roughly speaking, short-term payment plans give you about 4 months to repay your tax debt. This might be a good option for those who want to eliminate their tax debt quickly and without dealing with extended timelines. Or, perhaps you can’t pay the full total now, but you think you can move some money around to handle it by next month.
Either case might make the short-term payment plan a good move for you. Smaller tax debt totals can make a payment plan a good option, especially when you can trim the timeline down and handle it within a few months. And you don’t necessarily have to pay in monthly installments, which has the added benefit of flexibility.
Unfortunately, tax penalties and interest will still accrue on your debt throughout the duration of these short-term IRS payment plans. The upside remains that you won’t have to deal with these penalties and interest for long. However, if you can’t pay down your IRS debt within 120 days, the IRS offers another payment plan option for you.
According to the IRS, you can make payments on your short-term payment plan using these methods:
Some payment plans carry costs, like an online or phone application. Fortunately, if you set up a short-term payment plan, you won’t need to pay these fees. However, you’ll still be on the hook for penalties and interest, which will continue accruing until you completely pay your balance.
If you need longer than 120 days to repay your tax debt, you’ll apply for what the IRS refers to as an installment agreement. These IRS payment plans are very common. And they usually end up as the de facto method of repayment for anybody facing down a serious tax debt.
Like short-term IRS payment plans, you have multiple repayment options with a long-term installment agreement. However, your method of repayment can impact how much you pay in fees and costs.
Option 1: Pay through Direct Debit automatically each month. Also known as a Direct Debit Installment Agreement (DDIA).
For this repayment option, you’ll pay to apply for it.
In either of these cases, low-income taxpayers can typically have their fees waived. However, all taxpayers will still accrue penalties and interest until they fully pay their tax balance.
Option 2: After applying for a long-term payment plan, payment options include:
Unfortunately, this repayment option carries higher application fees.
Like with other IRS repayment plans, you’ll accrue penalties and interest until you pay your tax bill in full.
The IRS explains a bit more about applying for IRS payment plans in this video.
As much as we wish there existed a magical solution or a life hack that made eliminating tax debt simple, stress-free, and painless, there isn’t. As a full-service tax representation firm, we have plenty of tools and creative tactics at our disposal to lower your tax obligation. And yes, some of our tax clients end up owing $0 to the IRS!
But the undisputed best method for preventing the need for your IRS payment plan is to stop tax debt before it happens. Regularly filing your taxes, checking and adjusting your withholding, and reporting all your income will stop all this before it starts.
In some cases, issues may still arise! But by paying regular attention to your taxes and finances, you can prevent spiraling tax debt before it ever happens.
When you’re facing down a massive tax debt of $5,000 or more, the last thing on your mind is hiring someone to help you resolve it. We hear this story all the time, so stop us when it starts to sound familiar: After avoiding your tax debt for a while, you finally realize you need to face this thing head on. But when you sift through all the notices and IRS letters, you get overwhelmed all over again. How long is it going to take to pay this down? Thinking of adding any additional money onto that is simply out of the question. After all, you got yourself into this. You’ll just have to grit your teeth and get yourself out.
Do not allow yourself to be swayed by that thought. When you’re in deep tax debt with the IRS, the first call you should make is to an expert tax team. IRS payment plans serve as one of many available tools for lowering and eliminating your tax debt with the IRS. So, when you decide to go it alone and just start paying in installments, you may end up paying more than you really needed to. Perhaps filing back tax returns or establishing an Offer-In-Compromise would have saved you thousands of dollars! And a good tax relief company may end up saving you more money than you end up paying them, all while taking the stress off your shoulders.
We get a lot of questions about installment plans, especially since they’re one of the most commonly employed strategies for getting out of tax debt.
If you owe $10,000 or less in taxes, chances are slim that the IRS would deny your installment agreement. You’ll need to meet a few simple requirements. You need to have filed all tax returns on time in the past five years, paid any income tax due, and have not previously requested an installment plan. Also, the IRS should easily see you can’t afford to pay your tax debt in full.
The IRS can always deny you a payment plan, and they may choose to do so for a few reasons. Inaccurate information and previous payment plan defaults can interrupt your best-laid plans.
The IRS has 10 years from the assessment of your tax debt to collect it. So, in most cases the IRS will adjust your monthly payments to ensure you pay off your tax debt in that timeframe. However, you shouldn’t use this 10 year period to avoid paying your installments or your tax debt altogether. The IRS has your information, and if you don’t cooperate with them, may move to tax liens or wage garnishments to get their money.
Installment plans can offer a sense of stability to the tax debt repayment process. You may find that big mountain of debt pretty imposing. But it’s a heck of a lot less imposing when it’s broken down into monthly chunks.
That doesn’t mean that paying down your debt will be easy! No matter how you cut it, an extra monthly payment of a few hundred dollars can still strain your pocketbook. But when you enlist the help of an expert tax team, they will find and employ every tool out there to lower your tax debt. This way, the amount you owe becomes as manageable as possible. And when that happens, you can finally get back on track to your financial future.
Struggling against back taxes? Then get in touch with our expert tax team via our free live chat. We’ll discuss your situation and help you reach financial freedom from the IRS.
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