How to Set Up a Payment Plan for Federal Taxes

Filing federal tax may be a difficult and daunting process, more so when you find yourself unable to pay the required amount. Luckily, the Internal Revenue Service (IRS) offers alternatives to taxpayers who are not able to pay their taxes upfront in full. Establishing a payment plan is one of them. This enables you to settle your tax debt within a period of time and in affordable amounts.

In this guide, we will take you through the process of establishing a payment plan with the IRS and how to make sure you keep your tax payments in check.

Learning about the Payment Plans of Federal Taxes

An installment agreement, also known as a payment plan is an official agreement between you and the IRS to pay your tax debt in lesser and manageable amounts over a period of time.

There are two broad categories of payment plans provided by IRS:

Short-Term Payment Plan: Taxpayers able to pay their debt within 120 days. This plan has no setup fees, and the interest and penalties will keep on accumulating until the debt is cleared.

Long-Term Payment Plan (Installment Agreement): This is needed in case one requires more than 120 days to pay his or her taxes. This scheme can be paid on a monthly basis. It will usually entail a set up fee and the interest and penalties will keep on mounting.

The best payment plan is determined by your taxes and the duration you are supposed to pay the debt.

How to Establish a Payment Plan in Step-by-Step Guide

Step 1: Check Your Tax Debt

To create a payment plan, the initial thing you need to do is to determine the precise amount you owe to IRS. This comprises the sum of taxes, penalties and interest.

To check your tax debt, you can:

Online: You can log in to your IRS account and see your balance and payment history.

Mail: You will be billed by the IRS in case you owe them.

Call: In case you are not sure of the total amount, you may call IRS at 1-800-829-1040.

Be sure to include any penalties or interest which may have been assessed to your balance as this can cause the balance due to increase dramatically.

Step 2: Find the Best Plan that Suits You

Then, you should determine what kind of payment plan is more suitable to your finances.

Short-Term Payment Plan: In case you are able to pay your debt within 120 days, a short-term plan could be the most appropriate. This is best suited to individuals with a short-term cash flow problem who can afford to pay the entire balance within a comparatively short period of time.

Long-Term Payment Plan (Installment Agreement): In case you require additional time, then you can use the long-term installment plan. Under this scheme, you will pay monthly, but over a longer time (up to 72 months, or depending on your debt).

You are eligible to a short-term payment plan if you owe $100,000 or less in combined taxes, penalties and interest. In the case of a long-term plan, the threshold is usually 50,000 dollars in taxes, penalties, and interest combined.

Step 3: Submit Application to Payment Plan

After you have checked your tax debt and made a decision regarding the kind of payment plan, the next step is to apply the plan.

Application to a payment plan may be made in a number of ways:

Online: Both short-term and long-term payment plans may be applied online through the IRS web site by using the Online Payment Agreement (OPA) tool. It is the most simple and quick way.

By Phone: You may call IRS at 1-800-829-1040 and negotiate your payment terms and ask them to provide you a payment plan. They will assist you to establish the terms on phone.

By Mail: In case you wish to do it by mail, you can send Form 9465, Installment Agreement Request. You can use this form to request a long-term installment agreement with IRS.

In Person: You can also go to your local IRS office in case you need help or you simply want to have face-to-face assistance. They can assist you in establishing a plan or provide you with more resources.

Step 4: Read the Terms of Payment Plan

After you have applied, the IRS will go through your details and either grant or reject your request.

In the event that it is accepted, the terms of the payment plan will be offered to you and they include:

Payment Amount: The sum of money you will be required to pay on monthly basis.

Due Date: The date your monthly payments are due.

Fees: With long-term plans, a setup fee may be charged, and it may differ depending on the manner of application, and whether you want your payments to be automatically debited by linking your bank account.

Interest and Penalties: Be aware that the debt you have will continue to accrue interest and penalties until the time you have completely paid it.

Be sure to read the conditions of your payment plan carefully and make sure that you will be able to pay the monthly payment. And in case you can not, you might have to reconsider your plan or use the services of a financial advisor.

Step 5: Pay and Keep on Track

After establishing a payment plan, paying on time is the only secret to success. A failure to make a payment may lead to imposition of penalties and interest on your debt, and IRS may terminate your plan.

These are some of the tips to keep in mind to keep you on track:

Automatic Payments: If you can, sign up to make automatic payments with IRS Direct Debit program. This will guarantee that your payments are on time every month and may save you a set up fee.

Monitor Your Payments: Periodically review your IRS account on the internet to make sure your payments are being allocated properly.

Notify the IRS If You Suffer Hardship: In case your financial status alteration is no longer able to cover the payments, inform the IRS as soon as possible. They can possibly provide you with a temporary decrease in payments or modify your plan.

Tips for Successfully Managing Your IRS Payment Plan

Be Proactive and Communicate:

Stay on top of your payments and always communicate with the IRS if you’re having trouble. The IRS is often willing to work with taxpayers who are proactive about their situation.

Pay Extra When Possible:

If you can afford to pay more than the minimum amount due, it’s a good idea to do so. This will help you pay off your tax debt faster and reduce the amount of interest and penalties you accrue.

File Your Taxes on Time:

Even if you’re paying off an old tax debt, it’s crucial to file your taxes on time for the current year. Failure to file can result in additional penalties and interest.