File the returns as soon as possible. When you file, make the largest payment you can afford with the returns. The returns should take about 8 to 10 weeks to process, after which the IRS will issue notices asking for full payment of the unpaid tax and the initial charges of Failure To File (FTF) and Failure To Pay (FTP) penalties, and interest on the tax and penalties. It is important to respond to these notices as soon as possible.
CP 504 IRS Notice
If you are able to full pay the balance due by the due date on the notices, you are done. You will receive two more notices five weeks apart with an updated payoff balance and due date. The final notice, typically identified as a CP (Computer Paragraph) 504, is sent by certified mail, and is a warning of enforcement action, and describes wage levy, bank levy, state income tax refund levy, notice of federal tax lien, and seizure of property.
Failure To File (FTF) and Failure To Pay (FTP) penalties
If you need more time than the notice due dates, a short term payment plan is called a Full-payment Agreement. This agreement covers up to 120 days. With this type, the Service computes your balance due out to 120 days, including all accruals of FTP and interest. With this plan, there is no user fee, and no requirement for a monthly payment. You could make the one full-payment received on Day 120, or you could make 3 or 17 payments, as long as the balance is paid in full on or before the 120th day.
If you make partial payments, or you can full-pay before the 120th day, call the Service, and a representative can re-compute your final payoff amount. With this agreement, the Service issues a confirmation letter with the terms, and usually one notice about 2 weeks before the due date.
This plan is also useful if you are expecting a refund for 2014, which will be automatically offset to the balance due.
IRS Installment Agreement
The next step is an Installment Agreement (IA). This is a monthly payment plan, with a fixed minimum payment amount and due date. The general rule for the minimum payment is the assessed balance due on the first notices divided by 72. There is a one-time fee to establish an IA of $120, and you may qualify for a reduced fee of $43.00. Missed payments, late payments, and payments of less than your minimum can result in a defaulted IA. There is a $50 fee to reinstate an agreement after it defaults. Another reason for default is a new balance due.
Direct Debit IA
You may request a Direct Debit IA also. The fee for this payment plan is $52.00 (or the $43.00), and the payments are debited from a checking account. Another option is a Payroll Deduction IA, where your employer makes your monthly payments on your behalf, deducted from your net wages. The fee is the $120 or $43.
After either type of agreement is set up, you will receive a letter that confirms the terms within 2 – 3 weeks. If you request a regular or payroll IA, you will receive monthly reminder notices with an updated balance, a record of your last payment, and a voucher to send along with a check or money order. DDIAs do not have reminder notices. If you establish a formal IA, the FTP rate is generally reduced to 1/4% per month. The FTP is calculated on the unpaid tax, and the interest is calculated on the unpaid tax and penalties.
Payments you make are applied to the tax first, not like a mortgage or car payment. Your payment reduces the tax every month, which reduces the accrued penalties and interest for that month. If you have an overpayment (refund) on a future return, it would be applied to the balance due first, and the Service would send a notice explaining the offset. If your refund is more than what you owe at the time, you’re done.
Contact IRS About Payments
IRS customer service is 1-800-829-0922 Monday through Friday 7am – 7pm local time. If you contact the Service by phone, you should expect to be asked to verify your identity and provide a contact telephone number, which you are not required to give. You will be asked if you know why you owe, and have you corrected the problem.
The representative is generally required to research for filing compliance: all required returns for the the last six tax years. An un-filed return can, in many cases, delay acceptance of a payment plan.
The IRS website will allow you to set up these plans. The upper right section of most balance due notices should have a Caller ID number. You use this number to establish a PIN, and then use the PIN to access the Online Payment Agreement system.