Taxpayers who are unable to pay their back taxes in full can choose to pay their tax debt in monthly payments through an IRS payment program called an Installment Agreement. Here is an introduction to the Installment Agreement program so taxpayers can make an informed decision.
The IRS uses different formulas to calculate the amount taxpayers will pay under this IRS program. Largely, the decision is based on income, assets, and the liabilities of a taxpayer.
Although this IRS debt payment program can be convenient, the IRS charges penalties and interest on the amount of tax debt that is yet to be paid, resulting in the Installment Agreement being more costly than paying the debt amount in full.
To set up an Installment Agreement, taxpayers need to file all the required tax returns, as the main requirement is compliance. Taxpayers should determine the largest monthly payment they can make to quickly satisfy the tax debt to save money on interest and penalties.
Until a taxpayer's tax debt is fully satisfied, all future refunds will be applied to the debt.
The IRS charges a one-time fee for setting up an Installment Agreement. If taxpayers cannot pay the full debt amount, they will be charged a fee for setting up an agreement of $52 for a direct debit agreement, $105 for a standard agreement or payroll deduction agreement, or $43 if their income is below a certain level.
After taxpayers have chosen an Installment Agreement, they need to choose a method of payment. Taxpayers can opt to write a check or money order, organize monthly electronic transfers, or have funds deducted from their paycheck, although this method is seldom used by taxpayers.
Taxpayers can apply online for an Installment Agreement if they owe $50,000 or less in combined individual income tax, combined with penalties and interest. It is in the best interest of taxpayers to consult a tax resolution company or a tax professional to ensure this IRS payment program is the right choice for them.
Taxpayers should be careful when agreeing to payment amounts and dates, as a default in an Installment Agreement will cause more penalties, and possibly the start of IRS collection actions.