Navigating tax debt can feel overwhelming, but the good news is that the IRS offers various options to help taxpayers resolve their liabilities, one of the most common being a payment plan. If you find yourself in a situation where you owe taxes but can't pay them in full right away, setting up a payment plan with the IRS can provide much-needed relief and prevent further penalties and collection actions.
This comprehensive guide will walk you through the process of establishing a payment plan with the IRS, step by step, so you can regain control of your financial situation.
How Do I Set Up a Payment Plan with the IRS? A Step-by-Step Guide
Step 1: Are you ready to take control of your tax debt?
The first, and perhaps most crucial, step is to acknowledge your tax liability and make the decision to address it. Ignoring tax debt will only lead to escalating penalties and interest, and potentially more aggressive collection actions from the IRS. By proactively seeking a payment plan, you're taking a significant step towards financial peace of mind.
Before you begin, gather all relevant tax documents, notices from the IRS, and financial information, including income, expenses, and assets. Having this information readily available will make the application process much smoother.
Step 2: Understand the Types of IRS Payment Plans
The IRS offers several types of payment plans, each with its own criteria and benefits. Understanding these options will help you choose the one that best fits your financial circumstances.
Sub-heading 2.1: Short-Term Payment Plan
- What it is: This option allows you to pay your tax liability in full within 180 days (approximately six months).
- Who qualifies: Individuals who owe less than $100,000 in combined tax, penalties, and interest.
- Benefits: This plan helps you avoid the fee for setting up a long-term installment agreement. While interest and penalties still accrue, they will generally be less burdensome due to the shorter repayment period.
- Important Note: You won't be charged a setup fee for a short-term payment plan.
Sub-heading 2.2: Long-Term Payment Plan (Installment Agreement)
- What it is: This is the most common type of payment plan, allowing you to make monthly payments for up to 72 months (six years).
- Who qualifies:
- Individuals: You must have filed all required tax returns and owe $50,000 or less in combined tax, penalties, and interest.
- Businesses (including sole proprietors/independent contractors): You must have filed all required returns and owe $25,000 or less in combined tax, penalties, and interest.
- Benefits: Provides a manageable way to pay off significant tax debt over an extended period. As long as you adhere to the agreement, the IRS is generally prohibited from levying your assets.
- Important Note: Penalties and interest will continue to accrue on the unpaid balance until it's paid in full. There are also user fees associated with setting up a long-term installment agreement, which vary based on how you apply and how you pay.
Sub-heading 2.3: Offer in Compromise (OIC)
- What it is: An OIC allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than what they originally owe. This is generally an option if you're experiencing significant financial hardship and genuinely cannot pay the full amount.
- Who qualifies: The IRS considers your ability to pay, income, expenses, and asset equity. They'll assess if you can't pay the full amount or if doing so would cause undue financial hardship.
- Benefits: Can significantly reduce your overall tax debt.
- Important Note: An OIC is not a guaranteed option and requires a comprehensive financial disclosure. The IRS scrutinizes these applications carefully. There is typically an application fee, and you may need to make an initial payment with your offer.
Sub-heading 2.4: Currently Not Collectible (CNC) Status
- What it is: If the IRS determines that you truly cannot pay your tax debt due to financial hardship (e.g., you have no disposable income or assets), they may place your account in "Currently Not Collectible" status. This means they will temporarily pause collection efforts.
- Who qualifies: Those who can demonstrate that paying their tax debt would prevent them from meeting necessary living expenses.
- Benefits: Provides temporary relief from IRS collection actions.
- Important Note: Your debt is not forgiven, and interest and penalties will continue to accrue. The IRS will periodically review your financial situation, and collection efforts may resume if your circumstances improve.
Step 3: Determine Your Eligibility and Choose Your Application Method
Now that you understand the options, it's time to see which one you qualify for and how you'll apply.
Sub-heading 3.1: Eligibility Check
- For Short-Term Payment Plans: Owe less than $100,000 in combined tax, penalties, and interest.
