At some point, you may find yourself owing taxes to the IRS around tax time. If you can't pay the full amount due on your federal income tax return, you may be able to work out an arrangement with the IRS to pay in installments.
In order for the IRS to consider making an agreement for an installment plan:
- You must have filed returns and paid your taxes for the five years immediately prior to incurring the tax debt
- If you're self-employed, you must be up-to-date on your quarterly estimated tax payments
- You must promise to file tax returns and pay all tax due while the installment agreement is in effect
- You must not have had an installment plan agreement with the IRS within the past five years
Types of Installment Plans
There are different types of installment plans depending on the amount you owe. If you owe $10,000 or less (not including penalties and interest), you may be eligible for a guaranteed installment plan agreement. You have to pay the entire amount you owe within three years.
If you owe $25,000 or less, you may qualify for a streamlined installment agreement. You have to pay the entire amount you owe within five years.
If you owe more than $25,000, you'll have to provide extensive financial information to the IRS in order to be able to negotiate an installment plan.
Advantages and Disadvantages
The advantage of an installment agreement is protection. You won't have to worry about the IRS taking your money or property to pay your back taxes.
However, the disadvantage of paying your tax debt over time is that penalties and interest will continue to add up while you're paying. You'll end up paying more than if you paid the debt right away.
Negotiating an Installment Agreement
You can start the negotiation process by sending a Form 9465. This form will request a monthly installment plan from the IRS.
If you're unsure about the monthly payment you can afford, the IRS can help you figure it out. It will determine what discretionary income you have left over after you pay your necessary living expenses each month. You can apply this money toward your tax debt.
If the IRS decides not to accept your offer to make installment payments, you'll receive a formal rejection letter. It will reject your installment plan offer if:
- IRS personnel thinks the living expenses you've detailed aren't all necessary
- You've provided untruthful or incomplete information on your application form
It's possible that a simple phone call to the IRS will shed some light on the reason for the rejection. This will allow you to tweak your offer enough to make it acceptable. If you decide to appeal the rejection of your installment plan proposal, you must file a written appeal within 30 days of the date of your rejection letter.
If your installment plan is approved, it's important to carefully honor your agreement. If you don't, the IRS will terminate the plan and demand immediate payment of all taxes, penalties and interest due. The IRS may terminate your agreement if you:
- Don't make your payments when they're due
- Don't pay your other taxes as they come due
- Provided inaccurate or incomplete information on your installment plan offer
- Have significantly improved financial circumstances, and you don't update the IRS
The IRS may require you to provide updates on your current financial status every couple of years, even if you're making your installment plan payments on time.
Questions for Your Attorney
- What are my chances of negotiating an installment plan with the IRS?
- I had an installment plan agreement with the IRS 3 years ago, and I won't be able to pay my taxes now. What can I do? Will I be able to work something out with the IRS?
- Is it better for me to try to negotiate an installment plan or should I try to pay my taxes all at once?