IRS Installment Agreements Introduction and Summary
Does IRS Allow Installments? Can I ask to make installment payments on the amount I owe? Yes. If you cannot pay the full amount due as shown on your return, you may ask to make monthly installment payments. However, you will be charged interest and you may be charged a late payment penalty unless you can show reasonable cause for not paying on the tax not paid by April 15, even if your request to pay in installments is granted. Before requesting an installment agreement, you should consider less costly alternatives such as a bank loan.
Installment agreements allow you to pay your full debt in smaller, more manageable amounts. Installment agreements generally require equal monthly payments. The amount of your installment payments and the number you make will be based on the amount you owe and your ability to pay that amount within the time the IRS can legally collect payment from you. You should be aware, however, that an installment agreement is more costly than paying all the taxes you owe now. As with most revolving credit arrangements, the IRS charges interest and penalties on the unpaid portion of the debt. Another cost associated with an installment agreement is a user fee. This is a one-time fee (currently $43) the IRS charges to set up the agreement. If you don't meet the terms of the agreement throughout the life of the agreement, the IRS charges an additional fee of $24 to reinstate it. Setting Up an Installment Agreement
Setting up Continued • If you want to pay off your tax debt through an installment agreement, consider the following If you owe: • $25,000 or less in tax, be prepared with cash flow information – see the organizer (if you need a business organizer) • More than $25,000, the IRS is more likely to ask more detailed information and ask for bank statements and proof of income • The IRS will determine how much you the taxpayer will pay • Even if you set up an installment agreement, expect the IRS to file a Notice of Federal Tax Lien to secure the government's interest until you make your final payment. • Note: The IRS cannot take any collection actions affecting your property while it considers your request for an installment agreement, while your agreement is in effect, for 30 days after we reject your request for an agreement, or for any period while you appeal the rejection. • If you arrange for an installment agreement, you can pay with: • Personal or business checks, money orders, or certified funds (all made payable to the U.S. Treasury) • Payroll deductions your employer takes from your salary and regularly sends to IRS • Electronic transfers from your bank account or other similar means
Do I Get Tax Refunds? Can a person receive a tax refund if they are currently in a payment plan for prior year's federal taxes? You may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. The IRS will automatically apply the refund to the taxes owed. If the refund does not take care of the tax debt; you must continue the installment agreement.
Collection Period Generally the Internal Revenue Service has 10 years from the assessment of a tax liability to collect the liability. The date by which the liability must be collected is called the Collection Statute Expiration Date (CSED). Should you file an installment agreement request (Form 9465) your account will be reviewed to ensure your liability, including penalties and interest, will be paid in full by the CSED prior to approval of the agreement.
IRS Attitude and Position 10 Years to Collect – Levy – Seizure – Distraint Judgment
Cost of an Agreement What Will You Be Charged? You will be charged a $43 fee if your request is approved. Do not include the fee with Form 9465. After approving your request, IRS will send you a letter telling you how to pay the fee and how to make your first installment unless you choose direct debit(see below). You will be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your request to pay in installments is granted. To limit interest and penalty charges, file your return on time and pay as much of the tax as possible with your return. Before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loan.
How Does It Work? How does the Installment Agreement Work? If IRS approves your request, it will send you a letter. It will tell you how to pay the fee and make your first payment. By approving your request, IRS agrees to let you pay the tax you owe in monthly payments instead of immediately paying the amount in full. In return, you agree to make your monthly payments on time, pay all your future tax liabilities and file timely. This means you must have adequate withholding or estimated tax payments so that your tax liability for future years is paid in full when you timely file your return.
Interest Charges InterestFor individual income tax returns, tax is to be paid on the due date of the return, usually April 15. If the tax is not paid by the due date of the return, interest is charged at the rate in effect from that period to the date of payment in full. Interest is compounded daily and adjusted quarterly. Section 6601 of the Internal Revenue Code provides for interest on underpayment, nonpayment, or extensions of time for payment, of tax. Generally, if any amount of tax imposed by the Internal Revenue Code "is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under Section 6621 shall be paid for the period from such last date to the date paid."
Is Interest Deductible? Is the interest amount that we paid to the IRS deductible? No, only mortgage or investment interest is deductible on Schedule A. Interest paid to the IRS is considered personal interest and nondeductible. It would be the same as interest on a credit card or automobile loan.
Penalties Penalties For individual income tax returns, the return is to be filed on the due date. If the return is not filed, and tax is owed and not paid by the due date of the return, failure to file penalty is charged. The penalty amount is 5 percent of the outstanding tax amount per month for the first month, with an additional 5 percent for each month or part of a month. The penalty is charged until the return is filed and the tax is paid, or the penalty assessed is 25 percent of the tax amount owed. The penalty is assessed on net tax due, tax amount after deducting payments and credits.
Failure to File On Time Failure to File (Late Filing) Section 6651 of the Internal Revenue Code provides for penalty assessments in addition to tax and interest for certain conditions. In case of 6651(a)(1) failure to file any return required under authority of the Internal Revenue Code "unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which failure continues, not exceeding 25 percent in the aggregate."
Penalty - Continued For individual income tax returns, the tax is to be paid and the return filed on the due date. If the return is filed, and tax is owed and not paid by the due date of the return, failure to pay penalty is charged. The penalty amount is 0.5 percent of the outstanding tax amount per month for the first month, with an additional 0.5 percent for each month or part of a month. The penalty is charged until the tax is paid in full, or the penalty assessed is 25 percent of the tax amount owed. The penalty is assessed on net tax due. This penalty is increased to 1 percent per month or part of a month once the Internal Revenue Service makes notice and demand for immediate payment.
Late Payment Penalty Failure to Pay (Late Payment) Section 6651(a)(2) - In case of failure to pay the amount shown as tax on any return "on or before the date prescribed for payment of such tax (determined with regard to an extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate."
Penalty Reduction The Restructuring and Reform Act of 1998 provides for a reduction in the failure to pay penalty. The penalty is reduced when the return is timely filed and the taxpayer enters in to an installment agreement prior to the Internal Revenue Service notice and demand for immediate payment. The penalty is reduced only if the taxpayer timely filed the return relating to the liability that is subject to the installment agreement. Late filed returns do not received the reduction in the failure to file penalty. The penalty amount will be reduced to half the usual rate, from .5 percent to .25 percent per month, for any month in which an installment agreement with the Service is in effect. This reduction will be effective for months beginning after December 31, 1999.
Penalty Reduction Continued Section 6651(h) - Limitation on penalty on individual's failure to pay for months during period of installment agreement (effective Dec. 31, 1999). In the case of an individual who files a return of tax on or before the due date for the return (including extensions), paragraph (2) of subsection (a) "shall be applied by substituting 0.25 for 0.5 each place it appears for purposes of determining the addition to the tax for any month during which an installment agreement under section 6159 is in effect for the payment of such tax."**In all cases subject to both failure to file and failure to pay penalties, no taxpayer will be subject to more than 5 percent combined penalty per month.** Additionally, miscellaneous penalties may apply depending on the circumstances of each individual situation.
Notice of Missed Payment • What is the notice telling me? • This notice is telling you that IRS intends to terminate your installment agreement. The IRS may also issue a levy against your wages and/or bank accounts. The notice tells you the specific reason for this action. Some examples are: • You missed a payment. • You have a new balance due • You didn't file your tax return.
How Long From The Notice? How much time do I have? You have 30 days from the date of the notice to contact us.