A surprise tax bill can happen to anyone. One windfall or miscalculation in your payroll withholding, and suddenly you’re not getting a tax refund, but finding out that you owe money to the Internal Revenue Service.
If you’re self-employed, or have a side gig, it’s not unusual to owe taxes when April 15 rolls around.
There’s no reason to panic if you owe back taxes. The IRS has options for installment payment plans, no matter how much you owe or how tight your budget. You will pay more than if you’d paid on time in most cases, but it will cost less than ignoring the problem.
Some 9.3 million Americans owed, collectively, more than $120 billion in back taxes by the end of 2022, according to the IRS. The agency also collected $98.4 billion in back taxes.
The U.S. Department of Treasury wants people with tax debt to catch up without a lot of hurdles. In the past few years, the process for how to set up a payment plan with the IRS has been streamlined, particularly when done online.
The IRS has tax settlement plans for people who can pay within 180 days, as well as for those who need more time. If you owe back taxes, there is likely a plan that will work with your income and financial situation.
What Is an IRS Payment Plan?
An IRS payment plan is a way to pay federal back taxes directly to the agency. Interest and penalties will continue to be charged, but are reduced as your balance dwindles.
The payment plan is set up directly with the IRS, either online or by filling out a form and mailing it in. Those who apply online and have payments automatically withdrawn monthly from a checking or savings account pay the lowest fees.
There are both short-term and long-term plans, based on your ability to pay. If you owe more than $10,000, the plans are less flexible.
The interest rate charged changes quarterly and accrues daily.
Once you apply for an installment payment agreement with the IRS, the agency cannot levy more fines, and the collection window is suspended while the application is reviewed. If you withdraw the application, or it’s not approved, penalties and collection actions will continue.
The plan is only for federal taxes. If you owe state or local taxes, you will have to find out what your state and local government offer. An installment agreement also won’t keep the IRS from placing a lien on your property, usually if you owe more than $25,000. The lien is lifted within 30 days of the balance being paid off.
Individuals (not businesses) who owe back federal taxes may pay immediately at IRS.gov with Direct Pay from a checking or savings account. Both individuals and businesses may pay by phone through Electronic Federal Tax Payment System (EFTPS), by check, money order or debit/credit card. Fees only apply if using a card. No additional interest or penalties will accrue.
Short-Term Payment Plan
If you can pay what you owe in 180 days or less, the short-term IRS payment plan is the best option. You are eligible if you owe less than $100,000 in taxes, penalties, or fees, have filed your most recent taxes and can pay within the 180-day window.
There is no setup fee (unlike long-term payment plans), but penalties and interest still will be charged. You can pay all at once, or pay in installments, as long as the balance is paid by the deadline.
Features of the IRS short-term payment plan:
- Payment may be directly from a checking or savings account (Direct Pay); by EFTPS; by check, money order, debit, or credit card.
- Individuals who owe $25,000 or more must use Direct Pay.
- Fees ($2-$20) apply when paying with a card.
- Individuals may apply online, by phone, mail or in person (businesses cannot apply online).
Long-Term Payment Plan
The long-term payment plan is for taxpayers who owe $50,000 or less, have filed their most recent taxes, but can’t pay within 180 days. The IRS offers two payment options for long-term payment plans; both include setup fees, except for low-income taxpayers.
Option 1: Payment is through direct debit (automatic monthly payments from a checking account), called the Direct Debit Installment Agreement (DDIA). The option includes:
- Online application: $31 setup fee
- Phone, mail, or in-person application: $107 setup fee
- Setup fee waived for low-income applicants
- Accrued penalties and interest until balance is paid in full
Option 2: Monthly payment by EFTPS, check, money order or debit/credit card.
- Online application: $130 setup fee
- Phone, mail, or in-person application, $225 setup fee
- Low income online, phone or in-person application $43 setup fee (may be reimbursed if certain conditions are met)
- Fees ($2-$20) apply when paying with card
- Accrued penalties and interest until the balance paid in full
How to Set Up a Payment Plan With the IRS
The best way to apply for an IRS payment plan is online. It costs less and it can be done within minutes for most people who owe back taxes. If you owe more than $25,000, the process will be a little more complicated, but can still be done online in most cases.
The steps for setting up an installment tax payment plan are:
- Visit IRS.gov and click on “sign into your account,” or “make a payment.”
- If you don’t have an online IRS account, clicking on either of those will bring you to an option to create one. If you have an IRS account, but haven’t signed on in a couple years, you’ll have to create a new one since the IRS now uses ID.me for verification.
