When a taxpayer can not pay the IRS a lump sum payoff for their tax debt, they need to create a payment plan with the IRS. This is known as a IRS Installment Agreement. There are a number of options to consider when the payment plan is established. Obviously, it is almost always best to create the lowest monthly payment plan amount as possible and then pay more to get the balance down quickly, but not be at risk of defaulting the payment plan if money is tight. Therefore, there a number of factors to consider to get the correct balance of paying down the debt quickly, and not having a future issue. As with other payment plans that you might establish with a creditor, the amount you will pay will depend on the amount you owe, the amount you can afford to pay, and what assets and income you have.
As an overview, the IRS has many programs that allow for payments of taxes over time. The payment plans are within the discretion of the IRS, which means they decide the amount per month they will accept. Often it takes a lot of hard work to get the IRS to agree on an affordable number. The IRS does not give much flexibility with the monthly payment being late once the payment plan is established. In some rare instances, the payments can fluctuate if the person or business has seasonal income, or income on a non-recurring basis, such a lawyer who gets paid on contingency basis.
There are three common ways that you can make payments under the IRS Installment Agreement payment plan.
The first is through a payroll deduction. This method needs to have your employer take from your pay the correct amount and send it to the IRS. It sounds straightforward, but sometimes the employer does not want to become involved or your pay cycle is not monthly, and it becomes awkward for the employer to pay the exact right amount each month since the number of payroll cycles in a given month can fluctuate.
The second, and maybe the best method, is using a monthly direct debit electronic transfer from your bank. This payment method, once it is established, takes little energy to make sure the payments are made (other than keeping money in the account), so it is my favorite for most clients.
The last method, is to just mail in checks to the IRS or use EFTPS payment system. Typically, when you choose this method the payments needs to be made at least 10 days before the due date to enable the payment to be received by the IRS by the due date. The IRS sometimes sends monthly reminder letters, so that helps you stay compliant with the payment plan so you do not miss a payment and have a tax lien.
It is always important to understand that the true cost of the tax debt will continue to grow with interest and penalties until is paid off. In some cases, we can assist with penalty relief. Therefore, its important to pay the debt off as quickly as possible while still creating a payment plan that is affordable and not overly stressful to maintain. Also keep in mind that your tax refunds will be used to pay down the tax debt.