Creating a Tax Payment Plan with the IRS
You can make a payment plan if you owe a balance on your federal income tax return. Ideally, you’re able to full pay your balance due on or before April 15. The IRS has payment plans available when you come up a little or a lot short.
IRS Payment Plans on Unpaid Taxes and Interest
First things first: file on time and make the largest payment you can afford on or before April 15. You have your return completed. You know you owe a balance due, and you know you can’t pay it. File the return to avoid the Failure to File penalty (FTF). This penalty rate is generally 4.5% of the unpaid tax liability per month, for up to five months. Whether you file electronically or by mail, after the Service processes your return, we issue a notice asking for payment of the remaining tax liability, and the initial assessments of penalties and interest.
Failure to Pay penalty (FTP)
If you filed your return timely, the most-common penalty on the notice is the Failure to Pay penalty (FTP). This penalty rate is generally 0.5% of the unpaid tax liability per month, or part of a month. The interest rate is currently 3% per year, compounded daily. The interest rate can be adjusted up or down on a quarterly basis. If you can full-pay the amount due on your notice by the due date, you are done.
IRS Notices on Unpaid Taxes
Depending on how much you owe, you will receive one or 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.
At any point during the notice cycle, you can make contact the Service to request a payment plan.
I need a little more time to pay. The short term payment plan is called a Full-payment Agreement. This agreement covers up to 120 days. With this type, the representative 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 the 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.
Installment Agreement (IA)
I need more than 120 days to pay. 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 notice 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. 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.
IRS Installment Payments
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.
How to Start IRS Payment Plans?
IRS customer service is 1-800-829-1040 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. Taxpayers use this number to establish a PIN, and then use the PIN to access the Online Payment Agreement system.