- For Long-Term Payment Plans (Installment Agreements):
- Individuals: Owe $50,000 or less in combined tax, penalties, and interest, and have filed all required tax returns.
- Businesses: Owe $25,000 or less in combined tax, penalties, and interest, and have filed all required tax returns.
- For Offer in Compromise (OIC): Use the IRS Offer in Compromise Pre-Qualifier Tool on the IRS website to get a preliminary idea of your eligibility. This is a crucial first step for OICs.
- For Currently Not Collectible (CNC): This status is typically determined by the IRS after a review of your financial information, often after you've contacted them about your inability to pay.
Sub-heading 3.2: Choose Your Application Method
The IRS provides several ways to request a payment plan:
- Online Payment Agreement (OPA) Tool: This is often the easiest and fastest way for individuals and some businesses to set up an installment agreement if they meet the eligibility criteria.
- Individuals: If you owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns, you can use the OPA.
- Businesses: If you owe $25,000 or less in combined tax, penalties, and interest and have filed all required returns, you may be able to use the OPA.
- To use the OPA: You'll need to create an IRS Online Account, which requires identity verification (often through ID.me). Have your Social Security Number (SSN) or Employer Identification Number (EIN) ready.
- By Phone: You can call the IRS directly to discuss payment options.
- Individuals: Call 1-800-829-1040.
- Businesses: Call 1-800-829-4933.
- Be prepared to provide your financial information.
- By Mail: You can submit Form 9465, Installment Agreement Request.
- You'll need to fill out the form, providing details about your financial situation and proposed monthly payment.
- If your balance is over $50,000 (for individuals) or you don't qualify for a streamlined agreement, you may also need to attach Form 433-F, Collection Information Statement (for individuals) or Form 433-B, Collection Information Statement for Businesses. These forms require a detailed breakdown of your income, expenses, and assets.
- In Person: Visit a local Taxpayer Assistance Center (TAC). You may need to schedule an appointment. This can be beneficial if you prefer face-to-face assistance.
Step 4: Prepare Your Application and Submit It
This step involves filling out the necessary forms accurately and completely.
Sub-heading 4.1: Online Application (OPA Tool)
- Log in: Access the IRS Online Payment Agreement tool through your IRS Online Account.
- Follow Prompts: The tool will guide you through the process, asking for your proposed monthly payment amount and desired payment due date.
- Direct Debit (DDIA): The IRS encourages Direct Debit Installment Agreements (DDIA) where payments are automatically withdrawn from your bank account. This often results in a lower setup fee. Have your bank routing and account numbers ready if you choose this option.
- Review and Submit: Carefully review all information before submitting your application. You'll often receive immediate notification of approval.
Sub-heading 4.2: Mail Application (Form 9465, Form 433-F/433-B)
- Form 9465: Fill out this form with your personal information, the tax period(s) you owe for, the amount you owe, and your proposed monthly payment.
- Collection Information Statements (if applicable):
- If required (e.g., for larger debts or if you don't qualify for streamlined online agreement), meticulously complete Form 433-F (individuals) or Form 433-B (businesses). These forms are designed to provide the IRS with a comprehensive picture of your financial standing. Be honest and accurate.
- Include supporting documentation as requested in the instructions for these forms (e.g., pay stubs, bank statements, asset valuations).
- Mail to the Correct Address: The instructions for Form 9465 will provide the correct IRS address to mail your application.
Sub-heading 4.3: Offer in Compromise (OIC) Specifics
- Form 656, Offer in Compromise: This is the main form for an OIC.
- Collection Information Statements: You will always need to complete Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed, or Form 433-B (OIC), Collection Information Statement for Businesses, along with Form 656. These forms are more detailed than their non-OIC counterparts.
- Application Fee and Initial Payment: Be prepared to pay the application fee (currently $150, but waived for low-income taxpayers) and make an initial payment, depending on the payment option you choose (lump sum or periodic payments).
- Gather Supporting Documents: This is critical for an OIC. You'll need extensive documentation to support your financial claims.
Step 5: Await IRS Response and Maintain Compliance
After submitting your application, the IRS will review it.
