I anticipate
a question about an IRS payment plan this tax season. It almost always comes
up, so I review payment options every year. It occurred to me that this topic
would make a good post, and I could just send a link to CTG if and when the question
arises.
Let’s review
the options for individual taxes. We are not discussing business taxes in this
post, with one exception. If the business income winds up on your personal
return – say through a proprietorship or an S corporation – then the following discussion
will apply. Why? Because the business taxes are combined with your individual
taxes.
YOU DO NOT
HAVE THE MONEY BUT WILL SOON
You do not
have the money to pay with your return, but you do have cash coming and will be
able to pay within 120 days. This is a “short-term” payment plan. There is no
application fee, but you will be charged interest.
BTW you will
always be charged interest, so I will not say so again.
YOU OWE
$10,000 OR LESS
You cannot
pay with the return nor within 120 days, but you can pay within 3 years. This
is the “guaranteed” payment plan. As with all plans, you have to be caught up
with all your tax filings and continue to do so in the future.
If you are
self-employed you can bet the IRS will require that you make estimated tax
payments. I have seen this requirement sink or almost sink many a payment plan,
as there isn’t enough cash to go around.
The IRS says
they will not allow more than one of these plans every 5 years. I have had
better luck, but (1) I got a good-natured IRS employee and (2) the combined tax
never exceeded $10 grand. Point is: believe them when they say 5 years.
YOU OWE MORE
THAN $10,000 BUT LESS THAN $25,000
This is a
“streamlined” payment plan. Your payment period can be up to six years.
As long as
your balance is under $25 grand, the IRS will allow you to send a monthly check
rather than automatically draft your bank account.
YOU OWE MORE
THAN $25,000 BUT LESS THAN $50,000
This is
still a “streamlined” plan, and the rules are the same as the $10-25 grand
plans, but the IRS will insist on drafting your bank account.
DOWNSIDE TO
THE GUARANTEED AND STREAMLINED PLANS
Have
variable income and these plans do not work very well. The IRS wants a monthly
payment. These plans are problematic if your income is erratic – unless you sit
on a stash of cash no matter whether you are working or not. Then again, if you
have such stash, I question why you are messing with a payment plan.
UPSIDE TO
THE GUARANTEED AND STREAMLINED PLANS
A key
benefit to both the guaranteed and the streamlined is not having to file
detailed financial information. I am referring to the Form 433 series, and they
are a pain. You have to attach copies of bank statements and provide
documentation if you want more than IRS-provided amounts for certain
cost-of-living categories. Rest assured that – whatever you think your
“essential” bills are – the IRS will disagree with you.
Another
benefit to the guaranteed and streamlined is avoiding a federal tax lien. I
have had clients for whom the threat of a lien was more significant than the endless
collection letters they received previously. Once the lien is in place it is
quite difficult to remove until the tax debt is substantially paid.
YOU OWE MORE
THAN $50,000
If you go
over $50 grand you will have to provide Form 433 financial information, work
your way through the cost-of-living categories, fight (probably) futilely with
the IRS to spot you more than the tables and then agree on an amount that will
pay off the debt over your remaining statute-of-limitations (collections) period.
If you are
at all close to the $50,000 tripwire, SERIOUSLY consider paying down the debt below
$50,000. The process, while not good times with old friends, will be easier.
YOU CANNOT
PAY IT ALL OVER THE REMAINING COLLECTIONS PERIOD
It is
possible that – despite the best you can do – there is no way to pay-off the
IRS over the remaining statute-of-limitations (collections) period. You have now
gone into “partial pay” territory. This will require Form 433 paperwork and
working with a Collections officer. If one is badly injured in a car wreck and
has indefinitely decreased earning power, the process may be relatively smooth.
Have a tough business stretch but retain substantial earning power and the
process will likely not be as smooth.
HOW TO APPLY
There are
three general ways to obtain a payment
plan:
(1) Mail
(2) Call
(3) Website
There is a
charge for anything other than the 120-day plan. The cheapest way to go is to
use the IRS website, but the charge – while more if not using the website – is
not outrageous.
You use Form
9465 for mail.
The website
is https://www.irs.gov/payments/online-payment-agreement-application
for online.
Set aside
time if you intend to call the IRS. You may want to download a movie.
