Many people found themselves facing a hefty tax bill from the IRS this year. And for some, paying the full amount up front was simply not possible. Luckily, the IRS offers repayment plan options to deal with this challenge.
An IRS installment plan helps to avoid collections actions and spread out payments on your tax debt.
Short term vs. long term payment plans
The IRS offers two basic types of repayment plans: those that pay off the amount owed in less than 120 days, and those that extend payments over more than 120 days.
Short-term plans have no setup fees, while long-term plans can cost up to $225 to set up. Fees vary based on the method of application (online, phone, or mail) and someone’s income.
Payment plans still subject to penalties and interest
Creating an installment plan can relieve some of the pressure of a tax burden. However, it is important to remember IRS payment plans come with monthly accrued penalties and interest. The IRS calculates interest differently based on the type of penalty.
The penalty for failure to file is 5% of the tax amount owed, compared to the half a percent penalty for failure to pay. For this reason, it is essential to file your returns on time even if you are unable to pay the full amount owed. Plus, creating an installment plan reduces the penalty to .25%.
Some individuals qualify for relief from specific penalties – for example, if serious illness or death of a family member impacts their ability to pay their taxes on time.
Feeling overwhelmed? Help is available
Dealing with the IRS is stressful, even for the more financially savvy among us. Working with an attorney experienced in IRS tax debt resolution can help in creating a payment plan and even negotiating the amount you owe.