What happens if you owe more money to Uncle Sam than you can afford to pay at once?
Your first reaction might be to panic. But while it’s easy to feel overwhelmed about the situation, it’s critical that you pull yourself together and come up with a repayment strategy.
One of the best solutions is to set up a payment plan with the IRS.
The folks at the Internal Revenue Agency have payment plan schemes known as Installment Agreements to make repaying tax money easier.
The best agreement for you depends on what amount you owe, how quickly you can settle it, and whether your tax debt is for a business or an individual.
To set up an IRS Payment Plan, determined what amount you owe in outstanding taxes and then fill out Form 9465. The unpaid amount will include your primary tax figure plus interest and penalties.
If your tax debt is below or equal to $50,000, including penalties and interest, then you can use the Online Payment Agreement Application on the agency’s website. If you owe a higher amount, then you’ll need to download and fill up the paper document from the site and mail to the IRS along with the Collection Information Statement, i.e. Form 433-F.
Once your application is accepted, choose what day of the month you want to pay the money. The IRS requires that you settle your payments by the same day every month. It’s possible to choose any day between 1 and 28.
You’re also required to select your monthly payment figure. You can choose this within specific parameters. For example, if your owed tax amount accumulates to a figure that’s less than $10,000, you can propose a monthly settlement that’ll pay back the debt within 4 years.
It’s worth noting that the IRS will charge you a fee to activate a payment plan. It’s $79 for reinstating or restricting a defaulted installment plan, $107 for direct debit agreements, and $225 for new installment agreements. If you qualify as a low-income taxpayer, then you might be eligible for lower rates.
Now that you have a basic idea of how the IRS Payment Plan works, let’s take a look at some of the do’s and don’ts of setting it up.
Do offer to pay at least a portion of your earnings minus the living expenses. This refers to the money you have left after paying for utilities each month.
Don’t opt for a plan that requires you to pay more than you can afford. A lot of people do this just to get their plan approved. In reality, promising more money than you can pay is a big mistake; once a plan is approved by the IRS, renegotiating it becomes next to impossible.
Do familiarize yourself with different installment agreements. Doing this will enable you to pick the right agreement for your needs. For instance, guaranteed installment agreements allow taxpayers who owe less than $10,000 to settle the amount in increments over a period of 3 years. Other popular agreements include the routine installment agreement, partial pay installment agreement, streamlined installment agreement, and in-business trust fund express agreement.
Don’t miss a payment. If you do, you’re going to incur additional fines and penalties. Even after you have started paying money to the IRS to settle your tax debt on a monthly basis, interest and penalties would still be levied on the debt that is still owed. So, it is vital to make payments in a timely fashion to avoid higher fines.
Do make extra payments when you have the capacity. The IRS enables you to pay off an extra portion or all of your installment agreement. Taking this step will help settle your debt faster and, consequently, reduce penalties and fines.
Don’t modify your installment agreement to reflect a one-time payment of extra money. If you fail to pay the same amount in the next few months, then you’ll end up defaulting on your own installment agreement. The best solution is to open https://www.irs.gov/payments in your web browser, and make the payment online with your credit card. Alternatively, you can send the IRS a check, and the extra payment will be accounted for and deducted from your debt figure.
Do stay compliant—not just with your payment plan, but with every tax return filing that follows. Make sure your W-2 withholdings are adequate for the existing year, and if you’re registered as a self-employed individual, estimated taxes are remitted. If you can afford to hire an accountant, then consider contracting someone who can handle all of this on your behalf.
Don’t put your state taxes on the back burner. In fact, it’s better to pay your state tax bills before federal ones because you can then capitalize on the range of delayed payment choices that the federal government offers. States, in general, are less taxpayer-friendly than the federal government.
That rounds off our do’s and don’ts of setting up an IRS Payment Plan.
When you owe back taxes, keep in mind that your future refunds will be applicable to your debt until the amount is paid in full. Even then, you’ll still need to make all the scheduled payments according to the timeline specified in your chosen plan.
If you think the terms you chose initially aren’t suitable anymore, you can change them by going to the Online Payment Agreement tool and selecting “Apply/Reverse.” For instance, you can change the day you pay your debt each month or give yourself more time to settle what is owed (up to a maximum of 72 months).
It’s also worth mentioning that you may be able to reduce the debt via an “offer in compromise.” With this arrangement, you’ll need to identify how much you can realistically afford to pay with the help of an IRS formula that accounts for your assets and income. You then submit the proposal to the IRS, outlining that full payment will put you under severe economic hardship.
Because preparing one of these “in compromise” proposals isn’t straightforward, you may be better off with specialized assistance. The experts at our tax resolution firm know how to deal with these issues. Get in touch with us today to determine the best possible route for clearing your individual debt.