One of the most commonly asked questions asked of our Support Team during tax extension season is if there are any options to pay the IRS in installments. The answer is: YES.
How an Installment Agreement Works
If you cannot pay the full amount due with your income tax return, you can ask the IRS if they will allow you to make monthly installment payments for the full amount or a partial amount of the tax owed. Also known as an IRS Payment Plan, this arrangement allows you to pay-off your tax liability over a period of time (sometimes up to five years). Note that the type of arrangement you get will depend on what kind of tax debt you have and how much you owe. If you receive a notice from the IRS, you should respond first by following the instructions included with the notice. Usually the IRS will ask you to contact them by phone or mail. After that, you will receive further instructions and have the chance to request an installment agreement.
To ask for an installment agreement, use Tax Form 9465, known as the Installment Agreement Request. You should receive a response from the IRS within 30 days. You can also apply for an installment agreement online. To do that, go to the IRS website and click on the “Payments” tab at the top. You will see a section titled “Can’t Pay Now?”
There are fees associated with setting up an installment agreement, ranging from $43 to $120 depending on your request and situation. Keep in mind that you will also be charged interest and possibly a late payment penalty on the tax not paid by the date your return is due, even if your request to set up an installment agreement is granted. To limit the interest and penalty charges, you will want to file your tax return (or tax extension) on time and pay as much of the tax as possible by the original due date. At FileLater.com, you can make a payment online with your tax extension. All tax payments received by the IRS will be applied to your account.
By approving your payment plan request, the IRS agrees to let you pay the tax you owe in monthly installments (instead of immediately paying the amount in full). In return, you are agreeing to make your monthly payments on time. You are also agreeing to meet all your future tax liabilities.
Your request for an installment agreement will be denied if all the required tax returns have not been filed. Any tax refund owed to you in a future year will be applied against the amount you currently owe — if your tax refund is applied to your balance, you are still expected to make your regular monthly installment payments.
What Is an Offer in Compromise?
An “Offer in Compromise” is basically an agreement between the IRS and a taxpayer that allows the taxpayer to pay less than the full amount they owe. The taxpayer can usually choose to make a lump sum tax payment or set up an installment plan. While this type of arrangement isn’t for everyone, the Offer in Compromise program has allowed many taxpayers to pay off their tax debts.
The IRS will accept an Offer in Compromise under a few conditions. You may be approved if the IRS comes to the conclusion that the full amount owed is otherwise uncollectable. The IRS may also permit an Offer in Compromise if you have legitimate doubt that you actually owe that amount of tax debt — called “doubt as to liability.” Lastly, in certain situations the IRS will accept a lower amount than what’s owed if full payment would cause undue hardship to the taxpayer or their family.
Installment Payment Methods
There are several methods by which you can make your installment payments, including check, money order, direct debit, or credit card. After the IRS receives each payment, they will send you a notice with your remaining balance, plus the due date and amount of your next installment payment. Note that if you choose to have your payments automatically withdrawn from your bank account, you will not receive these notices in the mail — rather, your bank statement will serve as your record of payment.
If you do not make your payments on time, or you fail to pay the balance due on a return you file later, you will be considered “in default” on your installment agreement and the IRS may take action against you. This can include filing of a “Notice of Federal Tax Lien” or an IRS levy action to collect the entire amount you owe. To ensure that your payments are made in a timely manner, consider making them automatic via Electronic Funds Withdrawal (EFW).