If you owe no more than $50,000 in tax debt, you can arrange with the IRS to pay off your debt in installments over a six-year period. This option is available upon request and does not require a detailed evaluation by the IRS. You only need to show that you have kept up with filing your tax returns for the current year. If you are self-employed, you must have kept up with your quarterly estimated tax payments for the current year. If you run a business with employees, you must have kept up with your payroll tax deposits and filings. People who owe more than $50,000 in tax debt will need to ask the IRS to approve a plan.
While installment payment plans are the most common way in which taxpayers resolve tax debts, they come with some disadvantages. For example, interest and penalties accumulate on the tax debt during the course of the plan. Since the interest and penalty rate may be close to 10 percent, a taxpayer may not be able to pay off their debt within the six-year period of the plan. Also, if you do not have any remaining cash available once you have covered your basic expenses of daily living, an installment payment plan will not work for you. You might want to consider filing for bankruptcy or making an offer in compromise instead. Read more here about filing for bankruptcy to resolve tax debt, and read more here about making an offer in compromise.
Proposing an Installment Payment Plan
People who will not be able to pay off their tax debt within the six-year period or who owe more than $50,000 in debt will need to submit Form 433-A to request an installment payment plan. An IRS collector will calculate the amount that the taxpayer can pay. During the negotiation process, you should make sure to propose a payment plan that is manageable. However, your proposal should cover any income left over once you have covered your basic living expenses. To show your good faith, you should start making monthly payments under your proposed plan before the IRS approves the plan. This will encourage the IRS collector to approve the plan by showing that you are able to keep up with payments.
If you have not yet received the IRS notice approving your installment payment plan, you can make monthly payments to your local service center. If the IRS has approved the plan, you can ask your employer to apply a direct payroll deduction to cover the payments. Or you can ask your bank to apply a direct debit to your checking account and send the funds to the IRS.
Refusals of Installment Payment Plans
The IRS will not approve your proposed plan if it finds that you provided false or misleading information on Form 433-A. For example, it might suspect that you are hiding assets to secure more favorable terms. The IRS also may reject a proposal if it finds that your living expenses are unreasonable or unnecessary. Substantial credit card bills may be a red flag. Finally, the IRS might reject a proposal if you defaulted on a previous installment payment plan, although this does not always happen. If your proposal is rejected, you can continue negotiating.
Revoking an Installment Payment Plan
The terms of an installment payment plan remain in effect unless your financial condition changes significantly, you miss a payment, you fail to file tax returns or keep up with ongoing tax obligations, or the IRS later finds out that you provided false or misleading information during the negotiations over the plan. If you miss a payment, the plan theoretically can be revoked immediately, but usually you have a grace period to make up for the first missed payment. The IRS also is required to send the taxpayer a warning or give them a chance to reinstate the agreement if it is being revoked on this basis.
The IRS may continue to review your financial situation on an annual or biennial basis during the course of the plan. In some cases, a taxpayer may need to complete a new version of Form 433-A to keep their plan in effect.