How to Figure Out Which IRS Payment Plan Is Best For You
If you owe taxes and you can’t pay them all, you have options.
But there are a lot of potential options to sort through, each with its own pros, cons, and rules.
Most people in this situation set up simple monthly payment plans with the IRS (called installment agreements). But there are other options, such as:
- Extensions of time to pay your whole tax balance
- Deferred payment (called currently not collectible status)
- Settling for less than you owe (called the offer in compromise)
Here are a few rules to keep in mind for all installment agreements
- If you owe tax for more than one tax year, you have to bundle all the taxes you owe into one installment agreement.
- The IRS generally has 10 years to collect tax debts (called the collection statute expiration date). If your expiration date is coming up, you may have to make higher monthly payments, and you could even be disqualified from some types of agreements.
- To request some types of installment agreements, you’ll have to give the IRS your financial documents, including your assets, income, and expenses. In some cases, the IRS can limit your expenses to a “reasonable” amount when it’s calculating how much you can afford to pay every month. These are collection financial standards.
- Some agreements come with a federal tax lien, which is a public record of your tax debt. Federal tax liens can affect your ability to get loans and sell property.
- It’s important to file and pay on time so you don’t default on your agreement.
Here’s a guide to all the types of installment agreements – and how to get started figuring out the right one for you. You can also outsource the work to a tax pro, who can look at your situation to determine the right option – and even request the installment agreement from the IRS for you.
Simple and quick agreements, for smaller amounts
These agreements are easy to set up and usually don’t come with a federal tax lien. You also won’t have to give the IRS your financial information or sell off any assets.
To set up a guaranteed or streamlined agreement, use the IRS online payment agreement application, or call the IRS. To avoid a lien, it’s important to set up your agreement before the IRS starts officially collecting on your balance.
Guaranteed installment agreement
As the name suggests, the IRS must grant this agreement if you qualify and request it.
To qualify, you:
- Owe $10,000 or less (not including penalties and interest)
- Can pay the total balance within three years, or by the collection statute expiration date (whichever comes first)
- Have filed all your required returns
- Haven’t had an installment agreement during the past five years
Streamlined installment agreement
To qualify, you:
- Owe $50,000 or less (not including penalties and interest)
- Can pay all your taxes within six years, or by the collection statute expiration date (whichever comes first)
If you owe more than $25,000, you’ll have to set up direct debit payments. If you owe more than $50,000, consider paying the balance to under $50,000 so you’ll qualify for a streamlined agreement.
More complicated agreements for more complicated situations
If you don’t qualify for a guaranteed or streamlined agreement because you owe too much, or the monthly payments are too much, you may want to look at one of these more complicated agreements.
The IRS will look at your full financial situation to figure out your ability to pay. The IRS will calculate your monthly payment based on your income and allowable expenses. And you have to be able to pay your whole tax balance by the collection statute expiration date.
The IRS will file a tax lien for most of these agreements. To avoid a lien filing, consider paying down your balance to under $50,000 to qualify for a guaranteed or streamlined agreement.
Standard “ability to pay” installment agreement
If you request this agreement:
- The IRS will probably file a tax lien if you owe more than $10,000.
- You’ll have to provide your financial information to the IRS.
- The IRS may limit some of your expenses.
- You may have to sell off some of your assets and use that money to pay down your tax balance before the IRS will grant you the agreement.
Conditional installment agreement (six-year rule agreement)
With this installment agreement, you’ll generally be allowed to have expenses over the IRS financial standards. That means your monthly payment may be less, but you’ll still have to pay your full tax balance within six years, or by the collection statute expiration date (whichever comes first).
12-month lifestyle adjustment installment agreement
As the name implies, this agreement allows you to change your lifestyle for a year so that your expenses meet the IRS collection financial standards. After the first year, the agreement basically becomes an ability to pay installment agreement.
Partial pay installment agreement
This agreement is the same as an ability to pay agreement, except you don’t have to pay your whole tax balance by the collection statute expiration date. If you get this agreement, you’ll pay every month until the time to collect your balance expires. The IRS will re-evaluate your agreement every two years to see whether you can pay more each month.
Tax pros can do the work for you
Lots of factors can affect the type of installment agreement you qualify for, and the one that best meets your needs.
Some agreements are easy to request, and others can become a complicated math problem. The more complex agreements mean you’ll need to gather and submit your financial documents. This is where a tax professional can help you sort through the options and request the right installment agreement from the IRS for you.
Learn about H&R Block’s Tax Audit & Notice Services.
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