Whether you owe back taxes, end up with a surprise tax debt after an audit, or simply struggle with paying your current year’s tax come Tax Day, an Installment Agreement can help you to divide up the amount into smaller, monthly payments that fit nicely into your budget. If you are considering using the IRS’ Installment Agreement program, there are a few things you need to know to ensure that it is the right course of action for you.
Criteria for Approval
Compared to the other tax relief settlement options, the Installment Agreement has fewer criteria a taxpayer must meet to qualify for the program. However, you still have to meet certain qualifications in order to set up a payment plan. The most important criterium is that you must have all past tax returns filed for which you are required to file. You also must be compliant with all future taxes, which means you will have to file your return on time every year and pay your tax in full (or restructure your Installment Agreement to include the new tax liability).
The IRS may reject your payment plan if the agency determines that you can afford to pay the tax in its entirety at the present time. You may need to prove that by paying it in a lump sum you will face undue financial hardship.
The payment terms depend on how much you owe, as well as your current and estimated future financial situation. Those who owe less than $25,000 generally can determine their own monthly payment, as long as they pay the debt in full within six years. Balances between $25,000 and $50,000 can still use the IRS’ online application process, but you also have to provide additional information to allow the IRS to determine a fair monthly fee for you. Those who owe more than $50,000 can still apply for an Installment Agreement. However, it will have to be done through the mail and also is based on information you provide about your current financial situation and assets to help the IRS determine fair payment terms for you.
When it comes to determining how much to pay each month, you can propose an amount that fits your budget. The IRS will review it, as well as your income and assets, to see if it is a reasonable amount. They may determine it is too low. If this is the case, the IRS generally counters by dividing the total amount by the number of payments, which is typically 72 (six years of monthly payments). Those who owe $50,000 and higher may have more room to negotiate the payment as part of a unique agreement. The IRS may reject your proposal if they determine that your living expenses are not necessary, there is incomplete or inaccurate information on the form you send in, or you have a history of defaulting on an IRS Installment Agreement.
Penalty, Interest, and Other Extra Charges
When you apply to set up an Installment Agreement, you will have to pay a one-time fee of $120, or $52 if you choose direct deposit. Some users may qualify to pay just $43, but this is typically for those whose annual income is less than 250 percent of the national poverty line. This amount is on top of the tax you owe and the interest and penalty fees that accrue over time. The IRS also charges $45 when you reinstate the payment plan after missing a payment or restructuring it.
During your Installment Agreement, your tax debt remains subject to interest and penalty fees, but it is less than if you chose to simply not pay. The interest remains the same, but the penalty payment is halved once the Installment Agreement is in effect. Rather than paying 0.5 percent per month in late-payment fees, you pay 0.25 percent per month. Although you may save some money, the additional fees are typically higher than many private loans and credit cards. If your tax debt is low enough, then it may be better to get a line of credit from somewhere to handle your debt.
What Happens if You Miss a Payment
Part of the terms of the Installment Agreement is that you pay your monthly payment on time every month, and that you remain up-to-date on all current and future taxes. As long as you remain compliant, then the IRS will not take collective action and otherwise honor your Installment Agreement. However, if you miss a monthly payment, then you may find yourself facing a lien, levy, or wage garnishment. It is important to contact the IRS as soon as your realize you have missed a payment to reduce any negative consequences.
What About Any Tax Refunds?
The IRS routinely garnishes federal tax refunds to pay for any outstanding tax debt. Even if you have an Installment Agreement, you may still have any future tax refunds applied to the amount of outstanding tax you owe. It is also important to know that if your financial situation gets better while you are in the Installment Agreement, the IRS may choose to revoke the agreement. This will not happen overnight or be a complete surprise to you. The IRS asks you to submit updated information every two years. If they feel you can now pay the rest of your debt in full, they may ask you to do so rather than continue the payment plan.
Although you can fill out the applications to set up an Installment Agreement on your own, working with a tax professional, such as those at Fidelity Tax Relief, can ensure that you accurately fill everything out. This reduces the chance of a rejection or a revocation of the agreement at a later date. If you owe $50,000 or more in debt, working with a professional can help increase your chances of negotiating a settlement that is in your favor, rather than the IRS’. There are also other tax relief settlement options, such as an Offer in Compromise or Penalty Abatement, that may be a better solution for your situation. Call us today at 877-372-2520 to discuss your circumstances and find out the best way to find relief from your federal tax debt.