Setting up an installment agreement with the IRS may be a good way to help you pay off your debt with the IRS if you cannot pay the full amount all at once. An installment agreement allows your tax debt to be paid off over time by breaking it down into a series of affordable, equal monthly payments.
If an IRS Installment is an option you want to pursue it is important to understand when to consider an Installment agreement and what type of Installment agreement is best for you. Understand that an Installment Agreement will not always prevent a tax lien from being filed on your property or assets (just in case for example you sell your home the proceeds would be used to satisfy your tax debt.). The reason for this is the government wants interest in your assets over other creditors. Lastly, realize Installment Agreements carry interest and penalties, but your penalty interest is typically cut in half with an Installment Agreement versus not having one at all.
An Installment Agreement is best when you are unable to pay all of your taxes at once so instead you can pay them back over a series of monthly payments. Installment agreements are also a great alternative if you applied for an Offer In Compromise and you were rejected. Furthermore, Installment Agreements are great if you cannot obtain a lower interest rate from a bank or financial institution. In general, make sure that if you do propose a monthly IRS payment that you can afford it, and that it is big enough to make the principal balance decrease every year. Here are the four common Installment Agreements (IAs).
This type of agreement is easy to obtain. The reason it is fairly simple to obtain is because it is "Guaranteed" under the law so long as you meet the basic requirements. However, it is only for those taxpayers that owe $10,000 or less. Understanding the specific requirements and what forms are required is important to get you started in the process of paying back your taxes over time. This type of agreement typically is paid back over a 36 month period (three years) or generally by the Collection Statute Expiration Date. Again, this is for individuals only. Your monthly minimum payment can be lower than the $25 minimum on Installment Agreements so long as you pay off your balance in 3 years or less. You are better off paying the most you can per month because you end up saving more in the end (because you pay less interest and penalties).
A streamlined installment agreement is an option for businesses who owe the IRS $25,000 or less and individuals who owe the IRS $50,000 or less (including assessed penalties and interest), and/or who did not meet the Guaranteed Installment Agreement requirements. The reason they are named "streamlined" is because it usually does not require verification of financial assets, expenses, and income (Form 433 or a Collection Information Statement). The payment plan is usually over a period of up to 60 months (now 72 months for individuals who elect a DDIA with IRS Fresh Start Program enhancements announced 2/12) and the minimum monthly payment is typically calculated by taking the total amount of taxes you owe plus penalties and interest and then dividing it by repayment term. It is usually recommended to check in with a professional. If you cannot make the minimum monthly payment, consider an Offer in Compromise, a Partial Payment Installment Agreement, or try to prove Financial Hardship to the IRS.
A financially verified installment agreement is for those taxpayers who currently owe the IRS $50,000 or more (including penalties and interest) and/or who did not meet the Streamline Agreement requirements and/or monthly payments. This kind of Installment agreement is a bit trickier in the sense that will most likely need to have a professional help you with financial disclosure through the use of the Collection Information Statement (433A for individuals and 433B for Businesses). 433A or 433B will show your income, assets and expenses for your household or business. Your monthly payment will be determined by what your Collection Information Statement illustrates what you can afford.
This type of installment agreement is also based on a verified financial statement but allows you to pay less or settle for less than you actually owe. This is considered a settlement technique that is easier to get than an OIC and is a good alternative if your Offer in Compromise was rejected. Again this installment is recommended if you do not meet other types of installment agreement requirements or minimum payments. Your monthly payment is based on what your verified financial statement (updated every 2 years) says you have the ability to pay. You end up paying less than you owe because some of your tax debt is forgiven as the Collection Statute of Limitations becomes effective. This is only a feasible option if you can prove financial hardship for tax debt that is unresolved and any assets you have, you are willing to use to reduce the amount you owe.
This could fall within the installment agreements as described above. When you hear the phrase "direct debit installment agreement," that is generally referring to taxpayer who is paying monthly payments via direct debit. You would want to setup this type of agreement if you have $25,000 or less and you want a tax lien withdrawn. In other words, the IRS is deducting payments directly from your bank account and after a few successful payments the IRS will consider withdrawing the tax lien. In the case of a Payroll Deduction IA, the IRS would be deducting monthly payments directly from the taxpayer's wages or salary.
When setting up an installment agreement like a Guaranteed or Streamlined installment agreement you will also have to pay a one-time fee that is paid with the first monthly payment. Fees are the following:
-$52 for a new installment agreement that is direct debt (deducted directly from your bank account). This in most cases will prevent a tax lien from being filed or after a few payments lead to the withdrawal of one. A drawback is now the IRS can potentially levy your bank account if you default.
-$120 for a new installment agreement that is not a direct debit. (payroll deduction, credit card, online payment option, money order or check).
-$50 for restructuring or reinstating an existing installment agreement.
The IRS will accept or reject your installment agreement request typically within a 30 day period. The IRS must accept your request if you meet some basic requirements (if you filed a guaranteed IA and you meet requirements). Read the requirements for each by visiting the specific IA you are interested in or are most appropriate for you.
The IRS can back out of the installment agreement if there is a missed payment, you fall behind on other taxes that are due to the IRS, you do not give updated financial records when requested by the IRS, or the IRS finds out that you gave false information when setting up your IA. If you do miss a payment due to a change in financial condition it is important to contact the IRS immediately. Once payments are missed the IRS can place a tax lien on your assets (if they didn't do before) or they could place a tax levy on your paycheck (wage garnishment), bank account, or social security.