Each year, the Internal Revenue Service issues income tax refunds to millions of taxpayers. But not everyone is lucky enough to get a check or direct deposit from the United States Department of the Treasury.
Some people owe additional tax, either because they didn’t have enough tax withheld via a payroll deduction (if employed) or didn’t pay enough in via estimated tax payments (if self-employed or collecting other non-payroll income).
If you ever find yourself in that boat and don’t have enough cash on hand to pay your tax liability with your tax return, don’t panic. It’s easy to set up an IRS tax payment plan.
IRS Tax Payment Plan Options
The IRS is used to working with taxpayers who need more time to pay their tax bills in full. That’s why the agency offers two payment plan options.
1. Short-Term Payment Plans
If you owe a relatively small amount and can afford to pay off the balance within 120 days (about four months), a short-term payment plan is the way to go.
There’s no fee to set up a short-term IRS payment plan. You can apply online or call the IRS at 800-829-1040 to request a short-term extension of time to pay. An IRS employee will add a note to your account indicating the agency granted you additional time to pay, and the IRS won’t begin collection proceedings during that time.
Interest and penalties continue to accrue while you’re on a short-term payment plan. Pay as much as you can as quickly as possible to pay your balance in full and minimize interest and penalties. You can pay online directly from your checking or savings account and avoid payment processing fees using IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS).
2. Long-term payment plans
Sometimes, you need more than 120 days to pay your federal tax bill. In that case, you can request an IRS installment agreement. The easiest and cheapest way to apply for a monthly installment agreement is online at IRS.gov.
To qualify for an online installment agreement, you need to owe $50,000 or less in combined tax, penalties, and interest. If you owe more than that, you need to apply for an installment agreement by mail using Form 9465 and Form 433-F.
The IRS charges a setup fee to establish an installment plan. Currently, the fee is $31 if you authorize the IRS to direct-debit monthly payments from your checking account or $149 if you pay monthly via check, money order, or debit or credit card. Low-income taxpayers — defined as people with adjusted gross income at or below 250% of the federal poverty level — qualify to have the IRS fully or partially waive the setup fee.
When you apply for a long-term installment payment agreement, you decide how much money you can afford to pay each month and on what date you’ll make the installment payment. As long as you owe less than $10,000 and the payment plan you recommend pays off your tax debt within three years, the IRS has to accept your payment plan.
Other Options for Dealing With Tax Debt
By law, the IRS has 10 years from the tax return due date to collect the tax you owe. So you may wonder whether you can simply let the clock run on your tax debt to avoid paying the IRS. That can be an expensive mistake.
The federal government has a lot more collection power than other kinds of creditors. The IRS can:
- Put a Lien on Your Real Estate or Business Property. Federal tax liens are a public notice to your creditors, and creditors to which you owe money file them with the county government where you live, work, own property, or do business. If you try to sell property while a federal tax lien is in effect, the IRS has first dibs on the sales proceeds.
- Freeze Your Bank Accounts. If you receive an IRS notice of intent to levy your bank account, the IRS intends to take money from your account immediately. Once it issues the levy, the IRS can take as much money from the account as it needs to satisfy your tax debt. You may not even realize the money is gone until you try to buy groceries or learn the bank returned your rent or mortgage payment due to insufficient funds.
- Levy Other Assets. A levy also allows the IRS to seize and sell other property, including personal property, real estate, vehicles, boats, and rental income.
- Seize Federal and State Tax Refunds. The Treasury Offset Program allows federal and state government agencies to collect outstanding debts by seizing tax refunds. Don’t count on a fat refund check next year if you have an outstanding IRS tax debt.
- Garnish Your Wages. If the IRS garnishes your wages, it will send a notice to your employer, and your employer has no choice but to comply. You’ll be allowed to keep a portion of your paycheck — the IRS determines how much you get to keep based on your filing status, pay period, and number of dependents. To stop the garnishment, you need to pay the full amount of your tax bill, set up an installment plan with the IRS, or appeal the garnishment.
- Revoke Your Passport. If you owe more than $50,000 in unpaid taxes, penalties, and interest and the IRS considers your tax debt to be “seriously delinquent,” it will inform the State Department. In turn, the State Department will deny, revoke, or limit the use of your passport until you’re in good standing with the IRS.
The best defense against these collection actions is to take advantage of an online payment agreement via the IRS website.
Of course, your financial and tax situation may be so dire that making monthly payments to the IRS simply isn’t an option. In that case, there are other options.
3. Offer in Compromise
An offer in compromise (OIC) is an agreement between you and the IRS that settles your tax debt for less than the total amount you owe.
However, getting an OIC isn’t easy. To qualify, you must submit financial information and records proving you’re unable to pay off your tax debt via an installment agreement. For that reason, OICs are usually only available to low-income taxpayers with few assets to liquidate to pay debt. To find out whether you might qualify, check out the IRS’s prequalifier tool.
To apply for an OIC, you must complete the forms included in the Form 656 Booklet. Mail your application and additional information and pay a nonrefundable application fee of $205. You also need to make an initial payment amount toward your offer.
Officially, the IRS cannot consider your application for an OIC unless you’ve filed all required tax returns.
Because qualifying and applying for an OIC is complex, it’s a good idea to get help from an experienced certified public accountant, enrolled agent, or tax attorney.
4. Currently Not Collectible Status
If you truly don’t have the means to pay your back taxes — even a reduced amount under an OIC — the IRS may consider placing your account in currently not collectible status.
That means the IRS temporarily suspends collection actions until the 10-year statute of limitations runs out. However, penalties and interest continue to accrue during this time, and the IRS monitors your income. They will reopen your account and pursue collection if your financial situation improves before the 10-year period ends.
The IRS has a reputation for being heavy-handed in dealing with taxpayers — a reputation that may be well deserved. However, IRS employees recognize that many people simply owe more than they can afford to pay. As long as you (or a tax professional to whom you’ve given power of attorney) proactively communicate with the IRS, they’ll usually work with you on payment options or help you reach another solution.
If you find yourself falling behind on your taxes each year, you can adjust your withholding or make quarterly estimated payments to avoid facing the same problem in the future.