How Do IRS Payment Plans Work?

Paying your tax bill in full is the best way to avoid penalties, interest, collections, and the distinctly unpleasant feeling you might get from owing money to the IRS. However, if the tax filing deadline is approaching and you don’t have the money to pay what you owe, you may be able to set up an IRS payment plan that buys you up to six years to pay.

Setting up a payment plan with the IRS is relatively simple, won’t hurt your credit, and may cost you less than high-interest credit card debt or a personal loan, even after paying penalties and interest. Here’s what you need to know about IRS payment plans and how to apply.

Who Is Eligible for an IRS Payment Plan?

To see if you qualify for an IRS payment plan, start by filing your taxes. Even if you think you may be unable to pay, prepare and file your tax return by the filing deadline to avoid a late-filing penalty. Calculating what you owe on your tax return will help you determine whether you’re eligible to apply for a payment plan and which plan might work for you.

You have a few basic options if you’re applying for a payment plan with the IRS:

• Short-term payment plan: Less than $100,000 in combined tax, penalties, and interest. Get an additional 180 days to pay your balance in full.
• Long-term payment plan: Less than $50,000 in combined tax, penalties, and interest. Make monthly payments for up to 72 months.
• Business payment plan: Less than $25,000 in combined tax, penalties, and interest from the current and preceding tax year. Make monthly payments for up to 24 months.

Pros and Cons of IRS Payment Plans

Pros of IRS Payment Plans

• No need for loans or credit: Although you’ll pay interest on your IRS debt, you may pay less than you would if you used a high-interest credit card to carry a balance—and possibly less than for a personal loan as well. You’ll also avoid having to apply for new credit, which can be especially helpful if your credit score is low.
• Avoid collections and liens: It may be tempting to ignore your IRS debt and hope it goes away, but that’s not a winning strategy. The IRS is serious about collections. They can place a lien against your real estate, personal property, and financial assets. If your debt continues to go unpaid, the IRS can levy, seize, and sell your property.
• Enjoy predictable budgeting: An IRS payment plan has regular monthly payments and a defined end date. Though the additional monthly expense may be a challenge, budgeting for it is simple: You know what you’ll pay and for how long.

Cons of IRS Payment Plans

• You’ll pay interest and penalties: You’ll have to pay interest and monthly penalties for as long as you have an outstanding balance. You may also have to pay a setup fee and transaction fees for online card payments. If you can use savings or a 0% introductory APR credit card offer to pay your tax bill instead, you might save money over borrowing from the IRS.
• You’ll carry debt: Although IRS debt doesn’t appear on your credit report and does not affect your credit, it still represents money you owe and a monthly payment you’ll have to meet until your balance is paid.
• Your plan options are limited: As an individual taxpayer, you can’t make payments on a balance of more than $50,000 for a long-term payment plan or $100,000 for a short-term plan, though you may still be able to negotiate a payment arrangement directly with the IRS if your debt is larger.

How to Set Up a Payment Plan With the IRS

If you can’t pay your IRS tax bill in full, pay as much as you can and set up a payment plan to cover the rest. Individual taxpayers with $100,000 or less in combined debt or business taxpayers with up to $25,000 in combined debt can set up a payment plan online following these steps:

1. Find the exact amount you owe using your tax return or a balance notice you’ve received from the IRS.
2. Estimate how much you can pay monthly and how long you need to pay off your debt. A short-term plan gives you up to 180 days (or roughly six months); a long-term plan can extend your payments up to 72 months (six years).
3. Visit the IRS payment plan portal to apply for your payment plan.
4. Be prepared to create an IRS account online if you don’t already have one. You’ll need a photo ID, email address, Social Security number, and a mobile device with internet access to verify your identity with ID.me.
5. Have your bank routing and account numbers ready if you’re planning to set up direct debit. Automatic payments using direct debit are required if your individual balance is $25,000 or more, or if your business balance is $10,000 or more.

You can also apply for a payment plan by mail using IRS Form 9465. Or call the IRS at 800-829-1040 (for individual taxpayers) or 800-829-4933 (for businesses) to discuss your plan options by phone.

The Bottom Line

Getting hit with a tax bill you can’t pay is stressful. Setting up a payment plan with the IRS is one way to alleviate the stress—and make paying your tax bill manageable. Once you’ve worked out a payment plan, you may want to double-check your withholding to make sure you’re setting aside enough each paycheck to avoid another tax bill in the year to come. Alternatively, consider making quarterly estimated tax payments to bridge the gap, so you don’t end up owing too much at tax time. An IRS payment plan can be a helpful solution, but avoiding a large bill on April 15 is decidedly better.

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At O1ne Mortgage, we understand the importance of managing your finances effectively. If you need assistance with any mortgage services, don’t hesitate to reach out to us. Call us today at 213-732-3074 and let our expert team help you find the best solutions for your mortgage needs.