Types of IRS Payment Plans and How to Qualify
Taxes can put a strain on anyone, but if you find yourself facing an unexpectedly large tax bill when you’re filing your tax return, you can feel like you’re out of options. Tax debts are due on the filing deadline, regardless of how much you owe. So what can you do? The IRS actually offers several types of payment plans for taxpayers earnestly seeking to pay their bills. Here are the three plans available and how you can qualify for them.
Be Upfront with the IRS
The first step in qualifying for any kind of IRS repayment plan is to be upfront and honest with the IRS about your difficulty paying. Many people believe that they can avoid their tax troubles by simply not filing their returns. While you might think the IRS won’t notice you owe them if you don’t send in the paperwork, that’s rarely the case. Tax debts are bound to come to their attention eventually; then, not only will you have to pay what you owed, but you’ll also have to pay fees, penalties, and interest. Plus, you’re a lot less likely to qualify for a repayment plan if you’ve been caught trying to dodge your taxes.
Your best course of action is always to file, reach out to the IRS, and request a payment plan. If you make a good-faith payment and take proactive steps to settle your debt, you’re highly likely to qualify for a payment plan. Here are the types you might be able to receive.
Short-Term Payment Plans
Sometimes simply referred to as a payment extension, short-term payment plans provide you with 120 more days to pay your tax debt. There’s no application or setup fee, and it doesn’t require monthly payments. Essentially, your payment date is just pushed back by about four months.
Please note that a short-term payment plan is not the same as a tax extension. A standard tax extension is an extension to file your return—not an extension on paying your debt. This has to be requested separately, either by calling the IRS directly or filling out their payment agreement application online.
This payment plan is ideal if you simply need a little more time to scrap your funds together. For example, if you know you can pay your tax debt after liquidating a few stocks and moving some funds, but those sales and transfers won’t be done before the tax deadline, a short-term payment plan is exactly what you need. Or, if you’re waiting on approval for a loan or home equity line of credit, this can give you the necessary time for that approval to come through.
Be aware that your tax debt still accrues interest during that 120-day window, so the sooner you can fully pay off the debt, the better.
Long-Term Payment Plans
If you need more than a few extra months to pay off your debt, you can also request a long-term payment plan via the online payment agreement application mentioned above. Long-term payment plans are more complicated to apply for, and the application process gets even more complicated based on just how much you owe. However, it’s very common for these requests to be approved, especially for individuals who have a history of paying their taxes on time.
These payment plans set you up with monthly installments on your tax debt, which you can have automatically withdrawn via direct debit or payroll deduction. The bottom line is quite simple: Make your payments on time each month until your debt is repaid. While interest does continue to accrue on the debt, if this is your first time falling behind on your taxes, you can request an abatement of the fees after completing your repayment plan.
Offer in Compromise
While the previous two payment plans are quite commonly approved, an offer in compromise is much harder to get. Only those with little to no income, few assets, and no income prospects in the future are likely to have an offer in compromise accepted. However, if you fall into this category, you could have your tax debt dismissed for a fraction of what you owe.
It’s important that an application for an offer in compromise be filled out carefully and correctly if you hope to have it approved, so we strongly encourage you to work with one of our CPAs. Doing so can ensure that your application is not denied for a simple error that could have been avoided. Contact us today to set up your consultation.