The IRS has several types of installment agreements. Most require you to provide a financial statement. In most cases the IRS will restrict your standard of living standard. Professional assistance is recommended because the risk of financial hardship is real.
Sometimes a payment plan is not the best approach. Interest and penalties will continue to accrue. It is possible to pay under a payment plan and have the penalties and interest every year exceed the payments. That certainly is no fun.
IRS Payment plans are not always granted automatically, especially if you have assets available to pay the tax debt. Also, sometimes the IRS will ask the taxpayer to extend the statute of limitations.
All tax returns must be filed. No payment plan is permitted without first filing all required tax returns.
A payment plan does not stop interest on your tax debt. Generally, interest compounds daily and is never abated. Interest accrues on the tax, penalty and previously assessed interest.
The IRS may ask for a waiver of the statute of limitations (ten years or longer) as a precondition to entering into a payment plan.
During the term of a payment plan, the IRS will retain all tax refunds. Accordingly, be sure that your tax withholding or estimated tax payments are not overly large.
Most payment plans are based on equal monthly payments. Deviations are possible, but these typically involve monthly payments with additional one-time or periodic payments. And, yes, payments must be made on time or the agreement is defaulted.
Also, all future tax returns and payments must be timely made, or that failure will constitute a default of the payment plan.
The IRS charges a fee to enter into a payment plan. That fee is currently $105, unless the payments are automatically deducted in which case the fee is $52.
You will receive a balance due statement once a year from the IRS.
The amount you will have to pay is a function of three factors: 1) the amount you owe, 2) your ability to pay, and 3) the amount of time left on the statute of limitations for collection.
The IRS may compute your monthly income, and subtract taxes and allowable living expenses. You are expected pay the balance every month to the IRS. At that level, it is really very simple. The friction point is “allowable living expenses.” This is where the trouble lies. The IRS’s view of your reasonable living expenses and your idea of reasonable living expense will probably not be remotely related. There are ways to mitigate this problem, but many times it’s not easy. This IRS has no interest in helping you, and many people get stuck monthly payments that are larger than what they should be.
Another friction point is the where you have multiple creditors. If you owe the hospital or the credit card company in addition to having an IRS debt, and that hospital or credit card debt has not been reduced to judgment in court, the IRS will demand that you avoid paying the other creditors and pay only the IRS. Your other debts are of no concern to the IRS. There are ways of addressing this problem. Many IRS employees either do not know about them or act like they don’t know.
In summary, obtaining a payment plan is very simple in concept. It is the execution of the details that cause problems, which is why we do not recommend people trying to obtain a payment plan without professional help. Call us first. Sometimes we can find a better solution, and even if we cannot find a better solution than a payment plan, we can ensure that you will get the best possible payment plan from the IRS.
And even if you attempted to get a payment plan on your own and it did not work out very well, call us. We will try to see if we can fix it, but be advised that once the well has been poisoned the project can become much more difficult.