If you find yourself in a situation where you can’t pay your taxes in full this tax season, you may want to consider applying for an installment agreement. Installment agreements allow you to spread out your payments without incurring penalties over that time. However, you cannot have more than one installment agreement at once.
When it comes to tax debt, the IRS is not a forgiving creditor. If you owe money to the government, you can expect penalties and interest charges on top of your original balance. And if you don’t take action to pay off your tax bill, the IRS can garnish your wages or seize your assets. This is where installment agreements come in handy.
An installment agreement with the IRS is a payment plan that allows taxpayers to pay their taxes over time. While they can be helpful for taxpayers, these agreements also do not absolve you of your debt. You still need to pay back what you owe in full, and if you miss a payment or default on the agreement, the penalties can be steep. Throughout this article, we’ll talk more about the types of installment agreements, how you can consolidate your debt into one payment plan, and whether an installment agreement is right for you.
What is an installment agreement?
An installment agreement is a payment plan that allows taxpayers to pay their tax debt within an extended timeframe. Taxpayers can request an installment agreement if they realize that they might not be able to pay their full tax liability all at once. A taxpayer can apply for several types of installment agreements depending on the amount of the tax debt they owe and their ability to pay.
To set up this payment plan with the IRS, you can apply through the following methods:
- Online through the Online Payment Agreement tool
- By phone at 800-829-1040
- By mail by submitting Form 9465
Can you have two installment agreements with the IRS?
The simple answer is no, you cannot have two installment agreements with the IRS. A new unpaid tax balance due would put your existing installment agreement into default. If this happens, the IRS will require you to pay your previous and current tax debts at once, which many can’t afford.
However, if you have new tax debt, you can amend your existing agreement to include new tax balances. Do this before the tax year’s due date to avoid collections agencies and further penalties.
To do so, contact the IRS as soon as possible or use the online payment agreement tool to make an amendment to your existing plan. If you feel you can’t afford your monthly payment after consolidating your debt, complete form 433-F to see if you qualify for an offer in compromise instead.
How else can I manage my debt?
Maybe installment plans don’t sound right for you, and that’s okay. The IRS has more options available to help taxpayers manage their tax debts. On the other hand, if you need some additional help, speak with a tax relief company to learn what tax breaks you qualify for. We recommend comparing rates from a few companies before making your decision, which you can start doing right here.
Types of IRS installment agreements
Depending on the amount of taxes you owe, there are different installment agreements you may qualify for.
Guaranteed installment agreement
Guaranteed installment agreements are for taxpayers who owe taxes of less than $10,000 (excluding penalties and interest).
To qualify for this payment plan, you must also meet the following criteria:
- Have not failed to file any income tax returns or to pay taxes during any of the preceding five tax years.
- Must agree to fully pay the tax liability within three years or before the collection statute expiration date.
- Must not have entered into an installment agreement during any of the last five tax years.
Streamlined installment agreement
Taxpayers who owe less than $50,000 in taxes may be able to apply for a streamlined installment agreement.
To be approved for this IA, you must be willing to make payments for up to 72 months or before the collection statute expiration date. The minimum monthly payment for this agreement can be calculated by dividing the amount you owe by 72 or the number of months left before your CSED.
Non-streamlined installment agreement
The non-streamlined installment agreement is for taxpayers who owe more than $50,000 in tax debt and are not able to qualify for the streamlined installment agreement. With this non-streamlined method, you’ll need to provide extensive information about your assets, liabilities, income, expenses, etc., to the IRS. To do so, fill out and submit Form 433-F.
The information included in the form will then be used by the IRS to determine whether or not you qualify for this payment plan.
Partial payment installment agreement
If you aren’t able to pay your entire balance off by the collection statute expiration date (CSED), you may want to apply for a partial payment installment agreement (PPIAs). This payment plan will allow you to make affordable monthly payments. To qualify, you must first complete and submit Forms 433A so that the IRS can determine your ability to pay.
It’s important to know that the IRS might require you to first use the equity in your assets to resolve some of the current tax debt you owe. The IRS will also likely conduct a financial review every two years to determine whether your agreement may be changed or canceled depending on your financial situation.
What are the pros and cons of an IRS installment agreement?
While an installment agreement may sound like a great option for everyone that owes taxes, there are some disadvantages to these deals. Consider the points below before entering into an installment agreement with the IRS.
Here is a list of the benefits and drawbacks to consider.
- Allow you to pay down debt over a longer period of time. An installment agreement with the IRS can be a great way to pay down your debt over a longer period of time. Also, since it allows you to make smaller payments each month, you can manage your finances more effectively.
- Avoid collection activities from the IRS. If you fail to pay your taxes on time, the IRS will send you a notice of intent to levy, which is also called a Notice of Federal Tax Lien. If you don’t pay the amount due immediately, the IRS could potentially levy your bank account and garnish your wages to pay back the amount you owe. By applying for an installment agreement with the IRS, you can prevent this from happening.
- Reduced failure-to-pay penalty. If you filed your tax return on time and you have an approved payment plan, then the failure to pay penalty drops from 0.5% of unpaid taxes each month to 0.25%. This reduction can save you a lot of money over time, especially if you have quite a bit of taxes owed.
- Interest and penalties will continue to accumulate during the repayment period. This can add up quickly and become very costly over time. And you might end up paying a lot more than your original balance by the end of the payment plan.
- Enrollment fees. These will vary depending on the type of agreement you choose. The lowest fee is for those who agree to a direct debit installment agreement, while the highest fee is for those who choose the long-term payment plan. Either way, to apply for a payment plan, you’ll have to pay out of pocket, unless you qualify for a fee waiver.
- An installment agreement with the IRS is a payment plan that allows taxpayers to pay their taxes over time if they’re unable to make a lump-sum payment during tax season.
- You can only have one installment agreement with the IRS, as a new unpaid tax balance would put your existing payment plan into default.
- There are four main types of installment agreements: 1) the guaranteed installment agreement, 2) the streamlined agreement, 3) the partial payment installment agreement, and 4) the non-streamlined installment agreement.
- You can apply for the IRS payment plan through the online payment agreement tool, or by phone and mail.
- There are both pros and cons of entering into an installment agreement with the IRS, so make sure to think carefully before making a decision.
View Article Sources
- Guaranteed Installment Agreements — IRS
- Request a Payment Plan — Colorado Department of Revenue
- IRS Penalties Explained: How To Get Tax Penalties Waived — SuperMoney
- 5 IRS Tax Relief Programs That Can Help You Pay Off Tax Debt — SuperMoney
- The Best Tax Relief Companies | March 2022 — SuperMoney
- Tax Relief Companies: Reviews & Comparisons — SuperMoney
- The Definitive Guide to Back Taxes — SuperMoney
- Top IRS Red Flags That May Trigger an IRS Tax Audit — SuperMoney
- Ultimate Guide to Unfiled Tax Returns — SuperMoney