When an individual or business owes taxes to the Internal Revenue Service (IRS), settling the entire amount in a single payment may not be financially feasible. In such cases, a tax payment plan can offer a viable solution. This arrangement with the IRS allows taxpayers to pay their due taxes over an agreed period, easing the burden of a lump-sum payment. Here’s how payment plans for taxes work and how to set one up.
How Payment Plans for Taxes Work
If you’re reviewing your finances and realize that you have a more substantial tax bill than anticipated, a tax payment plan could be a structured solution. This is designed to help individuals and businesses in such predicaments.
Tax payment plans can help alleviate some financial pressure by allowing a taxpayer to distribute their debt in manageable increments over time. They also prohibit the IRS levying your assets and garnishing your wages. Levies are legal seizures of property to satisfy a tax debt, while garnishments allow the IRS to take a portion of a taxpayer’s income.
For example, imagine that you operate a small business and suddenly realize that you owe $7,500 in taxes. Paying this amount in full could significantly impact your business cash flow. By setting up a tax payment plan, you can spread out your payments and maintain your business operations without a financial disruption.
When setting up a payment plan, taxpayers can opt for either a short- or long-term plan based on how soon they think they can repay their debt. A short-term plan requires the outstanding balance to be paid within 180 days. However, there are no setup fees associated with these plans.
A long-term plan on the other hand is an installment agreement that requires monthly payments to be made. Unlike a short-term plan, the IRS charges setup fees for establishing a long-term plan, which can vary based on how you apply and how you plan to make your payments.
Taxpayers with long-term payment plans can:
- Set up automatic monthly payments from their checking account (Direct Debit)
- Make direct manual payments from their checking or savings account (Direct Pay)
- Use the Electronic Federal Tax Payment System (EFTPS)
- Make monthly payments by check, money order or debit/credit card
Lastly, it’s important to note that whether you opt for a short- or long-term payment plan, your balance can accrue penalties and interest until it’s paid.
Setting Up a Tax Payment Plan
Before setting up a tax payment plan, you’ll want to assess your tax liability and determine the full amount that’s owed, including taxes, penalties and interest.
From there you can apply for either a short- or long-term plan and pay the requisite setup fees. You’ll want to review your payment plan and stick to the defined schedule, if you have one. Finally, the IRS allows you to adjust and revise your payment plan if needed.
Here’s a closer look at the process of setting up a tax payment plan:
1. Apply for a Payment Plan
The IRS offers several ways to request a payment plan. You can apply for one online, by phone or mail, or request one in person.
However, there are certain restrictions for who can apply for a payment plan online. To apply for a short-term payment plan online, you must owe less than $100,000 in combined taxes, penalties and interest. Meanwhile, you must owe $50,000 or less in combined taxes penalties and interest to qualify for a long-term payment plan online. All of your tax returns must also be filed.
2. Pay Setup Fee
Your setup fee can vary based on the type of plan you enroll in, how you apply for it and how you’ll ultimately make your payments. While short-term payment plans do not have a setup fee, long-term plan applicants should carefully consider their options, which are illustrated in the following table:
Long-term Payment Plan Setup Fees
| Payment Option | Setup Fee |
|---|---|
| Automatic monthly payments (Direct Debit) | Online application: $31 Phone, mail or in-person application: $107 Low-income application: Fee waived |
| Direct Pay, EFTPS, monthly payment by check, money order or card | Online application: $130 Phone, mail or in-person application: $225 Low-income application: $43 (may be reimbursed |
3. Review Your Payment Plan
Reviewing payment plan terms is critical. Taxpayers should periodically review their plan, not only when they first agree to it. This ongoing review is crucial to adapting to any changes in financial circumstances and avoiding the accumulation of additional interest and penalties.
A step-by-step checklist for this process may include:
- Confirming payment amount: Know the exact amount of each installment.
- Checking due dates: Note all due dates, perhaps marking them on a calendar or setting reminders.
- Understanding interest and penalties: Acknowledge the impact of interest and penalties on the total amount paid over time.
4. Make Your Payments
How you make your payments may depend on how much money you owe the IRS. Individuals who apply for a payment plan online must make their payments via Direct Debit (automatic payments from a checking account) if their balance is over $25,000. Businesses that apply for a payment plan online must do the same if their balance is more than $10,000.
5. Revise Your Payment Plan If Needed
If your financial circumstances change, contact the IRS to discuss potential adjustments to the payment plan. You can also revise your plan online using the ID.me system.
Bottom Line
Tax payment plans serve as a lifeline for those daunted by an unexpected tax bill. These plans can help taxpayers distribute their debt across a manageable timeline while mitigating the risk of severe financial disruption. You can apply for a payment plan online, by phone or mail or apply in person. However, you may owe a setup fee, as well as penalties and interest.
Tax Season Tips
- Keeping track of your potential tax liability or refund can help you make smarter financial decisions throughout the year. SmartAsset’s tax return calculator can help you estimate how your income, withholdings, deductions and credits may impact your return this year.
- A financial advisor who specializes in tax planning can help you get your financial house in order, making tax filing season a little less stressful. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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