How an IRS Payment Plan Works


Oftentimes, taxpayers face a large tax bill for various reasons. In some instances, they may fall behind on their tax payments or they discover after a period of time that they owe a sizable amount of money in back taxes. Either way, tax debts to the IRS are a stressful thing for anyone. The IRS has many tools in its arsenal that it can use to get the money that it is owed. Simply stated, you do not want to be on the IRS’s bad side.

The IRS does have some leeway in collecting taxes from delinquent taxpayers. Sure, the IRS will always get its money, but there is some room to maneuver when dealing with Uncle Sam. Specifically, you can enter into an IRS payment plan where you can pay off the money that you owe over a period of time. There are different types of IRS payment plans so you have a few options but the most common one is entering into an installment agreement with the IRS.

There are many rules that govern installment agreements. It is helpful to be familiar with them ahead of time before you propose any plan to the IRS because you will be obligated to abide the rules and the agreement once you sign it. First, you should know the distinction between the types of programs. There are two primary types of installment agreements. One is a short-term agreement and the other is a long-term agreement.

Know that the maximum amount of time that you have to pay your taxes is ten years. That is because the IRS is only allowed by law to collect taxes over a ten-year time period. Any more time and the IRS loses the ability to collect taxes from you. Therefore, the outer bounds of a long-term installment agreement is ten years.

Payment plans must be approved by the IRS. The smaller the amount that you owe, the more likely the IRS is to approve your proposed plan. Of course, if the IRS thinks that you have the ability to pay of your tax liability at once, they may reject your proposed installment plan.

At the same time, you will still have to pay interest and accrued penalties on taxes over the time that it takes to complete the installment agreement. In other words, the fact that the IRS is willing to spread out your liability does not mean that it is an interest-free loan. IRS’ interest rates, while not prohibitively high, are also not negligible. The rate that you will pay is determined quarterly and is the federal short-term interest rate plus three percentage points. Since interest rates fluctuate, you stand a chance of having to pay a higher rate at the end of the agreement than you paid at the outset.

In addition, there are payments required to enter into an installment agreement with the IRS. How much you will need to pay depends on what type of agreement that you sign. If you can pay your tax in less than 120 days, you do not need to pay anything in fees. Similarly, the fees are less if you sign a long-term agreement, but elect for direct deposit.

In terms of flexibility, you also have the option of submitting an offer in compromise to the IRS. In some cases, the IRS will settle with a taxpayer for a fraction of what it is owed in order to recover as much tax payments as possible and not have to undertake collection measures. There are income limits on this program and the IRS will generally not settle for less than it thinks that it can get from you otherwise.

Many people do not feel comfortable negotiating with the IRS on their own. In reality, the IRS can be a scary organization to deal with, especially given the weapons they have at their disposal. Many people prefer to hire some professional help when it comes to negotiating and signing these agreements. There is some room to breathe when dealing with IRS, provided that you are informed of your options and take the right steps.