If you are late submitting your tax returns, or fail to pay outstanding tax, you may be liable to pay penalties to the Internal Revenue Service (IRS). A payment plan is an agreement with the IRS to pay the taxes you owe within an extended timeframe.
Types of Installment Agreements
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The IRS has created four types of installment agreement with different rules, interest, fees, and qualification criteria. Some payment plans stretch out over many years to make it easier to repay a debt.
Guaranteed Installment Agreements: If you owe $10,000 or less as of 2017, the IRS guarantees an installment agreement spread over a maximum of 36 months. This is as long as you haven't filed late or paid late within the past 5 years, or have had an installment previous installment agreement within the past 5 years.
Streamlined Installment Agreements: If you owe $50,000 or less as of 2017, a streamlined agreement allows you to pay the balance over a maximum of 72 months. The same conditions as the guaranteed agreement apply.
Partial Payment Installment Agreements: If the guaranteed or streamlined agreements are not feasible for what you can afford, then a partial payment installment agreement allows you to make monthly payments after considering your monthly living expenses. The IRS may also decide to file a federal tax lien to cover their debt collecting. The agreement is reviewed every 2 years.
Non-Streamlined Installment Agreements: If the balance owed exceeds $50,000, you will need to negotiate an individual installment agreement with the IRS. It's advised to seek professional tax advice as the IRS will file a federal tax lien, and may also ask you to sell capital assets to repay the debt.
Follow the Guidelines
Future refunds will be applied to your tax debt until the balance is clear. It's important to follow all the guidelines stipulated in your installment agreement. This includes paying the minimum payments on time every month, including all information required with each payment, and notifying the IRS of any changes to your personal details.
Installment payments can be made a number of ways including via payroll deduction, direct debit, money order, Electronic Federal Tax Payment System, credit card, and online. Failure to follow the guidelines of your installment agreement runs the risk of going into default and incurring significant penalties from the IRS which may result in an audit.
Budgeting Monthly Outflows
Setting up an installment agreement is the easiest and most efficient way to pay off a large outstanding tax debt. Instead of paying off a large amount of money when your budget doesn't allow, an installment agreement helps with budgeting monthly outflows so you can better manage your finances.
Having a debt of any kind is never fun, but the IRS has made it relatively easy to repay tax debt with their various installment agreement plans. As long as you follow the specific guidelines of your plan, and ensure you pay the agreed amount on time each month, entering into an IRS installment agreement needn't be too stressful.