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IRS Installment Plans

December 27, 2014

Taxpayers that have the financial strength to pay the full amount of their tax debt, but not in a lump sum can pay their back taxes in installments. The IRS reviews the financial information of the taxpayer to determine their ability to pay. If the IRS finds that the taxpayer can pay their full tax debt, then it offers the taxpayer the choice either to pay the entire tax debt in one payment or pay it in monthly installments. The taxpayer may choose either, depending upon their comfort.

To pay the tax debt in installments, taxpayers need to qualify for an IRS Installment Agreement (IA). There are many kinds of installment agreements based on the amount of tax debt owed, each with its unique qualifying factors. For example, for tax debts of $10,000 or less, there is a Guaranteed Installment Agreement. This plan does not require extensive sharing of financial information. Other plans, like the plans that resolve tax debts of $50,000 or above require financial disclosure.

Advantages of Paying Tax Debt in Installments

An installment agreement provides more time to pay. From 36 months under a Guaranteed Installment Agreement to 72 months under a Streamlined Installment Agreement, taxpayers can pay their tax debt over a long period of time without upsetting their financial stability.

To assist taxpayers in paying their back taxes, the IRS introduced the Streamlined procedures for installment agreements that ease the process of resolution. For example, for tax debts of $25,000 or less, taxpayers do not need to provide the IRS with a financial statement (Form 433-F). With the streamlined procedures, more taxpayers can now easily resolve their back taxes.

The Disadvantage of Installment Plans

A major drawback of installment plans is that the taxpayer must pay IRS penalties and interest on the tax debt that remains to be paid. For instance, if you owe $20,000 in tax debt and you pay $2,000 in the first installment, the IRS will charge both penalty and interest on the remaining $18,000. If in the next installment, you pay another $2,000, then you pay penalty and interest on $16,000, and so on. Penalties and interest are charged each month.

Reducing Penalty and Interest

To avoid paying more in penalties and interest, taxpayers must pay more in the initial payment to bring down their total tax debt. The lower the amount that remains to be paid, the lower the penalties and interest will be. Remember that the IRS charges penalties and interest each month on tax debt from the day a taxpayer owes back taxes. Without a resolution, the total tax debt amount keeps on increasing each month due to the accumulation of penalties and interest.