To verify your identity when creating an account, you’ll need:
- A valid email address and access to your email
- Photo identification (driver’s license, state ID, passport)
- Your Social Security number or individual tax ID number
- Access to a smartphone or webcam for ID verification
- A phone number or email address for two-factor verification
The site has a help page if you need assistance with ID verification or with setting up in general.
- Once you have an online IRS.gov account, you can choose whether to pay now, or to apply for a payment plan by clicking on the appropriate option.
- You will be asked your filing status, how much you owe and how much you can pay monthly if you are applying for a long-term plan.
- If you don’t want to apply online, you will have to fill out form 9465, which you can download from IRS.gov. If you don’t have access to a computer, you can pick up the form at most local public libraries or IRS Taxpayer Assistance Centers. You can also call 1-800-TAX-FORM (1-800-829-3676) to have one mailed.
Minimum Payments on IRS Payment Plans
The IRS sets minimum payments, as well as length of payment term, depending on how much you owe. If you can pay more than the minimum, there’s no penalty to pay it off early, and it will cost you less in interest.
- Less than $10,000: No minimum payment, maximum three-year term. Since interest is charged, be sure to set the payment as high as you can afford.
- $10,000-$25,000: Minimum payment is balance of taxes owed divided by 72; six-year (72 month) term.
- $25,000-$50,000: Minimum payment is balance of taxes owed divided by 72; six-year (72 month) term. The application process involves a deeper dive into your finances by the IRS, and additional documentation is required.
- $50,000 or more: No minimum payment or payment term. The IRS works with individual taxpayers to set up a repayment plan depending on their financial situation.
Making Changes to Your Payment Plan
Once you have an installment plan set up, it’s easy to make changes online.
You can increase your payment amount or reinstate an old plan by logging onto your account.
If you owe taxes in a subsequent year, you don’t set up a second payment plan, but simply add the tax year to your current plan.
The IRS charges a fee if you change your plan more than once within 180 days.
You can also call the IRS at 800-829-1040 to get help making changes. Keep in mind that there may be long wait times when calling.
Can the IRS Revoke a Payment Plan?
The IRS can revoke your tax payment plan if:
- You don’t file a tax return after entering the agreement
- You miss payments
- Your financial situation has changed substantially
- You provide inaccurate or incomplete information when you apply
If your plan is revoked, you will owe the amount due, and taxes, fees and interest will apply.
Pros and Cons of an IRS Payment Plan
There are pros and cons to setting up an IRS payment plan, depending on your financial situation. Of course, the other options are to pay what you owe immediately, or not pay and end up owing even more.
Pros of an IRS Payment Plan
- More time to pay taxes (3-6 years)
- Flexibility of monthly payment amount for those who owe less than $10,000
- A break on penalties and fees, which decrease with the balance
Cons of an IRS Payment Plan
- Interest and penalties accrue until balance is paid
- Enrollment fees must be paid before plan starts
- More expensive for people who don’t want to apply, pay online
- Does not offer protection from federal tax liens
What Happens if You Don’t Pay Your Taxes?
Even if you can’t afford your tax bill, file your tax return on time. This saves you the cost of a penalty and keeps you on good terms with the IRS.
The failure to file penalty is 5% of the unpaid taxes, accrued each month that the return is late, up to five months. It’s capped at 25% of your unpaid taxes.
If you don’t pay what you owe, the failure to pay penalty is 0.5% of the balance accrued monthly. It’s capped at 25% of the unpaid balance. Unlike the failure to file penalty, there is no limit to how many months it will accrue.
The IRS charges interest on the penalties, as well as what you owe. That means not filing or paying your taxes can result in a big bill, and possibly a lien on your property.
Is an IRS Payment Plan Right for You?
If you can’t afford to pay your taxes, a payment plan is a better option than ignoring the problem.
It will ease your anxiety to know you are working with the IRS to take care of your commitment, instead of allowing the balance of the unpaid bill to keep growing.
If you don’t think you can afford monthly IRS payments, reviewing your finances with a credit counselor at a nonprofit credit agency can help you work out a way to do it.
A consultation with a credit counselor is free, and they’re required by law to offer advice that is in your best interest. The counselor will go over your finances and budget with you and discuss in depth how an IRS payment plan works. They may also talk about debt relief options to help you fit the payment plan in, if you are buried in credit card debt, or medical bills.
Owing the IRS money can be overwhelming. Having a conversation about how to set up a payment plan that fits your budget is the first step to peace of mind.
About The Author
Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.
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