IRS Payment Plan

What is an IRS Payment Plan?

If you owe back taxes you are either looking for a way to resolve your IRS tax liability, or you should be. While multiple different forms of tax debt relief are available, perhaps the simplest and most common is the IRS Payment Plan. Assuming you meet some basic requirements, you can get an IRS Payment Plan that breaks your liability into monthly payments that you pay over a pre-determined period of time. In the end, assuming you make all of your payments on time, the IRS Payment Plan will completely relieve you of your tax liability.

How Do I Get Into an IRS Payment Plan?

Do you owe the IRS money? Can’t afford to pay it all right now? You may be a prime candidate for an IRS Payment plan. But how do you get into an IRS Payment Plan?

How you get into the payment plan program, and the amount of your monthly payment, is going to depend on 3 factors:

  1. The dollar amount of your tax debt;
  2. The amount of time the IRS has left to collect your tax debt;
  3. The amount your budget allows you to pay the IRS after allowing for “reasonable living expenses“?

Depending on how you answer these three questions will determine if you qualify for an IRS payment plan, the amount of your monthly payment, and how long your IRS payment plan will last.

How Much is Your Tax Liability?

Usually, the biggest determining factor of how much you will have to pay the IRS on a monthly basis will be determined by the amount of money you owe.

If you owe $50,000 or less.

If you owe $50,000 or less in back taxes, the IRS should agree to an installment agreement over 72 months without asking for financial documentation. That means that you should be able to get into an installment agreement for $700-$750/month for a $50,000 liability without the IRS taking your personal finances into consideration.

If you owe $50,001-100,000

The same possibility of a “guaranteed” IRS payment plan exists if you owe between $50,001-$100,000 in back taxes. In these cases, a limited amount of financial information will need to be provided to the IRS and it is possible to get into an IRS payment plan for 84 months for tax liabilities that will be paid off by the proposed Installment Agreement before they expire (see below).

If you owe $100,001+

If you owe more than one hundred thousand dollars in taxes to the IRS, then you will probably need to submit detailed financial information to the IRS and make your case for the smallest amount of monthly payments.

No Cookie Cutter Solutions for an IRS Payment Plan

The options stated above are very general, and not situation specific. It will not always be possible to simply divide the amount you owe by 72 or 84 to figure out the required payment under a streamlined installment agreement. For example, prior tax problems, or failure to comply with prior IRS programs, could result in a negative decision on your payment plan application.

The IRS also takes into account the legal fact that they only have 10 years (with some exceptions) to collect a tax liability. That means if your tax liabilities are older, you might have to fight for an appropriate payment amount. If your tax debt will expire before being fully paid under a proposed IRS payment plan, the IRS will want you to pay a higher amount every month.

When this occurs, a comprehensive analysis of your finances will be necessary to see if an argument can be made to get a lower IRS payment plan than the streamlined programs would allow. This is also referred to as a “Partial Payment Installment Agreement” (or PPIA) because the IRS would be agreeing to an Installment Agreement that would not fully satisfy your tax liabilities.

Partial Payment Installment Agreements used to be a great way to cram down those tax liabilities, because the IRS rarely reviewed these plans as long as payments were being made on time. A successful PPIA would result in the IRS accepting regular monthly payments, and tax liabilities eventually expiring without being paid in full. These days, the IRS is more likely to review PPIAs biannually and request updated financial information to assess whether or not to increase your payment amount.

In situations that are too complicated for a simple IRS payment plan, an Offer in Compromise could be a solution in the right set of circumstances.

Other Concerns:

Will an IRS Payment Plan Affect Your Credit?

Yes and no. If you are applying for a mortgage, for example,  your bank will take your IRS payment plan into account in determining whether you can afford your mortgage and it could effect your debt to income ratio.

On the other hand, by proactively getting into an installment agreement you can avoid the filing of a tax lien – something that would certainly be fatal to almost any hope of getting a mortgage.

Can the IRS Collect After 10 Years?

Generally, no. This is referred to as the Collection Statute Expiration Date (CSED). The CSED is codified as are the exceptions to the general 10-year rule.

For How Many Years of Tax Liability Can You Do a Payment Plan with the IRS?

In our experience, the majority of large tax liabilities arise in one of two ways – 1) a one time event such as an IRA/401k distribution or an audit, and 2) Chronic underpayment or under-withholding.

In the first situation, it is likely that the tax liability is for one year, and is a newer liability. In these situations – where there are 7+ years left before the CSED date, the streamlined installment agreement calculation is going to be roughly what is discussed above. However, if you have tax liabilities for several years – some of them fairly old, the IRS is going to ask for a much higher payment plan unless you submit properly organized and analyzed financials.