Navigating tax debt with the IRS can feel overwhelming, but thankfully, the IRS offers various payment plans to help taxpayers manage their obligations. If you find yourself in a situation where you can't pay your tax bill in full, don't despair! Taking proactive steps to set up a payment plan is crucial to avoid more severe penalties and collection actions. This comprehensive guide will walk you through the process, step by step, to help you understand your options and secure a suitable payment arrangement with the IRS.
Step 1: Assess Your Financial Situation and Understand Your Options
Before you even think about contacting the IRS, let's get organized! The first and most critical step is to honestly evaluate your financial standing. This will help you determine which payment option is best suited for your circumstances.
Sub-heading: Gather All Necessary Information
- What do you owe? Compile all IRS notices and statements that detail your tax debt, including penalties and interest. Know the exact amount owed for each tax year.
- What can you afford? Create a detailed budget of your monthly income and expenses. Be realistic. Account for all essential living expenses like housing, food, utilities, transportation, and medical costs. Do not underestimate your expenses, as this will directly impact your proposed payment amount.
- Have you filed all your tax returns? The IRS generally requires you to be current on all your tax filings to qualify for a payment plan. If you have unfiled returns, you must file them first.
Sub-heading: Explore the Main IRS Payment Plan Options
The IRS offers several avenues for taxpayers who can't pay their tax debt in full. Understanding these options is key:
- Short-Term Payment Plan: If you believe you can pay your full tax liability within 180 days or less, this is often the simplest and most straightforward option. There's typically no setup fee for this plan, though interest and penalties will continue to accrue until the balance is paid in full. You can generally apply for this if you owe less than $100,000 in combined tax, penalties, and interest.
- Installment Agreement (Long-Term Payment Plan): This allows you to make monthly payments for up to 72 months (6 years). This is a common choice for those who need more time to pay off their debt. To qualify, individual taxpayers generally must owe $50,000 or less in combined tax, penalties, and interest, and have filed all required returns. For businesses, the limit is typically $25,000 or less in combined tax, penalties, and interest from the current and preceding tax year, with a maximum payment period of 24 months. While interest and penalties still apply, the failure-to-pay penalty rate is usually halved once an installment agreement is in effect.
- Direct Debit Installment Agreement (DDIA): This is the most cost-effective long-term option, with a lower setup fee. Payments are automatically debited from your bank account. The IRS encourages, and sometimes requires, direct debit for larger balances (e.g., between $25,000 and $50,000 for individuals).
- Non-Direct Debit Installment Agreement: If you prefer to make manual payments (e.g., by check, online transfer, or debit/credit card), the setup fee is higher.
- Offer in Compromise (OIC): An OIC allows certain taxpayers to settle their tax debt for a lower amount than what they actually owe. This is generally an option if paying your full tax liability would cause a significant financial hardship. The IRS will consider your ability to pay, income, expenses, and asset equity. This is a more complex process and is not for everyone; the IRS typically approves OICs when the offered amount is the most they can reasonably expect to collect within a reasonable timeframe. You must have filed all required tax returns and made all required estimated payments to be eligible.
- Currently Not Collectible (CNC) Status: If you are in a severe financial hardship situation and cannot afford to make any payments while meeting your basic living expenses, the IRS may temporarily delay collection efforts. This doesn't eliminate your debt, and interest and penalties will continue to accrue, but it provides a temporary reprieve. The IRS will likely request detailed financial information (like Form 433-A, Collection Information Statement for individuals or 433-B for businesses) to verify your inability to pay. Future tax refunds will typically be offset and applied to your debt while in CNC status.
Step 2: Determine Your Eligibility and Choose Your Application Method
Now that you've got a clearer picture of your finances and the available options, it's time to figure out how to apply.
Sub-heading: Check Eligibility for Online Application
- Online Payment Agreement (OPA) Tool: This is the fastest and easiest way for most individual taxpayers to set up a short-term payment plan or an installment agreement. You're likely eligible for the OPA if:
- You owe $50,000 or less in combined tax, penalties, and interest (for installment agreements).
- You owe less than $100,000 in combined tax, penalties, and interest (for short-term payment plans).
- You have filed all required tax returns.
- You are not currently in bankruptcy.
