Paying Back Your IRS Debt a Piece at a Time

Imagine if you received a bill demanding payment of your credit card balance – the entire balance – at one time. It's fair to say this might not be feasible for you. Fortunately, you're given the option to pay back your credit purchases with monthly installments (plus interest, of course).

If you receive a bill for back taxes owed to the IRS, you're not immediately presented with payment options. In fact, you will be instructed to pay the full assessed amount, typically within one month. But the IRS, like your credit card company, understands that you may not have thousands – or even hundreds – of dollars lying around. That's why you can opt to pay back what you owe in installments. How much you pay is dependent on a few different factors. Remember to review not only how much you owe, but what you're making every month. What you end up paying to the IRS may be far lower than you think.

Mind the Details

Many people, especially those who owe enormous IRS debts, make a request for a payment plan. The good news is that even if you have a balance less than $10K, but have a history of filing and paying on time, you should qualify for an installment agreement. Details to consider when requesting this type of plan include how much you'll pay, your payment method, the due date for each installment, how long you'll be making payments and how much you'll pay in interest over the course of the agreement. While it's smart to pay as much as you can each month, you want to make sure not to commit to an installment you won't be able to afford. If you miss a payment – even one – you can default on your agreement and have to hope you're approved for another.

Your Ability to Pay

How much you pay each month will depend not only on the total tax liability, but also your ability to pay. Depending on your level of debt, the IRS may request a copy of your monthly income and expenses; their goal, remember, is to create a payment that you can manage but also satisfies the debt as quickly as possible. The IRS provides for certain "allowable expenses" such as food and housing or rental payments (the amounts for which are determined by your cost of living index), but will not permit certain other expenses in your monthly budget. Your credit card payment, for example, will not count toward your monthly allowable expenses. Generally speaking, though, if your income and expense analysis is properly prepared, you'll be given an installment payment you can afford.

Your Inability to Pay

No matter how well-meaning your intentions, you may simply be unable to make a monthly payment. If the IRS determines that you are unable to make even a monthly installment payment, you may be placed in Currently Not Collectible (CNC) status. This simply means that the IRS will not pursue collection actions against you for a period of time. Your financial situation will be periodically reviewed and if it improves, you may be required to start making payments. An important thing to remember about CNC status is that although collections efforts are suspended for a time, interest does not stop accruing. When you're able to begin a regular payment schedule, you'll likely find that the total you owe has grown substantially from what it was.

Before you roll up your sleeves and try to bargain with the IRS, your first order of business should be to consult with a licensed tax professional. Such a consultation is typically free, and you'll be offered suggestions on how to best handle your tax debt. If your particular issue is too complicated to tackle alone, a tax professional can also work on your behalf to create a formal resolution with the IRS. He or she can prepare an income and expense analysis to ensure you're not paying too much or determine if you don't have to pay anything at all. Lastly, there may be a solution for your tax debt that you haven't considered and the IRS wouldn't necessarily present. Make sure you understand all of your options before committing to an IRS installment plan and take advantage of professional experience in so doing.

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