- Online Applications: As mentioned, online applications often provide immediate approval.
- Mail/Phone Applications: For applications submitted by mail or phone, the IRS will typically notify you of their decision within 30 days. However, during peak tax season, it might take longer.
- Potential for Negotiation: If the IRS doesn't approve your proposed payment amount, they may propose an alternative. Be prepared to negotiate if necessary.
- Maintaining Compliance: Once your payment plan is approved, it is absolutely critical to adhere to the terms of the agreement.
- Make all payments on time.
- File all future tax returns on time.
- Pay all future taxes due on time (e.g., through withholding or estimated tax payments).
- Failure to comply can result in the default of your payment plan and the resumption of IRS collection actions.
Step 6: What Happens After Approval (and During)?
Your payment plan isn't just a one-time setup; it's an ongoing commitment.
- Interest and Penalties: Remember that even with a payment plan, interest and penalties will continue to accrue on the unpaid balance until it's paid in full. The annual interest rate for underpayments is periodically adjusted (it's currently 8% per year, compounded daily).
- Lien Considerations: The IRS generally won't file a Notice of Federal Tax Lien (NFTL) while an installment agreement is pending or in effect, unless your tax liability exceeds certain thresholds or you default on your agreement. If a lien was already filed, entering into a Direct Debit Installment Agreement might allow for its withdrawal.
- Modifying Your Agreement: If your financial situation changes, you can usually modify your existing payment plan through the Online Payment Agreement tool, by phone, or by mail. There may be a fee for modifying or reinstating an agreement.
- Paying Off Early: You can always pay off your tax debt in full at any time, even if you have a payment plan in place. This will stop the accrual of further interest and penalties.
Frequently Asked Questions (FAQs)
Here are 10 common questions related to setting up a payment plan with the IRS:
How to know if I'm eligible for an IRS payment plan?
You are generally eligible if you have filed all required tax returns and owe a combined amount (tax, penalties, and interest) of $50,000 or less for individuals, or $25,000 or less for businesses, for a long-term plan. Short-term plans have a higher threshold of $100,000.
How to apply for an IRS payment plan online?
Visit IRS.gov and use the "Online Payment Agreement" (OPA) tool. You will need to create an IRS Online Account and follow the prompts to apply.
How to apply for an IRS payment plan by mail?
Complete and mail Form 9465, Installment Agreement Request, to the IRS. Depending on your debt amount, you may also need to include Form 433-F (individuals) or Form 433-B (businesses).
How to find the right IRS contact number for payment plans?
For individuals, call 1-800-829-1040. For businesses, call 1-800-829-4933. You can also find phone numbers on any IRS notice you may have received.
How to determine my monthly payment amount for an IRS payment plan?
The IRS generally calculates a monthly payment that will pay off your debt within the allowable timeframe (up to 72 months for long-term plans). You can propose an amount you can afford, and the IRS will review it based on your financial information.
How to avoid a federal tax lien when setting up a payment plan?
Entering into a Direct Debit Installment Agreement (DDIA) is the best way to prevent a lien from being filed, or to request its withdrawal if one has already been filed.
How to check the status of my IRS payment plan application?
If you applied online, you usually receive immediate approval. For mail or phone applications, you can check by calling the IRS directly at the numbers provided above, or by logging into your IRS Online Account.
How to change my existing IRS payment plan?
You can typically change your monthly payment amount, due date, or convert to a Direct Debit agreement through the IRS Online Payment Agreement tool, or by contacting the IRS by phone or mail.
How to understand the fees associated with IRS payment plans?
Short-term payment plans have no setup fee. Long-term installment agreements have varying setup fees ($22 for online direct debit, $69 for online non-direct debit, higher for phone/mail applications), which may be waived or reduced for low-income taxpayers.
How to get help if I cannot afford any IRS payment plan options?
If you truly cannot afford to pay, even with a payment plan, you may consider an Offer in Compromise (OIC) or discuss "Currently Not Collectible" status with the IRS. It's often advisable to seek assistance from a qualified tax professional or tax attorney in such complex situations.
