When you owe taxes, a payment plan can keep the IRS from taking collection action like liens and levies. You can apply online, by phone, or in person.
A payment plan won’t reduce the amount you owe, but it can help you avoid the stress of paying off your debt all at once. Here’s how it works:
Determine Your Income
If you owe the IRS money, you can pay it off in a few different ways. The most common method is an IRS payment plan. This agreement with the IRS allows you to make monthly payments on the debt while avoiding garnishments and levies. However, it is important to note that your interest will continue to accrue. Therefore, speaking with a tax professional before pursuing this option is important.
During the process of setting up an IRS payment plan, you will need to determine your income. This will involve taking a look at all of your financial information, including income, assets, and liabilities. This will give the IRS a clear picture of your overall financial situation. It will also help you determine the minimum amount you can afford to pay each month. It is important not to promise the IRS more than you can deliver, as this will be a major red flag and could result in having your plan revoked.
There are a number of different IRS payment plan options available, each with its own pros and cons. For example, a short-term payment plan may be appropriate for taxpayers who owe less than $100,000 in taxes, penalties, and interest. This type of payment plan can be set up online, which is a quick and easy process that doesn’t require you to call or visit the IRS. In addition, it has a lower user fee than other application methods.
A guaranteed installment agreement is another option for taxpayers who owe less than $10,000 in total. This agreement allows you to pay your debt over six years, with a minimum monthly payment of your balance divided by seventy-two. However, you can choose to pay more than the minimum if you want to eliminate your debt faster.
It is also important to note that the IRS will consider your living expenses when determining whether you can afford a payment plan. The agency will take into account things like credit card payments, mortgage or rent, food, clothing, transportation, and utilities. They will also factor in charitable contributions, student loan payments, and any other debt you may have. If they determine that you cannot afford a payment plan, they will offer other alternatives, such as a deferral or an offer in compromise.
Review Your Financials with A Credit Counselor
If you are behind on your taxes, the IRS allows several types of payment plans. However, the agency charges interest and penalties on any outstanding balance, even when you are on a payment plan. This can add up to a large sum over time. Fortunately, there are ways to minimize the amount of interest you pay.
First, meet with a credit counselor and review your finances. A counselor can help you create a budget that includes your monthly expenses and income. He or she can negotiate with creditors to reduce outstanding debt balances and consolidate payments. This will save you money in interest and penalties.
You should bring all of your monthly bills, including the current balances on your credit cards and the interest rates. You should also bring a record of your current employment and source of income. You may also want to bring copies of any communications creditors have sent regarding late payments or accounts in default.
Your counselor can use the information you provide to help you determine if you are eligible for an IRS streamlined or installment agreement. These agreements can last up to 36 months and don’t require a lawyer. They are available for individuals who owe $100,000 or less in tax, penalties, and interest. You can apply for a streamlined payment agreement online or by mail.
If you have filed all of your past tax returns and owe $50,000 or less, the IRS has an online streamlined agreement that can be used by individuals or businesses. This is a great option for those who will be able to pay off the debt in 72 monthly payments or less.
The IRS may grant you a currently not collectible status if it determines that you will experience significant financial hardship and are unable to pay your balance. However, you must keep up with your payments. If you do, the IRS will delay collection activities such as wage garnishment. Using this option can reduce your overall cost of paying off your debt because you will be paying the lower interest rate charged by the IRS instead of, the higher rate charged by a bank or credit card company.
Determine Your Payment Amount
A payment plan allows you to pay what you owe over a longer period than if you paid the entire amount. The IRS offers different types of plans, from short-term payments that last no more than 120 days to long-term options that span years. Each option has its own minimum payment and fee structure.
When proposing a payment plan, it’s important to offer an amount that you can afford to pay each month. This will help you avoid defaulting and having your agreement revoked. Generally speaking, the IRS wants you to pay your necessary living expenses plus 10% of any other available cash flow. If your income is lower than this number, the IRS may require you to apply for a hardship exemption.
If your proposal is initially rejected by an IRS collector, keep negotiating. Ask to speak to that person’s manager and try to get your case reviewed. This will help you create a track record of payments that will show the collector your financial situation has improved and that you can afford to make regular monthly payments.
A successful payment plan will depend on your ability to adhere to a strict budget. This might force you to tighten your spending and save some money, but it will be worth the effort in terms of keeping your tax debt under control. Also, be sure to use a direct debit payment method. This will automatically send a specified amount to the IRS each month, so you can’t forget to pay and risk having your agreement revoked.
Getting an IRS payment plan can be a long and frustrating process, but it’s a better alternative to being pushed into bankruptcy by mounting interest fees and late penalties. If you’re unsure how to get started, a credit counselor at a non-profit credit agency can help you review your finances and budget and determine whether or not an IRS payment plan is a good fit. Law requires them to offer free advice, so it’s well worth the call.
Set Up Direct Debit
Although filing on time and paying what you owe is always the best option, it’s understandable that some taxpayers may not be able to pay in full. That’s why the IRS offers various payment plans that can help you settle your tax debt in an affordable way. You can usually set up a plan online – it’s fast… easy, and secure. You can also pay by card, phone, or mobile device. And if you need to change or cancel your Direct Debit, it’s simple. Just go to the ‘Direct Debits and Standing Orders’ tab in the My Account menu and click ’Manage your Direct Debits.’ Then scroll through your options and click ‘Cancel’ next to the relevant one.
The type of plan you need depends on how much you owe and whether you think you can pay off your balance within a reasonable amount of time. For example, a short-term plan is available to individual taxpayers who owe less than $100,000 in combined taxes, penalties, and interest. These plans don’t involve any setup fees and require you to pay a minimum monthly payment, which is calculated as your total debt divided by 62 months (six years).
There’s also a long-term plan that allows businesses to settle their tax debt with monthly installment payments. Businesses can qualify for this plan if they owe more than $25,000 and agree to pay off their outstanding debt in three or more years. This plan involves a fee when you apply for it, though low-income business owners can get this user fee reduced or even waived.
Finally, there’s the partial payment installment agreement, which is similar to an Offer in Compromise and lets you settle your tax debt for less than what you actually owe. This option can be difficult to qualify for, but it’s worth considering if you have a solid plan and can prove that you will be able to pay off your outstanding debt in a few years. This plan requires you to meet certain criteria, including not having other tax debts, not owing any penalties or interest, and not having filed late in the past five years.
