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How IRS Payment Plans Work

Do you owe back taxes to the IRS? Are you having trouble coming up with the money to pay your Federal taxes? You are not alone. Here’s our guide to how IRS payment plans work. If you cannot pay your tax debt within a reasonable timeframe, you can request to make monthly payments through an IRS installment agreement.

IRS Payment Plan

When it comes to setting up an IRS payment plan, there are a few options to choose from. In general, the type of arrangement you can obtain depends on the amount of taxes that you owe and how quickly you are able to pay. Let’s take a look at the different kinds of tax payment plans that are available through the IRS.

Individual Installment Agreement

This payment plan applies to individuals who owe $50,000 or less in income tax, interest, and penalties (combined). With an installment agreement, you can make regular monthly payments over time. Payments can be made through Direct Debit (from your bank account), check or money order, credit card (online or by phone), EFTPS (Electronic Federal Tax Payment System), payroll deduction (from your employer), or an Online Payment Agreement (OPA). When you set up an installment agreement, make sure you will be able to make the monthly payments without defaulting. Defaulting on your loan can not only hurt your credit, but it can also lead to your installment agreement being invalidated.

Installment Agreement for Individuals Who Owe Over $50,000

If you owe more than $50,000 or can’t pay the amount you owe in six years or less, your request for an IA begins with an IRS collector’s analyzing your Collection Information Statement on Form 433-A. The collector uses the information on the form to determine the amount you can pay. Payment amounts are at the discretion of the IRS. If you deal with eight different collectors, you might end up with eight different IAs! Even so, here are some strategies for negotiating an installment plan:

  • Propose a payment plan you can live with. Do this when you hand the completed Form 433-A to the collector.
  • Offer to pay at least the amount of your income minus your necessary living expenses. This is the cash you have left over every month after paying for the necessities of life. Don’t, however, promise to pay more than you can afford just to get your plan approved. Promising the IRS more than you can deliver is a serious mistake; once an IA is approved, the IRS makes it difficult for you to renegotiate it.
  • Give the first payment when you propose the agreement — and keep making monthly payments even if the IRS hasn’t yet approved your IA. Making voluntary payments demonstrates your good faith and creates a track record. For example, if you pay $200 a month for three months before your IA is approved, the collector may be inclined to believe that this is an appropriate amount.

If the IRS Refuses Your Installment Agreement Proposal

If the IRS won’t agree to installment payments, it is for one of three reasons:

  • Your living expenses are not all considered necessary. The IRS may deem your expenses extravagant. For example, if you have hefty credit card payments, make any charitable contributions, or send your kids to private school, expect the IRS to balk. Although reasonable people would disagree on what is necessary and what is extravagant, the IRS is rather stingy here.
  • The information you provided on your Collection Information Statement,Form 433-A, is incomplete or untruthful. The IRS may think you are hiding property or income. For example, if public records show your name on real estate or motor vehicles that you didn’t list, or the IRS received W-2 or 1099 forms showing more income than you listed, be prepared to explain.
  • You defaulted on a prior IA. While this doesn’t automatically disqualify you from a new IA, it can cause your new proposal to be met with skepticism.

If you’re having tax troubles call Ayar Law today at (248) 262-3400 for a free, no-obligation consultation.