IRS installment agreements – definition, types, and FAQs
Due to the uncertainty of today’s economic situation, many people are falling behind on paying their taxes. The main problem is that once you fall behind, it is very difficult to pay your taxes on time and avoid the associated penalties. This is nothing new, however, and the IRS has several ways of making it easier for taxpayers to pay their tax bills. If you simply need a bit more time to pay your taxes, the IRS installment agreements are the best option at your disposal. If you want to minimize your tax bill, you may want to try talking to some of the top rated tax relief companies instead. In this article, we are going to go over what exactly IRS installment agreements are, the various types of agreements at your disposal, as well as answer some of the most frequently asked questions about them.
What are the IRS installment agreements?
IRS installment agreements are basically contracts you make with the IRS to get an extended timeframe to pay your taxes. Many people confuse installment agreements with payment plans, and the terms are usually considered to be interchangeable. However, the difference between an installment agreement and a payment plan is the length of time you have to fully pay your tax bills. Short-term payment plans require you to pay the amount you owe in 180 days or less, come without any application fees, and are generally available to anyone. Furthermore, there is only a single payment option for these plans, which is to make payments through Direct Debit.
Installment agreements, on the other hand, are basically long-term payment plans. They do not have a set time limit, as that is set on a case-by-case basis. These agreements also come with an application fee that is dependent on how you apply (in-person, by mail, or online).
The most important thing about IRS installment agreements is that the IRS will suspend their time to collect and will not be allowed to levy money from you. There are exceptions, of course, but the statement holds true in most cases. Furthermore, if you have an installment agreement request pending, the collection period will be suspended for 30 days. This means that you will not incur any further penalties that are associated with the collection process, should it come to its conclusion. However, if you already have any IRS penalties against you, they will continue to accrue interest until you pay your tax bill in full. Before you apply for an installment agreement, you may also want to understand all of the associated payment costs and fees.
Payment costs and fees
When applying for any of the IRS installment agreements, you will be able to choose from a few payment options. The only exception to this is if you owe more than $25,000 as an individual or more than $100,000 as a business. In that case, you will have to pay your tax bill through Direct Debit. Remember that even if you qualify for an installment agreement, you will still need to pay fees, penalties, and interest. For example, if you had incurred the IRS negligence penalty before or after the installment agreement was made, you will be expected to pay it through the installment plan. Furthermore, interest and penalties will continue to accrue throughout the duration of the installation agreement until you pay the balance in full.
IRS installment agreements also feature application fees. The amount you will need to pay depends on your application method as well as your payment method. The cheapest solution is to apply online and pay through Direct Debit (automatic monthly payments from your bank account). In that case, the “setup fee” will be only $31. If you choose to apply by either phone, mail, or in person, this fee will become $107. Low-income taxpayers are able to have this setup fee waived.
If, for some reason, you are unable to make Direct Debit payments, you may choose to pay your tax bill either through Direct Pay (direct payments from a savings or checking account), through EFTPS (Electronic Federal Tax Payment System), or through money orders, debit/credit cards, or checks. Do note that EFTPS requires enrollment and that paying with either a credit or a debit card will involve all the usual processing fees.
Regardless of which payment method you choose, you will need to pay a $130 setup fee if you are applying online or a $225 setup fee if you apply in any other way. Low-income taxpayers will need to pay a $43 setup fee that may be reimbursed to them under certain conditions.
Changing an existing installment agreement
An installment agreement is not “set in stone”. It is quite possible to change some of the details, but you may incur fees in the process. Unless you are considered a low-income taxpayer, any online application to revise the plan will come with a $10 fee. If you want to revise the agreement over the phone, by mail, or in person, this fee becomes $89 instead! You can apply to revise an installment agreement regardless of your payment method, as well.
Low-income taxpayers will incur the same fee when applying online, but the fee is only $43 if they apply in any other way. Like setup fees, these fees can also be reimbursed to low-income taxpayers if certain conditions are met. Lastly, low-income taxpayers do not need to pay any fees for revising their installment agreement if they are making their payments through Direct Debit.
There are many reasons why you may want to change an existing installment agreement. It may so happen that you’ve failed to consider garage sales and income tax interaction, or your financial situation has changed over the course of the plan. If you are planning to make any changes, however, it may be in your best interest to go through them with your tax professional first.
Low-income taxpayer status
The IRS applies a low-income taxpayer status to any individuals whose gross income is at or below 250% of the applicable federal poverty level. However, it is possible that your status and your current situation do not match. If you believe that you fall under the low-income category, but your status is not as such, you will need to fill out Form 13844 alongside your installment agreement or within 30 days of getting the installment agreement acceptance letter. This form will allow you to request a change of your status and may provide you with a way to avoid paying setup fees.
