Like millions of Americans, you owe back taxes. You can’t afford to pay what you owe, but you don’t want to get mired in debt. What should you do? One reliable way out is to set up an IRS installment agreement.
Although not as popular as other tax relief programs, such as the Offer in Compromise Program, an installment agreement is the only realistic tax relief option for most taxpayers. In 2018, the IRS approved 2.9 million installment agreements (413,287 were online agreements), and only 62,243 offers in compromise. Only 38.1% of offers in compromise go through, while installment agreements often get approved automatically (Source).
In 2018, the IRS approved 2.9 million installment agreements but only 62,000 offers in compromise.
Why does the IRS prefer installment agreements to offers in compromise? Because installment agreements better protect their interests. While offers in compromise let you pay less than what you owe, installment agreements enable you to pay off your debt in full through a series of monthly payments.
If you enter into an installment agreement, you’ll also have to pay interest on your debt balance — typically the equivalent of an 8% to 10% APR. As such, if you think you might qualify for an offer in compromise, you should at least apply. But if that strategy fails, an installment agreement can help you to stave off long-term debt.
What is an installment agreement?
An installment agreement is a payment plan that allows you to pay your tax debt over a set time period. Just like a car loan or mortgage, an installment agreement gives you the option to pay large debts over time.
There are five main types of installment agreements.
Let’s discuss each type so you can decide which is right for you.
Which installment agreement is right for you?
Which installment agreement you qualify for depends on how much you owe, your current financial circumstances, and whether you’re applying as an individual or as a business. Consider the following options:
Guaranteed installment agreement
Do you owe $10,000 or less in back taxes (excluding interest and penalties)? Then you have the right to a 3-year IRS installment agreement. You won’t even have to file a financial statement to qualify.
This option enables you to pay your taxes in increments over a period of up to 3 years. And as long as you remain current on your payments, the IRS will stop its collection efforts. That means you won’t have to worry about the IRS filing a federal tax lien against your property.
However, there are downsides to this route. Interest rates are high, at approximately 8% to 10% APR (Source). And installment agreements generally have a negative impact on your credit score. If your credit is good enough to qualify you for competitive rates, you might be better off paying your tax debt with a personal loan.
To qualify for a guaranteed IRS installment agreement, you must:
- Have filed and paid your taxes on time over the previous five years.
- Be up-to-date on filing your current taxes.
- Pay off your taxes within 36 months.
- Have had no installment agreement within the previous five years.
- Agree to file and pay on time in the future.
Streamlined installment agreement
How many types of installment agreement are there?
There are five types of installment agreements.
If you don’t qualify for a guaranteed installment plan and you owe the IRS $50,000 or less, you may be eligible for a streamlined installment agreement.
A streamlined installment agreement is much like a guaranteed installment agreement, but you must pay off your debt within 72 months (rather than 36). As with the guaranteed plan, as long as you are current with your payments, the IRS won’t file a tax lien against your property.
To qualify for a streamlined installment agreement, you must pay by direct debit or through payroll deductions.
Streamlined installment agreements are available to different applicants at different tiers of debt. Individuals, businesses, and businesses that have gone out of business can apply for streamlined installment agreements to pay off less than $25,000 of debt. But only individuals and out-of-business sole proprietors can apply for a streamlined installment agreement with $25,000 to $50,000 of debt.
Partial pay installment agreement (PPIA)
Not eligible for the first two agreements? Perhaps a partial payment installment agreement is right for you. This option is for taxpayers who can’t afford to pay their tax debt in full, but do have the resources to pay a portion of them.
To qualify you must:
- Owe over $10,000 combined IRS tax debt, penalties, and interest.
- Have filed and paid all taxes for previous years.
- Have no marketable assets.
- Not be in bankruptcy or have an active offer in compromise.
If you secure a PPIA, the IRS will assess your living expenses and set your monthly payment based on what you can actually afford. It may also offer you a longer repayment term.
To apply, fill out a financial statement and provide supporting documentation. Once your payments are set, the IRS will re-evaluate your terms every two years to see if you can afford to pay more.
With a PPIA, the IRS still has the option to file a federal tax lien to protect its interest.
If you’re considering a partial pay agreement, check to see if you might qualify for an offer in compromise instead.
In-business Trust Fund Express agreement
In-business Trust Fund Express agreements are available for businesses that owe $25,000 or less. To qualify, you must pay your entire tax balance within in 2 years or before the statute of limitations expires (whichever is sooner). If you owe more than $25,000, consider paying your tax liability down to $25,000 before applying.
Routine installment agreement
If you owe more than $25,000, need a repayment term longer than five years, or you don’t qualify for the above options, you may be eligible for a routine installment agreement.
This type of agreement falls outside normal IRS guidelines. As such, approval is not automatic. You may need to provide financial information to help the IRS determine your monthly payment. They may also encourage you to consider other ways to pay off your debt, such as selling off assets or apply for a loan. Additionally, they may file a federal tax lien.
Making payments on your installment agreement
Once you secure your chosen installment agreement, you’ll start making monthly payments. You can pay via payroll deductions, checks, money orders, or with a credit card. Additionally, you must pay a filing fee. If you’re able to pay off your debt in full within 120 days, you can avoid the fee.
The IRS can revoke your installment agreement at any time if you:
- Miss a payment.
- Don’t file a tax return.
- Don’t pay current taxes.
- Provide erroneous information in your financial statement.
- Your financial position changes under a PPIA.
FAQ on installment agreement
Can you have 2 installment agreements with the IRS?
When you cannot pay the taxes you owe, you can establish an installment agreement with the IRS. This allows you to pay down the balance over time. If you are assessed taxes you are unable to pay in a future tax year, you can add that new balance to your existing agreement. This does not constitute a second agreement.
How do I contact IRS installment agreement?
You have several options available if your ability to pay has changed and you are unable to make payments on your installment agreement or your offer in compromise agreement with the IRS. Call the IRS immediately at 1-800-829-1040.
What happens if you default on IRS installment agreement?
This means more money you owe and a longer period of time you will have to pay for the debt. However, if a taxpayer falls behind on payments or stops paying entirely, the IRS can cancel the installment agreement and put the taxpayer into default. When this happens, the taxpayer receives a notice called a CP523.
Can I pay off my IRS installment agreement early?
There’s no penalty for paying off your IRS payment plan early. In fact, if you pay tax debt quickly, it’s likely the installment plan fee will be waived. You can avoid the fee by paying the full amount within 120 days. If you owe more than $50,000, call the IRS at 800-829-1040 to discuss your tax debt options.
What if I miss a payment on my IRS installment agreement?
If you are temporarily not able to pay, contact the IRS and alert them of your financial situation. In general, they will not default an Installment Agreement after just one missed or late payment, and so you usually have a 30-60 day grace period.
It is your responsibility to meet your tax obligation. If you’re not sure how to proceed, you may want to seek the assistance of an enrolled agent, certified public accountant, or tax attorney. They can look at your financial situation and negotiate with the IRS on your behalf, or use their expertise to plan your next steps.
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