- For businesses, the online option is available for those owing $25,000 or less in combined tax, penalties, and interest from the current and preceding tax year, with a 24-month payment period.
Sub-heading: Understand Other Application Methods
If you don't qualify for the online application or prefer another method, you can apply:
- By Mail (Form 9465): You can request an installment agreement by completing and mailing Form 9465, Installment Agreement Request. If you owe more than $50,000 (for individuals) or $25,000 (for businesses) or are otherwise ineligible for online application, you may also need to submit Form 433-F, Collection Information Statement, detailing your income, assets, and monthly expenses. The instructions for Form 9465 will guide you on where to mail it.
- By Phone: You can call the IRS directly to discuss payment options and potentially set up an agreement. For individuals, call 800-829-1040. For businesses, call 800-829-4933. Have all your tax information and financial details readily available before you call.
- In Person: You can visit a Taxpayer Assistance Center (TAC) for face-to-face assistance. It's recommended to call ahead and make an appointment.
Step 3: Apply for Your Chosen Payment Plan
This is where you put your planning into action!
Sub-heading: Online Application (Recommended for Eligible Taxpayers)
- Create or Log In to Your IRS Online Account: If you don't have one, you'll need to create an IRS Online Account. This secure account allows you to view your tax information, payment history, and manage payment plans. Be prepared to verify your identity, which may involve using a service like ID.me.
- Navigate to the Payment Agreement Section: Once logged in, look for the "Payments" tab or a similar section related to payment options.
- Choose Your Plan Type: Select either a short-term payment plan or a long-term installment agreement.
- Follow the Prompts: The online tool will guide you through confirming your balance, entering your desired monthly payment amount (for installment agreements), selecting your payment method (direct debit is often encouraged), and reviewing the terms.
- Submit Your Request: After reviewing everything carefully, submit your application. You'll usually receive immediate notification of whether your payment plan has been approved.
Sub-heading: Mail Application (Form 9465)
- Complete Form 9465, Installment Agreement Request: Fill out all sections accurately and completely. Be sure to indicate your proposed monthly payment amount and the date you prefer to make payments each month.
- Complete Form 433-F, Collection Information Statement (if required): If your tax debt exceeds the online limits or if the IRS requests it, accurately detail your income, expenses, assets, and liabilities on this form. Honesty and thoroughness are vital here.
- Attach Any Supporting Documentation: If you're requesting an OIC or CNC status, you'll need to provide significant evidence of your financial hardship. This could include bank statements, pay stubs, medical bills, and other relevant documents.
- Mail Your Forms: Send your completed forms to the appropriate IRS address listed in the instructions for Form 9465. It's a good idea to send it via certified mail with a return receipt requested for proof of mailing.
Sub-heading: Special Considerations for Offer in Compromise (OIC)
Applying for an OIC is a more intensive process:
- Use the OIC Pre-Qualifier Tool: Before applying, use the IRS's online OIC Pre-Qualifier Tool. This helps determine if an OIC is a viable option for your situation and can even help you calculate a preliminary offer.
- Complete Form 656, Offer in Compromise: This is the main application form for an OIC.
- Complete Form 433-A (OIC) or Form 433-B (OIC): These detailed financial statements are crucial for the IRS to assess your ability to pay. Form 433-A is for individuals, and Form 433-B is for businesses.
- Submit Application Fee and Initial Payment: A non-refundable application fee (currently $205, but check current IRS guidelines) and an initial payment (20% of your offer for lump sum, or your first monthly payment for periodic payments) are generally required with your OIC application, unless you meet low-income certification requirements.
- Be Prepared for a Thorough Review: The IRS will conduct a detailed review of your financial situation. This process can take several months, and they may request additional information.
Step 4: What to Expect After Application and Maintaining Your Plan
Once you've submitted your application, the waiting game begins.
Sub-heading: Approval and Initial Payments
- Notification: The IRS typically responds to installment agreement requests within 30 days. For OICs, the process can take much longer. You will receive written confirmation of your approved payment plan.
- Start Making Payments: Once approved, begin making your payments on time according to the agreed-upon schedule.
- Fees: Be aware of any setup fees associated with your chosen payment plan. These fees can vary depending on the type of plan and how you apply (online vs. mail/phone). Low-income taxpayers may have reduced or waived fees.
