If you are not capable of paying your unpaid taxes to the IRS in one payment, the IRS offers several tax payment plans or Installment Agreements in order to help you pay off taxes without serious financial hardship. When considering an Installment Agreement, it is important to be aware of a few things associated with them.
Series of Monthly Payments
With a tax payment plan or Installment Agreement, you agree to pay the IRS a monthly payment amount each month. This monthly payment amount varies depending on how much you owe, and how long the payment plan is.
Types of IRS Tax Payment Plans
There are several types of Installment Agreements available depending on the amount that you owe the IRS. If you owe $10,000 or less, a Guaranteed Installment Agreement will suffice. If your tax balance is less than $25,000, but more than $10,000 a streamlined Installment Agreement is more suitable. Generally, you will not have to disclose all your financial information. If owe more than $25,000 you are obligated to disclose your financial situation on a Collection Information Statement (Form 433).
Application Fee or User Fee
At the initial signing of an Installment Agreement, the IRS will usually charge a user fee. While this fee is typically $120 (updated 1/14), it can vary depending on your income level and method of payment. For instance, if you commit to setting up a monthly bank draft or if you fall below the poverty guidelines, as outlined by the Department of Health and Human Services, the charge is reduced to $43.
In any agreement with the IRS, they will continue to charge you with interest and penalties until your balance has been paid off in full. Interest currently is at 4% (compounded daily) with a failure to pay penalty of about .25%.
IRS Tax Lien
The possibility of a tax lien is one of the most important factors to consider before committing to a tax payment plan with the IRS. If the IRS has yet to file a tax lien it is very likely that they will do so in the near future, even under an Installment Agreement. After a tax lien is issued it will generally not be withdrawn until you have a zero balance remaining and can have a severe impact on your credit score.
Monthly Payment Options
The IRS accepts monthly payments in different ways. You may either manually send in a check each month for the amount owed, or set up an ACH bank draft. It is a recommended that you use a bank draft because you will never be late on a payment (unless of course the money is not there).
Sell Off Assets
Sometimes the IRS requires that you liquidate assets that you own to satisfy some unpaid taxes before any payment plan can be accepted. While if you owe less than $25,000 you will not have to complete a Collection Information Statement (Form 433) and submit these assets. If you owe any amount greater than $25,000, you will need to fill out Form 433A and liquidate certain assets.