Tax trouble can feel like a heavy burden, but the good news is, the IRS offers pathways to lighten that load. If you find yourself in a position where you can't pay your tax bill in full, don't panic and don't ignore it. The IRS is generally willing to work with taxpayers who are making a good faith effort to resolve their tax debt. Setting up a payment plan can provide much-needed breathing room and prevent more serious collection actions.
Are you ready to take control of your tax situation and explore how to set up a payment plan with the IRS? Let's dive in!
Understanding Your Options: What Kind of Payment Plan Fits You?
Before we get into the "how-to," it's crucial to understand the different types of payment plans the IRS offers. Your eligibility and the best fit for you will depend on the amount you owe, your financial situation, and how quickly you can reasonably pay back the debt.
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| How Can I Set Up A Payment Plan With The Irs |
Short-Term Payment Plan (Extension of Time to Pay)
This is for you if you just need a little more time.
If you can pay off your tax liability in 180 days or less, a short-term payment plan might be your best bet.
- Eligibility: Generally available to taxpayers who owe less than $100,000 in combined tax, penalties, and interest.
- Key Feature: While you get a short extension, interest and penalties will continue to accrue on the unpaid balance. However, there are typically no setup fees for this option.
Long-Term Payment Plan (Installment Agreement)
This is for you if you need to make monthly payments over a longer period.
Tip: A slow skim is better than a rushed read.
An installment agreement allows you to make monthly payments for up to 72 months (six years).
- Eligibility:
- Individuals: You generally qualify if you owe $50,000 or less in combined tax, penalties, and interest and have filed all required tax returns.
- Businesses: You may qualify if you owe $25,000 or less in combined tax, penalties, and interest from the current and preceding tax year, and have filed all required returns.
- Key Features:
- Monthly Payments: You'll make regular monthly payments.
- Interest and Penalties: Interest and penalties will still accrue, but the failure-to-pay penalty rate is typically reduced while an installment agreement is in effect.
- Setup Fees: There are setup fees, which can vary depending on how you apply (online, phone, mail, or in-person) and whether you opt for direct debit. These fees can sometimes be waived for low-income taxpayers.
- Direct Debit Encouraged: For higher balances (e.g., $25,000 to $50,000 for individuals, $10,000 to $25,000 for businesses), direct debit is often required or strongly encouraged as it leads to lower setup fees.
Offer in Compromise (OIC)
This is for you if you truly can't pay your full tax liability.
An Offer in Compromise allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than they originally owed. The IRS will consider your ability to pay, your income, expenses, and asset equity. This is typically a last resort and has strict eligibility requirements.
- Eligibility: You must demonstrate significant financial hardship and that you cannot pay your full tax debt. You must also be current on all tax filings and estimated tax payments.
- Types of OICs:
- Doubt as to Collectibility: You can't pay the full amount due to your financial situation.
- Doubt as to Liability: You have a genuine dispute about whether you owe the tax.
- Effective Tax Administration: While you could pay, doing so would cause significant economic hardship or be inequitable due to exceptional circumstances.
- Complexity: OICs are complex and often require detailed financial disclosures (Forms 433-A, 433-B, and 656). It's often recommended to seek professional help for an OIC.
Currently Not Collectible (CNC) Status
This is for you if paying your taxes would leave you unable to meet basic living expenses.
If the IRS determines that you cannot pay any of your tax debt due to financial hardship, they may place your account in Currently Not Collectible (CNC) status. This means they temporarily stop active collection efforts.
QuickTip: Use posts like this as quick references.
- Eligibility: You must demonstrate that paying your tax debt would prevent you from affording necessary living expenses like food, housing, and medical care.
- Important Note: Interest and penalties continue to accrue while in CNC status, and the IRS can periodically review your financial situation to see if it has improved.
Step-by-Step Guide: Setting Up Your IRS Payment Plan
Now that you know your options, let's walk through the steps to set up a payment plan.
Step 1: Don't Procrastinate – File Your Returns!
Before you even think about setting up a payment plan, the most critical first step is to file all your required tax returns, even if you can't pay the tax you owe. The IRS won't consider any payment arrangement if you haven't filed all your past-due returns. Failing to file can lead to additional penalties and severely limit your options. So, if you're behind, get those returns filed immediately!
Step 2: Understand Your Total Tax Liability
Before you can make a plan, you need to know exactly what you owe.
- Check Your Notices: The IRS will send you notices (like CP14 or CP504) detailing your tax due, including any penalties and interest.
