Can’t afford to pay your income taxes? You may be able to qualify for an installment plan with the Internal Revenue Service.

There are times when a client may have financial difficulty paying the full amount of income taxes due by the due date. In situations like this, the IRS may allow the client additional time to pay the owed amount. This agreement with the IRS for extended payback time is called an installment agreement.

What is an installment agreement?
An installment plan allows you to pay your taxes over time while avoiding garnishments, levies, or other collection actions. It’s important to understand that you’ll still owe penalties and interest for paying your taxes late, but it can help make the payments more affordable. The minimum monthly payment will depend on the amount owed and the payback period.

How do I request an installment agreement?
To request an installment agreement, you’ll have to complete an installment agreement application online, over the phone, or via various IRS forms. You will be required to submit a personal and/or business financial statement (contingent on your balance owed). Before your installment agreement request can be considered, you must be current on all filing and payment requirements. Your request for an installment agreement will be denied if all required tax returns have not been filed. In addition, taxpayers in an open bankruptcy proceeding are not eligible.
To a degree, you get to choose how much you want to pay every month. The IRS will ask you what you can afford to pay per month, encouraging you to pay as much as possible to reduce your interest and penalties. If you choose not to answer, select too low of an amount, or let the IRS pick a payment amount for you, your minimum payment will be the amount that you owe divided by 72. However, be careful, selecting an amount that you know may not be affordable can cause you harm. If a payment is missed, it will cause the agreement to be terminated and you will have to begin the process over again. Consulting with a tax accountant before you apply can help you determine the best payment amount for your situation.

Are there any costs involved with installment plans?
Yes. If you can pay off your balance within 120 days, it won’t cost you anything to set up an installment plan. Otherwise, you’ll have to pay different setup fees based on the application method (online vs. phone, mail, or in-person), the payment method (automatic withdrawals from checking accounts vs. paying by cash, check, or money order), and your income level.

How long does the process take?
The IRS will usually let you know within 30 days after submitting your application whether your request is approved or denied. Be aware that if your request is for taxes due on a return you filed after March 31, it may take longer than 30 days to receive a reply. If the IRS approves your request, you will receive a Notice detailing the terms of your agreement and a request for the appropriate fee. If applicable, the IRS will let you know whether you qualify for the reduced fee.
It’s important to remember that you will be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your request to pay in installments is granted. Interest and any applicable penalties will continue to accrue until the balance is paid in full.

Other details to consider.
By approving your request, the IRS is agreeing to let you pay the tax you owe in monthly installments instead of immediately paying the amount in full. In return, you agree to make your monthly payments on time and to meet all your future tax liabilities. This means that you must have enough withholding or estimated tax payments so that your tax liability for future years is paid in full when you timely file your return. Any refund due to you in a future year will be applied against the amount you owe. If your refund is applied to your balance, you are still required to make your regular monthly installment payment.

The process may seem intimidating at first, but a skilled tax accountant will have dealt with the application process many times and will be able to help you determine the best monthly payment and provide a timeline of the process. This is one of many areas of the tax law where it’s in your best interest to have a professional help you navigate the nuances of the IRS process. If your situation requires you to take advantage of an IRS installment agreement, contact Sacco & Associates for assistance.