Setting Up a Payment Plan for a Small IRS Tax Debt

Highlights

  • The IRS is more flexible in setting up a payment plan for tax debts below $25,000.
  • The IRS charges a taxpayer fees to set up a payment plan.
  • Breaking a payment plan places the taxpayer at risk of wage garnishment and bank levy.
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Avoid aggressive IRS collection efforts by setting up an Installment Agreement to pay delinquent taxes.

Installment Agreement for Debts up to $50,000

The IRS raised the dollar amount at which you can set up an official installment agreement without making a full financial disclosure. The new amount is a personal tax debt up to $50,000. Payment plans can be spread out into monthly payments for as long as 72 months (6 years).

IRS tax debts can range from very small to extremely large. Anytime a person owes the IRS, no matter how small the debt, it is important to take the right steps to avoid having the situation deteriorate into a wage garnishment or bank levy.

If you owe the IRS a small amount, here is what you need to do:

  1. Make sure that your tax returns are filed up to date. The IRS can refuse to work with a taxpayer with unfiled returns, choosing instead to pursue aggressive collection efforts.
  2. Contact the IRS to set up a payment plan, if you can't afford to pay the balance in full. The IRS will allow you to make monthly payments over a number of years. In general, if the debt is less than $5,000, the IRS will allow you to make payments over three years. For tax debts between $5,000 and $25,000, the IRS allows you to spread out payments over a five year period.

Installment Agreement

For tax debts that are less than $25,000, you can request an installment agreement by sending the IRS a completed IRS Form 9465. You can request a payroll deduction installment agreement, using IRS Form 2159.

If you owe more than $25,000 and want to set up an Installment Agreement or want to prove to the IRS that you are currently unable to make ANY monthly payment or use an asset to pay the tax liability in full, then you will be required to make a full financial disclosure, listing all household income and a detailed accounting of your assets. For debts less than $25,000, setting up a payment plan generally does not require a financial disclosure.

IRS Fees

If your request to pay in installments is granted, the following conditions apply:

  • You will have to pay a set up fee of $105.00. If you agree to make payments by direct debt, the fee is reduced to $52.00.
  • If your income is below the poverty threshold, which is based on guidelines from the US Department of Health and Human Services, you can apply to pay a reduced set up fee of $43. The IRS will send you information about this reduced fee option in the installment agreement acceptance letter they send.
  • The IRS will charge you interest until the tax is paid in full, for any tax debt that is not paid in full by its due date.
  • The IRS will also charge a late payment penalty each month. The late payment penalty never can exceed 25% of the original balance you owe. It is possible to avoid the late payment penalty, IF you can prove to the IRS that there was a reasonable cause for not paying the tax by its due date.

Because the IRS continues to charge you interest and late-pay penalties, the faster you pay it back, the less you will pay in interest and penalties.

Direct Debit

You can request a direct debit Installment Agreement, using IRS Form 433-D. Advantages of setting up a direct debit Installment Agreement include:

  1. Paying a reduced user fee
  2. Not having to mail and pay the postage for sending the IRS a check each month
  3. Not being subject to any check processing charges
  4. Not breaking your payment agreement if you forget to send the payment in on time. Breaking a payment places you at risk of garnishment. Also, the IRS will charge you another fee to re-establish a broken payment plan.

It is important to remember that anytime you are in an Installment Agreement with the IRS, you are required to file all future returns on time and pay any federal tax liability in full by the due date. If you don't, the IRS will consider you in breach of your agreement and you will face levy on wages and bank accounts and seizure of assets.  The IRS can also consider you in violation of your payment agreement, if you do not provide financial information when they request it. Make sure to comply with all requests and keep up your filing and payment obligations, so you don't get levied.

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