- Access Your Online Account: The IRS offers an online account system where you can view your tax balance, payment history, and payment plan details. This is an excellent resource for getting an accurate picture of your debt. You might need to create an ID.me account to access this securely.
- Call the IRS: If you prefer, you can call the IRS directly to inquire about your balance. For individuals, the general number is 1-800-829-1040. For businesses, call 1-800-829-4933.
Step 3: Determine Your Financial Capacity
This is where you honestly assess what you can afford to pay.
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- Analyze Your Income: List all sources of income for yourself and your household.
- Track Your Expenses: Detail your essential monthly living expenses (housing, food, utilities, transportation, medical, etc.). Be realistic but also identify areas where you might be able to cut back.
- Consider Assets: What assets do you have that could be used to pay down the debt? (e.g., savings, non-essential investments).
- IRS Allowable Expenses: The IRS has national and local standards for certain living expenses. While you should list your actual expenses, be aware that the IRS will use these standards when evaluating your ability to pay, especially for more complex agreements like an Offer in Compromise.
Step 4: Choose the Right Payment Plan Method
Based on your financial analysis and the amount you owe, select the most appropriate payment plan option.
Tip: Remember, the small details add value.
Sub-Step 4.1: Applying for a Short-Term Payment Plan (180 Days or Less)
- Online: The quickest way is often through the IRS's Online Payment Agreement (OPA) tool. You can usually get immediate approval.
- Phone: Call the IRS directly (1-800-829-1040 for individuals).
- Mail: If you filed your return and included a payment you couldn't cover, the IRS might automatically grant a short-term payment plan.
Sub-Step 4.2: Applying for a Long-Term Payment Plan (Installment Agreement)
- Online (Recommended): The IRS Online Payment Agreement (OPA) tool is generally the easiest and most cost-effective way to set up an installment agreement if you meet the eligibility criteria (owed amount and filed returns).
- To use OPA: You'll need to create an IRS Online Account, which often involves identity verification through ID.me. Have your Social Security Number (SSN) or Taxpayer Identification Number (TIN), date of birth, filing status, and bank account information (for direct debit) ready.
- Immediate Notification: You'll typically receive immediate notification of whether your payment plan has been approved.
- By Mail (Form 9465): You can request an installment agreement by completing and submitting Form 9465, Installment Agreement Request. Attach it to the front of your tax return if filing, or mail it to the address specified in the instructions if you're applying after receiving an IRS notice.
- By Phone: You can call the IRS (1-800-829-1040 for individuals, 1-800-829-4933 for businesses) to discuss and potentially set up an installment agreement. Be prepared for longer wait times.
- In Person: Visit a Taxpayer Assistance Center (TAC). You may need to make an appointment.
Sub-Step 4.3: Exploring an Offer in Compromise (OIC) or Currently Not Collectible (CNC)
- Gather Extensive Documentation: For OICs and CNC status, the IRS will require detailed financial information. This includes income, expenses, assets, and liabilities. You'll likely need to complete Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses.
- Submit Form 656 (for OIC): If applying for an OIC, you'll also need to complete Form 656, Offer in Compromise.
- Consider Professional Help: Due to the complexity and high scrutiny involved with OICs and CNC status, it's highly recommended to consult with a qualified tax professional (Enrolled Agent, CPA, or tax attorney). They can help you navigate the process, ensure your application is complete and accurate, and advocate on your behalf.
- Application Fees: OICs typically have an application fee, which may be waived for low-income taxpayers.
Step 5: Make Your Payments on Time
Once your payment plan is approved, consistency is key.
- Direct Debit: Setting up direct debit (automatic withdrawals from your bank account) is often the most convenient and reliable way to make payments. It also sometimes comes with a lower setup fee for installment agreements.
- Other Payment Methods: You can also pay through IRS Direct Pay (from your bank account), with a debit or credit card (third-party processing fees may apply), by check or money order, or through the Electronic Federal Tax Payment System (EFTPS) for businesses.
- Consequences of Default: If you miss payments or fail to meet the terms of your agreement, the IRS can default your payment plan and resume more aggressive collection actions, including levies and liens.
Step 6: Stay Compliant with Future Tax Obligations
This is crucial for maintaining your payment plan.
- File On Time: Continue to file all your tax returns on time.
- Pay New Taxes: Pay any new tax liabilities in full by the due date. Failure to do so can cause your existing payment plan to default.