Do note that, in order to avoid paying setup fees, you will need to enter into a Direct Debit Installment Agreement (DDIA). Otherwise, the IRS will reimburse the fees once the installment agreement is over.
Types of IRS installment agreements
Similar to how there are many different types of taxes in the USA, IRS installment agreements come in four distinct types:
- Guaranteed installment agreement
- Streamlined installment agreement
- A partial payment installment agreement
- In-business trust fund express installment agreement
Each agreement type allows for streamlined processing. This means that installment agreements do not require the completion of a collection information statement. Furthermore, filing a Notice of Federal Tax Lien is also not required. To benefit from any IRS installment agreement plan, you also need to be current on all payment and filing requirements.
With that in mind, let’s take a look at how to select the best installment agreement for your situation.
Guaranteed installment agreement
This is the best option for taxpayers who can pay their tax bill in full within three years. However, to qualify for this agreement, you will need to owe less than $10,000 as an individual. The other requirements include:
- You have not entered an installment agreement in the last 5 years
- You have timely filed all income tax returns in the last 5 years
- You have paid any income tax due in the past 5 years
- You don’t have the financial means to pay your tax lien in full when due
- You agree to pay your full tax lien within three years while complying with all the tax laws while the installment agreement is in effect
Streamlined installment agreement
The second installment agreement type is for individual taxpayers, out-of-business taxpayers, and in-business taxpayers with income tax only that owe more than $10,000 but less than $25,000. It is also possible to enter a streamlined installment agreement if you owe up to $50,000. To do so, however, you need to be either an individual or an out-of-business sole proprietor and to also agree to pay by either payroll deduction or direct debit. Lastly, you will need to pay the full amount of your tax lien within 72 months or before the Collection Statute Expiration Date (CSED), whichever is less. You will still be able to benefit from tax reductions for business for the duration of the agreement, but any refunds are going to go toward settling your tax lien.
A partial payment installment agreement
If you are unable to pay the entire balance before CSED, you may be able to enter into a PPIA (Partial Payment Installment Agreement). To do so, you will need to provide the IRS with your complete financial statement, as well as provide any applicable supporting financial information. Unlike other IRS installment agreements, PPIA will require a Notice of Federal Tax Lien determination. Furthermore, the IRS may conduct reviews to determine whether your financial situation changes. This will usually require you to send new financial statements and supporting financial information.
However, it is entirely possible that your situation will change for the worse. In that case, you may get a reduction in your monthly installment agreement amount. If your financial situation becomes better, the IRS may require you to pay larger monthly installments. If the situation stays the same, you can expect no changes to your PPIA.
In-business trust fund express installment agreement
To benefit from an in-business trust fund express installment agreement, you will need to owe less than $25,000 in taxes. Furthermore, you will need to pay your full tax liability before the CSED date or within 24 months, whichever comes first. Lastly, you will need to make your payments through direct debit unless your tax lien is lower than $10,000. Of course, you will need to be an-in business taxpayer to benefit from this particular installment agreement.
IRS installment agreements FAQ
How can I check my balance/payment history?
The only way you can view your payment history and the current amount that you owe is through an online account on the IRS website. You will need to go through identity authorization and pass a few security checks to do so. It usually takes a week for electronic payments to show and three weeks for non-electronic payments.
I want to use the online payment agreement tool, but my browser is not supported
Due to security reasons, you can only use the following four browsers to use this application:
- Microsoft Edge/Internet explorer
- Mozilla Firefox
- Google Chrome
Furthermore, your browser needs to be able to accept session cookies. You may need to enable session cookies manually within your browser’s settings. The session cookies that the IRS site uses do not associate the user with an actual person.
What can I do to avoid default?
If you want to ensure that you don’t default on your installment agreement, you will need to manage and understand your account properly. You will also want to:
- Review your confirmation letter/recent statement, and confirm your payment amount, date, and miscellaneous information.
- If you are sending payments via mail, use the address in your correspondence with the IRS.
- Always pay at least the minimum amount when the monthly payment is due.
- Any refunds you get from popular tax deductions or any tax credits will go toward settling your debt.
- File your taxes on time. If this is not possible, contact the IRS to make a change to your installment agreement.
- Do not rely on refunds for scheduled payments. Always make the payments even if you have a refund incoming.
If you are incapable of paying your taxes on time, the IRS installment agreements are usually the best way to settle your tax bill. Of course, there are other options for people that are simply unable to make any payments at all. If you want to know more about them or need to find the best tax consultant in your area, all you need to do is browse and explore the Consumer Opinion Guide. We’re here to provide you with any information you might need to become current on your taxes, reduce tax lien, or get the most out of your tax credits and deductions!