How to Set Up a Payment Plan with the IRS

Life is full of certainties: the sun will rise, the tides will change, and taxes must be paid. The latter, albeit less poetic, is an inescapable part of adulthood. The conclusion of tax season can occasionally bring an unwelcome surprise—an imposing bill from the IRS. But don’t despair: believe it or not, the IRS offers solutions to help taxpayers manage their liabilities without wrecking their finances, and one of these tools is a payment plan. If you’re wondering how to set up a payment plan with the IRS, then you’re in luck!

This guide aims to provide a thorough understanding of how to set up a payment plan with the IRS, so you can manage your debt with confidence and ease. Let’s break it down together.

IRS Payment Plan Types

The IRS offers a variety of adaptable payment plans, each designed for specific situations. Choosing the right one is important when it comes to managing your tax obligations effectively. It should fit your unique circumstance and financial capabilities. They include:

Short-Term Payment Plan: This option is for taxpayers who can pay off their debt within 180 days or less. There is no setup fee, making it an attractive option if you can afford to clear your debt quickly.

Long-Term Payment Plan (Installment Agreement): If you owe a larger amount and need more than 180 days to pay, this is the option for you. Be aware that a setup fee applies, but this can be minimized if you opt to pay via direct debit.

Partial Payment Installment Agreement (PPIA): If your financial situation means you cannot afford to pay off your full tax debt, a PPIA may be the solution. This plan allows you to make smaller monthly payments, calculated according to your disposable income after necessary living expenses.

If you’re not sure which payment plan to go with, let IRS Shield step in and provide expert advice to help you select the most suitable plan.

Eligibility and Preparations

Now, the first stop on our journey of learning how to set up a payment plan with the IRS is confirming your eligibility. To apply online, individuals must owe less than $50,000 in tax, penalties, and interest (for a long-term payment plan), while businesses must owe $25,000 or less.

Once you’ve verified your eligibility, it’s time to prepare. Gather your essential information such as:

• Your Social Security Number or Individual Taxpayer Identification Number (ITIN)
• Your filing status and address from your most recent tax return
• Your employer’s details, including name, address, and phone number
• If planning to pay via direct debit, your bank account number and routing number

With this information in hand, you’re ready for the next phase: the application process.

How to Set Up a Payment Plan with the IRS: The Options

The IRS offers three main methods for setting up a payment plan: online, by phone, or by mail.

Online: The IRS’s Online Payment Agreement tool is the most efficient and convenient way to set up a payment plan. You just need to follow the prompts to complete the process.

By phone: If you’re more comfortable with direct conversation, setting up a payment plan over the phone might be the best route. Be prepared to hold the line, though, as wait times can vary. After discussing your financial situation and tax debt, they’ll help you choose a payment plan. You’ll provide your bank account details over the phone, and the IRS representative will guide you through the rest of the process.

By mail: If you’re a fan of traditional methods, the IRS accepts payment plan requests via mail. Download and print Form 9465, the Installment Agreement Request form, from the IRS website. Complete the form and mail it to the IRS at the address listed on the form. The IRS will review your request and send you a notice to confirm your payment plan.

Setting Your Payment Terms

When you start the application process, one of your main tasks is to decide on your monthly payment amount and when it should be due. This important step needs careful thought, balancing how much you owe in taxes with how much you can comfortably pay each month.

Choosing your payment due date is also a key decision. It’s a good idea to set it around the time you get paid, so you know you’ll have the money in your account when it’s time to pay.

Maintaining Your Payment Plan

Once your payment plan is in place, the key is staying on top of your payments. It’s not just about setting up the plan; it’s about keeping it going. It’s just like paying any bill: consistency counts. Missing a payment could lead to penalties, higher interest rates, and even cancellation of your plan.

Dealing with Changes in Financial Circumstances

Life isn’t static. Your financial situation today might not be the same as it will be six months or a year from now. Job loss, medical emergencies, or other unforeseen expenses can hit your budget and affect your ability to make your agreed payments.

If this happens, contact the IRS as soon as possible to inform them of your situation. They’re more understanding than you might think. You might be able to renegotiate the terms of your payment plan, or possibly switch to a different type of payment plan. Other options, such as an Offer in Compromise or Currently Not Collectible status, might also be available to you.

Remember, the goal is to manage your tax obligations without causing undue financial stress, and the IRS is usually willing to work with you toward that end.

Conclusion

Few things weigh as heavily on the mind as tax debt. That’s why it’s vital that you know how to set up a payment plan with the IRS, and that you understand the best option for your situation. We recommend letting IRS Shield guide you through this process, helping you choose and get set up on the best plan for your needs. With IRS Shield by your side, you can be confident that your financial future is secure.

