Understanding How IRS Tax Payment Plans and Installment Plans Function
An agreement for an IRS tax payment plan or IRS installment plan allows taxpayers with income to gradually repay their tax debt through scheduled installment payments, resembling a loan agreement.
Generally, these IRS plans are completed within five years or less.
Each month, fixed payments are due on a specific date.
The payment amount is determined based on the outstanding balance and your monthly affordability.
Under specific circumstances, the IRS has the ability to provide extensions to your existing IRS payment plan.
These conditions include:
1. Inability to meet the payment requirements of your IRS installment agreement.
2. Filing your federal income tax return.
3. Realizing that you are unable to fulfill the payment amount as originally arranged.
What are IRS Payment Plan options if you have financial hardship?
IRS installment agreements are one of your options if you can’t pay your federal taxes in full when they’re due.
These agreements are payment plans, & allow you to pay your debt over a time you establish with the IRS.
If you set up an automatic withdrawal from your bank account with a form 9465 installment agreement request you will not forget the monthly payment.
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Different Types of IRS Tax Payment Plans
Guaranteed Installment Agreement
You have the right to an agreement without providing a financial statement if:
The amount of tax you owe (excluding interest and penalties) is below $10,000.
You (and your spouse, if filing jointly) have filed and paid all taxes due for the past five years.
Neither you (nor your spouse, if filing jointly) have had a payment agreement with the IRS in the last five years.
You can pay the full amount owed within three years.
You agree to settle the liability before the collection statute date expires.
You comply with the tax laws during the agreement.
Streamlined Installment Agreement
There are two types of Streamlined Agreements, depending on the amount and type of tax owed.
Tax liability assessed is less than $25,000 (including all assessed tax, penalty, and interest).
This option is available to:
- Operating businesses with only form 1120 income tax or form 1065 late filing penalties owed
- Out-of-business businesses with any type of tax owed
Tax liability between $25,001 and $50,000 (including all assessed tax, penalty, and interest).
This option is available to:
- Out-of-business sole proprietors
Note: To qualify for this agreement, you must make payments through direct debit or payroll deduction.
You can apply for a streamlined agreement online or by mail.
For both types, you must fully repay the debt within 72 months and within the IRS's collection time limit. No financial statement submission is required.
In-Business Trust Fund Installment Agreement
These agreements may be granted if the unpaid balance is below $25,000. Taxpayers owing more than $25,000 can be considered if they reduce the amount owed to below $25,000 through payments.
Routine Installment Agreement
Accounts fall under routine installment agreements when the debt type is ineligible for other payment plans. If you don't meet the criteria for guaranteed, streamlined, or in-business trust fund express installment agreements, you can still request an installment agreement from the IRS. You can request a routine installment agreement by mail, but not online.
Partial Payment Installment Agreement
With a partial payment installment agreement, you must have the ability to make some payments toward your tax liabilities within the remaining collection period that the IRS has. The IRS may allow you to make payments until the collection period expires. If you find yourself in this situation, you might qualify for an Offer in Compromise to settle your taxes.
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how to apply for an IRS payment plan
If you owe money to the IRS (Internal Revenue Service) and you can't pay it all at once, you can apply for an IRS payment plan. This allows you to make smaller payments over time until you've paid off your debt. Applying for a payment plan is like asking the IRS for permission to pay your debt in installments.
To apply for a payment plan, you'll need to fill out a form, which is like a special paper with questions that you need to answer. The form will ask for information about yourself and how much you owe. You'll also need to choose how much you can afford to pay each month.
Once you've filled out the form, you'll send it to the IRS, which is like putting it in an envelope and sending it in the mail. The IRS will review your application and let you know if it's approved. If it is, they will set up a plan with you, which means they will agree on how much you'll pay each month and for how long.
After your payment plan is approved, you'll need to make your payments on time. Just think of it like paying your school lunch money every month until it's all paid off.
Remember, an IRS payment plan is a way to make it easier for you to pay the money you owe to the government.
