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You may hope for a nice refund when you file your federal income tax return, but sometimes you can end up owing Uncle Sam.
When that happens, what will you do if you don’t have the money to pay your full tax bill by the due date? An IRS online payment agreement could help make your bill more manageable. But there may be fees, interest and penalties associated with entering into a payment agreement with the IRS.
Here’s information to consider if you’re thinking about asking for an IRS online payment agreement.
- What is an IRS online payment agreement?
- How does an IRS online payment agreement work?
- Help for low-income taxpayers
- Advantages of IRS online payment agreements
- Disadvantages of IRS online payment agreements
- Keeping up with your payment plan
What is an IRS online payment agreement?
When you can’t pay your taxes in full by the due date, the IRS offers online payment agreements that give you more time to pay the amount you owe. You’ll need to meet certain qualifications, and you’ll have to apply for the online payment agreement through the IRS website. You can also apply for a payment agreement by phone, mail or in person at an IRS office.
Typically, if you owe individual income tax of $50,000 or less, and can pay it off in 72 monthly payments or fewer, you’ll be eligible to set up a payment plan. You’ll also need to be current on all filing and payment requirements, and not be in bankruptcy proceedings.
The IRS currently offers short-term and long-term payment plans. Short-term payment plans are for debts that you think you can repay in 120 days or less. Long-term payment plans are for debts that you will need more than 120 days to repay.
Depending on your balance and the length of time you need to pay off your debt, you can choose which plan will work best for you.
How does an IRS online payment agreement work?
First, you should file your federal income tax return on time and pay as much of the tax you owe as possible. Doing so can help reduce any penalties you might face for not filing on time.
You can also file your return and submit it with Form 9465, Installment Agreement Request. Or you can file and then request an installment agreement. If you wait to set up the agreement until you receive a bill from the IRS, the bill will include a toll-free number you can call to ask for an installment agreement.
When you’re ready to apply for a payment agreement, you’ll need to figure out if you require a short-term or long-term plan.
How short-term payment agreements work
When you can pay the amount you owe in 120 days or less, you can request a short-term payment agreement. You can apply for a short-term agreement online, by phone, mail or in person.
There is no fee to set up the arrangement. However, you will be responsible for paying the penalties and interest that will continue to accrue until your balance is paid in full.
You can pay by automatic debit from your checking account, or by sending a check, money order or debit or credit card number with your payment. If you pay by card, fees will apply.
How long-term payment agreements work
If you know you’ll need more than 120 days to pay the amount you owe, you can request a long-term payment agreement. They come in two basic formats — payments through automatic withdrawals and payments through a non-direct debit method of payment.
If you pay through automatic withdrawals, there’s a $31 fee to set up the arrangement online ($107 for phone, mail or in-person setup). You’ll also be responsible for interest and penalties accrued until you pay your balance in full.
If you pay through other means, such as a debit or credit card, check or money order, the setup fee is $149 for an online application, and $225 for all other ways of applying (by phone, mail or in person). There are payment options for eligible low-income applicants. Again, you’ll be required to pay penalties and interest that will continue to accrue until you’ve completely paid off the amount you owe. And paying with a card will mean additional fees.
Changing a payment agreement
If you already have an IRS payment agreement and it’s not working for you, you can ask to have it revised. You can apply online, by phone, mail or in-person. The change fee will be $89. Other payment options are available for low-income applicants.
What are some common triggers for IRS penalties?
When taxpayers don’t follow IRS rules, they can face penalties. Some common actions that result in IRS penalties include:
Failing to file a return on time
Failing to pay tax you owe on time
Failing to pay the proper amount of estimated tax
Making a bad payment
Help for low-income taxpayers
If you have a lower income, the IRS may waive or reimburse the setup fees for making an online payment arrangement. To be considered low-income, your adjusted gross income must be at or below 250% of the applicable federal poverty level.
The IRS system can determine automatically if you qualify as low-income. Your setup fees will be waived if you agree to pay through direct debit. If you don’t sign up for direct debit, your fee will be reimbursed once you complete the installment agreement. If the system doesn’t automatically waive your fees and you believe that you qualify for the waivers, you can still apply for assistance by filing Form 13844. It is important that you submit the paperwork within 10 days from the date of your installment agreement acceptance letter and mail the application to:
Internal Revenue Service
PO Box 219236, Stop 5050
Kansas City, MO 64121-9236
Advantages of IRS online payment agreements
IRS online payment agreements are convenient. You don’t have to sit on the phone waiting to talk to someone at the IRS about setting up a payment arrangement. It is easy to set up and can save time.
A payment arrangement can also help you budget because you’ll know how much money to set aside for the expense. The online portal gives you access to your tax account, which will allow you to track your payment history. You can monitor your payments and set goals to eliminate your outstanding balance. If something comes up and you need to change your plan, you can opt to change your agreement.
Disadvantages of IRS online payment agreements
By now, you probably realize that online payment agreements — or an IRS installment agreement of any kind — isn’t without drawbacks.
First, not everyone will qualify for a payment agreement. And entering into a payment agreement doesn’t halt penalties and interest. They will continue to accrue until you pay the full amount you owe. So your balance can actually increase even while you’re paying it down. You could end up paying way more than you originally owed.
And you have to stay on top of payments. If you default on your IRS payment agreement, the IRS will send you a notice letting you know they intend to terminate your installment agreement. You should fix the problem or contact the IRS as soon as you can, but no later than 30 days from the date of the notice. Otherwise, the IRS will terminate your installment agreement. The IRS can file tax liens against your property and could activate a wage garnishment.Learn about tax liens and levies
Keeping up with your payment plan
Your online tax account will help you keep up with your scheduled payments. Each month review your payments, and compare your balance owed. File all your tax returns on time and pay at least your minimum amount due. If you ever feel as if you can’t pay your scheduled payment, you should call the IRS at 1-800-829-1040 to discuss your options.
Try not to default on your IRS online payment agreement. If you default, you may have to reinstate the agreement — and there may be fees for that. Defaulting will make your payment plan costlier by adding the extra fees on top of what you already owe.
No one wants to owe the IRS. If you end up owing a large amount, you may want to look at your current tax withholdings. Having more money withheld throughout the year could help reduce your tax bill, or even score you a refund if you overpay.
It’s a good idea to do a midyear tax checkup to check your withholdings. You can check tax withholding by using this IRS calculator.
Relevant sources: IRS: Additional Information on Payment Plans | IRS Publication 5123: Got a tax bill you can’t pay? | IRS Tax Topic No. 202: Tax Payment Options | Treasury Inspector General for Tax Administration Report 2013-30-121 | IRS: Enforced Collection Actions
A tax specialist with Credit Karma Tax®, Tolla Tu has international experience in accounting, tax, finance, banking and consulting. She holds a bachelor’s degree in financial management from Beijing University of Chemical Technology, a master’s in corporate finance from Central University of Finance and Economics as well as a Master of Professional Accountancy from Montana State University. You can find her on LinkedIn.