Making monthly payments on the taxes you owe may be easier and more doable than having to pay an outstanding tax bill in full. IRS installment agreements are payment plans where taxpayers can pay taxes owed in small increments instead of having to pay one outstanding tax bill. Installment agreements do not exist without their drawbacks, however.
Expect interest and penalties with installment agreements. Penalties include:
- One-time fee of $105 or one-time fee of $52 for payments deducted directly from bank account
- Fee of $45 for reinstating agreements or changing existing agreements
- Interest on tax not paid by its due date
- Late payment penalty for not paying the tax by the due date
If you find that an installment agreement may be worth the above fees, consider setting one up. Most taxpayers who owe $25,000 or less will qualify for an installment agreement.
- For taxpayers who owe $25,000 or less: Visit the IRS website and go to the Online Payment Agreement (OPA) or call the phone number on your notice that you owe money to the IRS. Before doing these things, be sure to have your social security number and the notice with the amount owed readily available. Those not wanting to fill in the request on the website may mail in Form 9465, which can also be found on the IRS website. The request can be mailed to the address on your notice.
- Taxpayers who owe more than $25,000 may also qualify for an installment agreement. Form 433F, a Collection Information Statement, might also need to be completed. Taxpayers are advised to call the number on their notice or mail in requests Form 9465 and Form 433F, which can be found online.
- If you are a taxpayer who has not received a notice from the IRS, but has filed taxes and know that you owe money, you can still set up a payment plan on current year returns with the IRS using the Online Payment Agreement.
After applying for an installment agreement, the IRS will send a written notification stating whether the terms of your request have been accepted or if the request needs to be adjusted.
Once an installment agreement is set up, installment payments as well as tax return payments should be made on time by direct debit from a checking account, payroll deductions from wages, or by mail. Payments can also be made by check, credit card, certified funds, electronic funds transfer, or cash in person. The IRS recommends either direct debit or payroll deductions to save postage and help ensure that payments are made on time and that your agreement will not default. If you miss an installment payment, you should contact the IRS right away. A missed installment payment could default your agreement which could cause a Notice of Federal Tax Lien or IRS levy. Aside from causing financial burdens, both of these can negatively impact credit scores.
If you already have an installment agreement, you may be able to restructure it so that additional amounts can be combined with your current agreement into a new agreement.
Keep in mind that if you are in an installment agreement with the IRS, tax refunds owed to you will be applied to the payment amount. The IRS will apply the refund to amounts owed like taxes, student loans, or child support.