Sub-heading: Important Considerations While on a Payment Plan
- Interest and Penalties Still Accrue: Even with a payment plan, interest and penalties will continue to accrue on your unpaid balance until it's paid in full. This is why paying off your debt as quickly as possible is always beneficial.
- Compliance with Future Tax Obligations: A crucial condition of any IRS payment plan is that you must remain compliant with all future tax filing and payment requirements. This means filing all your tax returns on time and paying any new tax liabilities when they are due. Failure to do so can result in the default of your payment plan.
- Monitor Your Account: Regularly check your IRS Online Account to monitor your payment plan details, payment history, and current balance.
- Changes to Your Financial Situation: If your financial situation changes (e.g., you get a new job, experience a significant income increase or decrease), contact the IRS immediately. You may need to adjust your payment plan.
- Potential for Lien Filing: For installment agreements, especially those with larger balances (e.g., over $10,000), the IRS may file a Notice of Federal Tax Lien. This is a public notice of your tax debt and can impact your credit score. If you consistently make payments, the lien may be released once the debt is paid.
Step 5: What Happens if You Can't Meet Your Payments?
Life happens, and sometimes even the best-laid plans go awry. If you find yourself unable to make a payment:
Sub-heading: Act Immediately
- Don't ignore it! The worst thing you can do is miss a payment and not contact the IRS.
- Contact the IRS: Call the IRS as soon as possible to explain your situation. They may be able to temporarily suspend payments, modify your existing agreement, or explore other options like Currently Not Collectible status if your hardship is severe.
- Reinstatement Fees: If your installment agreement defaults due to missed payments, you may have to pay a reinstatement fee if you want to get it back on track.
Frequently Asked Questions (FAQs)
Here are 10 common questions related to creating a payment plan with the IRS:
How to determine if I qualify for an IRS payment plan?
You generally qualify for a short-term payment plan if you owe less than $100,000. For an installment agreement, individuals must owe $50,000 or less (combined tax, penalties, and interest) and have filed all required returns. Businesses have a limit of $25,000 and a shorter payment period. The IRS Online Payment Agreement tool can help you determine your eligibility quickly.
How to set up an IRS payment plan online?
Go to IRS.gov and create or log in to your IRS Online Account. Navigate to the payments section, select "Create a Pre-Assessed Payment Plan," and follow the prompts to choose your plan type, set payment amounts, and select your payment method.
How to apply for an installment agreement by mail?
Complete and mail Form 9465, Installment Agreement Request, to the IRS. If your debt is above certain thresholds or if requested, you may also need to include Form 433-F, Collection Information Statement.
How to know if an Offer in Compromise (OIC) is right for me?
An OIC is typically for taxpayers who cannot pay their full tax liability due to genuine financial hardship. Use the IRS's online OIC Pre-Qualifier Tool to assess your eligibility and calculate a potential offer based on your income, expenses, and assets.
How to get "Currently Not Collectible" (CNC) status?
Contact the IRS by phone (or the number on your notice) and explain your severe financial hardship. You'll likely need to provide detailed financial information, potentially by completing Form 433-A or 433-B, to demonstrate your inability to make any payments.
How to avoid penalties and interest with an IRS payment plan?
While a payment plan helps manage your debt, interest and penalties will continue to accrue until your balance is paid in full. The best way to minimize them is to pay off your debt as quickly as possible and make all payments on time.
How to change an existing IRS payment plan?
You can often change your monthly payment amount, due date, or bank information (for direct debit) by logging into your IRS Online Account. Alternatively, you can call the IRS or send a written request.
How to handle a defaulted IRS payment plan?
If you miss a payment, contact the IRS immediately. They may allow you to reinstate the agreement, though a reinstatement fee might apply. If your financial situation has worsened, discuss other options like a modified plan or CNC status.
How to find out how much I still owe the IRS?
You can view your tax account balance, payment history, and payment plan details by logging into your IRS Online Account. You can also call the IRS directly or refer to any notices they have sent you.
How to ensure future tax compliance while on a payment plan?
Make sure to file all your tax returns on time each year and pay any new tax liabilities in full by the due date. Adjust your withholding or estimated tax payments if necessary to avoid owing taxes in the future, as this is a critical requirement for maintaining your payment plan.
