Every working American has to file their income tax return with the Internal Revenue Service (IRS). Unfortunately, many taxpayers struggle when their federal tax liability is more than what they can afford to pay. As a result, they fall behind on their taxes and end up with a considerable amount of tax debt on their record.
Dealing with this issue can be a challenge. Some people face a few additional penalty charges. In worst-case scenarios, tax evaders serve jail time for non-payment of their owed taxes.
Luckily, the IRS allows American taxpayers to settle their tax debt through an installment payment arrangement called the IRS Payment Plan.
With this scheme, taxpayers can have more flexibility in settling their tax liability. But to properly utilize this to your advantage, you’ll need to understand first how the plan works.
What is the IRS Payment Plan?
The IRS payment plan is a payment arrangement that gives taxpayers extra time to settle their tax debt if they can’t immediately pay it in full. Currently, there are two types of payment plans the IRS offers – the 180-day short-term payment plan and the monthly payment plan or installment agreement.
Applying for a payment plan with the IRS can be simple, provided the applicant meets all the requirements. Let’s take a look at the eligibility criteria.
Eligibility Checklist: Criteria and Requirements for the IRS Payment Plan
Like with any other type of agreement, you need to meet the criteria set by the IRS to be eligible for the IRS payment plan. Having the right qualifications gives you a better chance of approval to make installment payments.
Guaranteed Installment Agreement
To qualify for the guaranteed installment agreement, you must meet the following criteria:
1. You owe $10,000 in taxes or less (excluding interest and penalties).
2. You have not declared bankruptcy.
3. You have consistently filed tax returns and paid taxes owed and have not entered into an installment agreement in the last five years.
4. You must pay off the tax liability within three years.
5. You must pay at least the minimum monthly payment set by the IRS.
Under this payment plan, the IRS will not file a federal tax lien against you.
Streamlined Installment Agreement
You must meet the following requirements to qualify for this payment plan:
1. Your tax liability (including interest and penalties) does not exceed $100,000.
2. Your balance can be paid off within 72 months.
3. The proposed payment is equal to or greater than the minimum acceptable payment. This should be greater than $25 or the minimum payment amount, which is derived by dividing the sum of tax liability, interest, and penalties by 50.
Non-Streamlined Installment Agreement
The non-streamlined installment agreement applies if the total amount owed is $100,000 or more. Here, you will need to file Form 433-F or the Collection Information Statement, detailing your income, assets, living expenses, debts, and any other financial information that can support your proposed installment payment amount.
Partial Payment Installment Agreement
This type of agreement also requires you to file Form 433-F to facilitate a partial payment agreement with the IRS. Again, you must report your income and living expenses. Then, the IRS will review the information and decide if they will approve or deny your request.
The eligibility requirements for online applications vary based on what type of plan you’re applying for.
If you opt for the long-term payment plan, your tax liability – including tax, penalties, and interest – must be $50,000 or less. Also, you must have filed all required returns.
If you’re a business owner, your tax liability has to be $25,000 or less, including penalties and interest. Likewise, you must have filed all required returns.
Sole proprietors and independent contractors may apply for a payment plan as individual taxpayers. Meanwhile, taxpayers who wish to avail the short-term payment plan must owe less than $100,000 in combined tax, penalties, and interest.
Payment Plan Costs and Fees
Once your payment plan application has been approved, you will need to pay additional charges, including the following:
- Set-up Fee
This is charged if you are applying for an installment agreement. The fee is $31 if you are applying online through direct debit. If the application is done by phone, mail, or in person through direct debit, the set-up fee is $107. If you qualify as a low-income taxpayer, the fee is waived.
Note that the set-up fee will be collected on top of the accrued penalties and interest.
If you intend to make monthly payments from a checking or savings account, by check, money order or debit/credit card, or electronically online or by phone using the Electronic Federal Tax Payment System, the set-up fee is $130 for an online application. For phone, mail, and in-person applications, the set-up fee is $225. If you are a low-income taxpayer applying online, by phone, or in person, you will be charged a $43 setup fee, which may be reimbursed if certain conditions are met.
Also, note that the set-up fee will be collected in addition to the accrued penalties and interest.
- Revision Fee
You would only pay a revision fee if you were to revise your payment plan. Otherwise, you will not be charged for it. For online applications, the revision fee is $10. For applications done by phone, mail, or in person, the fee is $89.
If you are a low-income taxpayer applying online, you will be charged a $10 revision fee. For applications done by phone, mail, or in person, the fee is $43. Note that the fee may be reimbursed if certain conditions are met.
No revision fee is charged for changes made to existing direct debit installment agreements.
Make a List, Check It Twice
Dealing with taxes, especially liabilities, can be stressful and confusing. Luckily, with several payment plans offered by the IRS, you can choose one and settle your tax liability without much worry.
If you find yourself facing tax problems year after year, consider getting help from a tax resolution services provider to help you settle the issue with ease.
Reach out to us at Peace of Mind Tax Help so we can help you solve your tax problem. Our team is composed of leading experts in tax negotiation and mediation, and we can help minimize your tax liability!