What to Do If Your Payment Plan is Rejected or You Need to Make Changes
If Your Request is Rejected:
- Understand the Reason: The IRS will typically send you a letter explaining why your payment plan request was rejected.
- Appeal the Decision: You have the right to appeal the IRS's decision through the Collection Appeals Program (CAP) or, in some cases, a Collection Due Process (CDP) hearing. You usually have a limited time (e.g., 30 days) to submit an appeal.
- Re-evaluate Your Options: Work with a tax professional to review your financial situation and determine if another payment option, like an OIC, or re-applying for an installment agreement with revised terms, might be more appropriate.
If You Need to Change Your Payment Plan:
- Use the Online Payment Agreement Tool: For online installment agreements, you can often use the OPA tool to change your monthly payment amount, due date, or convert to a direct debit agreement.
- Contact the IRS: If you can't make changes online or have a more complex situation, call the IRS or send a written request.
- Be Proactive: It's always better to contact the IRS before you miss a payment or default on your agreement.
Important Considerations
- Penalties and Interest: Remember that interest and penalties will continue to accrue on your unpaid balance until it's paid in full, even with a payment plan in place. While the failure-to-pay penalty rate is reduced under an installment agreement, interest still compounds.
- Federal Tax Lien: If you owe a significant amount, the IRS may file a Notice of Federal Tax Lien, which is a public notice of your tax debt and can affect your credit score and ability to secure loans. In some cases, setting up a Direct Debit Installment Agreement can help prevent or withdraw a lien.
- Professional Assistance: For large tax debts, complex financial situations, or if you're considering an Offer in Compromise, seeking advice from a tax professional is highly recommended. They can help navigate the intricacies of IRS procedures and ensure you get the best possible outcome.
By understanding your options and following these steps, you can effectively work with the IRS to manage your tax debt and get back on track financially.
10 Related FAQ Questions
How to calculate my monthly payment for an IRS installment agreement?
The IRS determines your monthly payment based on your ability to pay and the total amount owed, typically aiming to pay off the debt within 72 months. You can propose a payment amount you can afford using the Online Payment Agreement tool, and the IRS will review it.
How to apply for a short-term payment plan with the IRS?
You can apply online through the IRS Online Payment Agreement (OPA) tool or by calling the IRS directly at 1-800-829-1040.
Tip: Focus more on ideas, less on words.
How to get an IRS Offer in Compromise approved?
To increase your chances of an OIC approval, you must demonstrate genuine financial hardship, be current on all tax filings and estimated payments, and submit a complete and accurate Form 656 along with supporting financial documentation (Form 433-A or 433-B). Professional assistance is often beneficial.
How to find my IRS tax balance?
You can find your IRS tax balance by creating or logging into your IRS Online Account at IRS.gov, or by reviewing any recent notices or bills from the IRS. You can also call the IRS directly.
How to appeal an IRS payment plan rejection?
If your payment plan request is rejected, you can appeal the decision through the IRS Collection Appeals Program (CAP) by filing Form 9423, Collection Appeals Request, usually within 30 days of the rejection notice.
How to reduce penalties and interest on an IRS payment plan?
While interest continues to accrue, the failure-to-pay penalty rate is reduced from 0.5% to 0.25% per month when an installment agreement is in place. You may also qualify for penalty abatement if you have a reasonable cause for failing to file or pay on time.
How to change my IRS payment plan amount or due date?
If you set up your plan online, you can often adjust the amount or due date through the IRS Online Payment Agreement tool. Otherwise, you can call the IRS or send a written request to modify your existing agreement.
How to get a tax lien removed after setting up an IRS payment plan?
A federal tax lien may be released once your tax debt is fully paid. In some cases, if you enter into a Direct Debit Installment Agreement for a certain amount, the IRS may withdraw the lien.
How to set up an IRS payment plan for my small business?
Small businesses owing $25,000 or less in combined tax, penalties, and interest can apply for an In-Business Trust Fund Express Installment Agreement online or by calling the IRS business and specialty tax line at 1-800-829-4933. For larger amounts, you may need to submit Form 433-B, Collection Information Statement for Businesses.
How to qualify for IRS Innocent Spouse Relief?
You may qualify for Innocent Spouse Relief if you filed a joint return, there was an understated tax due to erroneous items of your spouse, you didn't know or have reason to know about the understatement when you signed the return, and it would be unfair to hold you responsible. You apply by filing Form 8857, Request for Innocent Spouse Relief.
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