When requesting an installment agreement with the IRS for a tax debt over $100,000 and being reviewed by an IRS Revenue Officer, you'll need to provide comprehensive documentation to support your case. Here's a list of documents you may need:
Form 433-A (OIC) or Form 433-F (Collection Information Statement):
This form is used to disclose your financial information, assets, and income. It helps the IRS determine your ability to pay and the most appropriate installment agreement terms
Detailed financial statements, such as profit and loss statements, balance sheets, and cash flow statements, can provide a clearer picture of your financial situation.
Submit evidence of all income sources, such as pay stubs, W-2s, 1099s, and supporting papers.
Provide bank statements for personal and business accounts to confirm your cash flow.
Submit your latest tax returns for both individual and business filings.
Submit proof of your current employment status
Provide your most recent pay stubs including job position, salary, and any bonuses or commissions.
If you own a business, include business licenses, registrations, and documentation related to the company's financial health.
Asset and Liability Documentation:
Provide documentation of your valuable assets, including details on real estate, vehicles, investments, retirement accounts, and any liabilities you owe.
Keep records of your monthly expenses, such as rent/mortgage, utilities, groceries, insurance, and loan payments.
Any Special Circumstances:
If you have any unique financial circumstances or significant life events that impact your ability to pay, include supporting documents as evidence.
Draft a cover letter explaining your financial situation, the reason for the tax debt, and why an installment agreement is a viable option for resolving the debt.
Before considering an IRS Payment Plan, review the notice and ensure the tax liability is accurate.
If you believe the tax liability is incorrect, you have the right to:
- Pay only the legally owed tax amount, including interest and penalties.
- Have the IRS apply all tax payments correctly.
If you have received an IRS notice, call us at 844-888-1040 to discuss the amount the IRS claims you owe. Don't ignore an IRS notice or potential tax lien.
Prepare for the IRS installment agreement
Before requesting an installment agreement, you should:
1) File all required tax returns (even if unable to pay) The IRS will only approve an installment agreement if you are fully compliant, meaning you have filed all tax returns and made necessary estimated tax payments or payroll tax deposits.
Once agreement is in place, you must maintain full compliance to avoid defaulting on the payment plan.2) Assess your finances to determine your monthly affordability.
Consider other payment options
Check if you can borrow from a bank or a family member to settle the balance.
This option may be more cost-effective, as the IRS charges interest even when on a payment plan.
By paying off the IRS through a short-term payment plan, you can avoid certain penalties and interest.
Documentation: The IRS may request supporting documents for your income, expenses, and other amounts owed (e.g., home and car loan payments, other obligations). The IRS uses national and local standards to determine allowable monthly expenses and calculate the appropriate monthly payment. If you believe you should be allowed more than the standard amount, provide a reasoning with your application.
The Six-Year Rule: Generally, if you only owe individual income tax, you may qualify for the Six (6) Year Rule. While you need to provide financial information, proof of reasonable expenses is not required.
You must remain current with all filing and payment requirements, including projected penalties and interest on the tax debt.
The installment payment to the IRS must typically be paid:
- Within six years (72 months)
- Before the collection statute date expires
The One Year Rule: If you are unable to pay the debt in full within six years, you may be granted up to one year to modify unnecessary expenses.
By eliminating unnecessary expenses, you may be able to pay off the liability within the six-year limit.
Fortunately, taxpayers have the option to establish an IRS installment plan for owed taxes.
I handle tax-related issues daily, offering solutions such as an IRS installment plan and can assist you in setting up an affordable payment plan for your outstanding tax debt.
UNDERSTANDING IRS TAX PAYMENT PLANS
For taxpayers who are in debt but cannot pay it all off immediately, the IRS offers choices. An IRS payment plan is frequently the best way for taxpayers to resolve their tax problem.
The IRS tax payment plan enables people with unpaid federal taxes to repay their debt over time without facing escalating collection efforts. There are various IRS tax payment plans that are accepted by the IRS, including:
Guaranteed installment agreement plan
Streamlined installment agreements
Offers in Compromise
Partial payment installment agreements
The IRS payment plan you choose will depend on your financial position, the amount of taxes you owe, and other factors. The two main types of IRS tax payment plans are short-term and long-term payment plans.
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