Understanding Tax Penalties and Fines

Mistakes happen; sometimes, you miss a tax payment or forget to file your taxes on time. Understanding IRS tax penalties and fines is essential to avoiding penalties altogether or limiting the amount you owe to the IRS.

This article covers the basics of how IRS penalties work and provides tips on avoiding them or limiting what you owe.

What Does the IRS Charge Penalties For?

The IRS expects you to meet your tax obligations year after year without fail. If you fail to meet your tax obligations, you will most likely pay a penalty.

Some of the reasons that the IRS may charge a penalty includes failing to:

• File your return by the deadline
• Prepare an accurate return
• Pay any taxes that you owe on time and in the correct way

While there are several penalties the IRS may assess, almost all of them are charged because of one of the three reasons above.

How Do You Know if You Owe the IRS a Penalty?

The IRS will notify you that you owe a penalty via an IRS notice or letter that is sent in the mail. The letter will describe why you are receiving the penalty, how much you owe, and what the next steps are.

If you miss the initial notice, don’t worry! The IRS will send a follow-up notice letting you know that they haven’t heard from you and that you now owe more money than before.

The IRS has a different notice or letter for practically everything. To learn about the different types of notices, read our article entitled, “What Does the IRS Send Notices For?“

How Do IRS Penalties Work?

Each type of IRS penalty works a little differently. However, there are two basic components to each penalty:

• Penalty – the amount owed for failing to meet your tax obligation on time.
• Interest – the increase of the penalty amount and any owed taxes over the period you fail to pay your penalty and owed taxes.

The interest charged on your taxes typically occurs for each month that you fail to pay your taxes and penalties. Therefore, it’s best to pay any owed taxes before the start of the next month to avoid additional interest. However, the good news is that most IRS penalties typically have a cap on the amount that can be charged.

Common Types of Tax Penalties

The IRS has a long list of penalties that they send notices and letters for. However, there are a few penalties that are assessed more often than others.

Failure to File

The failure to file a penalty occurs when you fail to either file an extension or file your taxes by the tax deadline. The penalty is 5% of your unpaid taxes for each month that your return is late, with a maximum cap of 25% of the taxes owed. This penalty is not applied if the IRS actually owes you a tax refund, but you may lose your refund if you fail to file within three years of the original due date.

Failure to Pay

The failure-to-pay penalty happens when you fail to pay taxes owed to the IRS on time. The penalty is 0.5% of the taxes owed per month, with a cap of 25% of the total taxes owed. Filing a tax extension will help you avoid a failure-to-file penalty, but not a failure-to-pay penalty.

Underpayment of Estimated Taxes

If you are self-employed or don’t have taxes taken out of your paycheck, you need to pay the IRS estimated quarterly payments. At the end of the year, if you owe more than $1,000, you could be charged a penalty.

The penalty is assessed based on the difference between the amount of estimated taxes you paid in each quarter and the effective interest rate for that quarter. The rate and amount that you may owe as a penalty can vary from quarter to quarter.

The IRS does offer two “safe harbor” options if you do end up miscalculating your estimated taxes. If you pay 90% of the taxes you owe in the current year or 100% of the previous year’s owed taxes (and make estimated payments), then you can potentially avoid the penalty.

Dishonored Check

If you write a check or set up an automatic withdrawal and don’t have the money in your account to cover the amount, the IRS will assess you a penalty.

The penalty for a dishonored check is 2% of the check’s value. However, if the check is less than $1,250, the penalty is $25, or the amount of the check if it’s lower than $25.

How to Avoid IRS Penalties

The best way to avoid IRS penalties is by filing and paying your taxes on time. However, mistakes do happen, and the IRS recognizes this. In instances where you have reasonable cause for missing a penalty or payment, or it’s your first offense, the IRS may waive the penalty.

Getting penalty abatement from the IRS isn’t always easy. Therefore, it’s best to use IRS Shield to help walk you through working with the IRS. We can help you communicate your situation to the IRS to give you the best shot at being approved for penalty abatement.

If this isn’t your first time getting a penalty or you’ve accrued a large amount of tax debt, check out our article on how to resolve your debt with the IRS.

Offer in Compromise: How it Works

Offer in Compromise: How it Works

If you find yourself with a crushing amount of tax debt with no way to pay it off don’t panic. The IRS routinely eliminates tax debt for individuals in these situations by agreeing to an offer in compromise. What is an offer in a compromise?

An offer in compromise is an effective tool to negotiate down your tax debt when you are unable to pay the taxes owed to the IRS. Essentially you are admitting that you won’t be able to pay your back taxes and are instead offering the IRS a compromise so that they collect at least a portion of the money you owe.

In this article, we will look at the process for proposing an offer in compromise and how to tell if you qualify. Additionally, we’ll cover what to do if the IRS rejects your offer and if there are any downsides to using this tool.

How Does an Offer in Compromise Work?

The idea behind an offer in compromise is quite simple. The IRS wants to collect the money you owe, but you don’t have the money to pay them. Instead of spending countless man-hours trying to collect that money, the IRS agrees to let you pay back what you can afford to pay.

However, in practice, the process is quite complicated. It’s strongly recommended that you get contact us prior to submitting an application for an offer in compromise, as one wrong step could result in your offer being rejected.

The application process involves completing the following steps:

• Filling out Form 656 (offer in compromise)
• Completing Form 433-A (collection information statement for wage earners and self-employed individuals)
• Completing Form 433-B (collection information statement for business)
• Submitting a $205 application fee
• Submitting your initial offer payment (first payment of installment plan or 20% of lump-sum payment).

There are several intricacies throughout the application depending on your individual financial situation. If you are looking for a complete step-by-step guide on how to complete an offer in compromise check out the Form 656 Booklet.

How do I Qualify for an Offer in Compromise?

There are some fairly stringent guidelines for even being considered for an offer in compromise by the IRS. The IRS will only consider your application if you meet one of the following criteria:

• There is a doubt about the amount that you owe to the IRS.
• There is a doubt that the IRS can fully collect on the debt, meaning that your assets and income are less than the amount of back taxes that you owe.
• Paying the debt would cause undue economic hardship.

If that wasn’t enough, you won’t qualify if any of the following situations apply to you:

• You are in an open bankruptcy proceeding.
• You haven’t filed your federal tax returns.
• You have not made the required estimated tax payments.
• You are self-employed, have employees, and have not submitted your required federal tax deposits.

Additionally, even if you meet the above criteria, it doesn’t necessarily mean that your offer will be approved. The IRS also considers your:

• Ability to pay
• Income
• Expenses
• Assets

As you can see the IRS wants to make sure that you have been “playing by the rules” and are actually unable to pay prior to even considering your offer in compromise application.

What Financial Information Do I Have to Provide for an Offer in Compromise?

When submitting an offer in compromise, the IRS wants to get a complete picture of your entire financial situation. Therefore, they require you to provide the following information when submitting your offer in compromise:

• Income and expenses
• If you have declared bankruptcy
• If you are a beneficiary
• Contents of your investments, personal banking accounts, insurance policies, and available credit.
• Owned assets like real estate, vehicles, and even intangibles

It’s important to note that there are certain financial obligations that the IRS will not consider when looking at your financial situation. For example, they won’t consider college debt, voluntary retirement contributions, or payments on unsecured debt as expenses.

Why Will the IRS Reject an Offer in Compromise?

Even if you meet all the qualifications for an offer in compromise there is no guarantee that the IRS will approve. On average, about 40% of qualifying offers in compromise applications are approved.

Some common reasons the IRS rejects a qualified offer in compromise include:

• Your offer is too low or the IRS thinks that they can collect on the full amount. They will inform you how much they think you should pay if this happens.
• You failed to provide enough information to give a full picture of your financial situation.
• You’ve missed tax payments for the current year, proving that you are still a risk.
• You’ve been convicted of a serious crime.

It’s important to be very meticulous when completing your offer in compromise application. Failure to demonstrate the need for an offer in compromise could be detrimental to your personal finances.

What Can I Do If the IRS Rejects an Offer in Compromise?

If the IRS rejects your offer in compromise you have a few options. If you want to revise your original offer within 30 days of submitting your application, you can simply send a letter increasing the amount of money. If 30 days have passed since submitting, you will need to submit a new Form 656 to revise your offer.

If you receive a rejection letter and feel that your offer was sufficient, then you can file a Form 13711 within 30 days of receiving the rejection letter. This will allow you to identify which parts of the rejection you are disputing and why you are doing so.

Are There Any Downsides to Applying for an Offer in Compromise?

There are a few downsides to applying for an offer in compromise. So, it’s important to weigh the pros and cons before starting the process.

The most obvious downside is the time it takes to complete the paperwork and process. All said and done, the entire offer in compromise process typically takes about a year.

Another important consideration is that the offer in compromise isn’t actually finalized until 5 years after the agreement has been made. You need to stay compliant with your taxes during this time period or the IRS can void the agreement and you will still owe the full amount.

Finally, the 10-year statute of limitations is put on hold during the offer in compromise process. Typically, the IRS is required to collect back taxes within 10 years. However, if you apply for an offer in compromise, then the time limit is put on hold.

For example, if you apply for an offer in compromise with five years remaining on the statute and the IRS takes a year to reject your offer, they will still have five years to collect.

Should I Get Help Applying for an Offer in Compromise?

The application process for an offer in compromise is extremely litigious and detailed. It’s not advised that you embark on the process without professional help.

At IRS Shield, we can help you prepare your application and walk you through all of your options. That way you have the knowledge you need to submit your application with confidence and have the best shot at getting your offer in compromise approved.

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