Although you may never have expected it to happen to you, sometimes taxpayers find themselves owing the IRS money they just don’t have. Fortunately, you have several options if you find yourself in this position. You’ll need to weigh those options carefully, however, as you won’t be eligible for some and others may hurt more than they help. As your financial situation changes, the IRS may also wish to change any arrangements you’ve made with them.

What is an IRS Tax Payment Plan?

An IRS payment program is a tax-paying strategy that you and the IRS agree on. If you don’t have the money you need to pay your tax debt, the IRS may allow you to pay the bill through an installment plan, a partial payment installment agreement, or an offer in compromise. You can also plead your case and ask the IRS to temporarily delay any collection attempts against you until your finances improve.

Each option is a little different, and it’s important that you understand all the terms and conditions of the agreement you make. If you default on your plan, the IRS may charge you a fee to reinstate it. If you take too long to catch up, the IRS may refuse to reinstate your previous payment schedule.

Who is Eligible for an IRS Payment Agreement?

As a general rule, most taxpayers are eligible for an IRS installment agreement if they owe less than $100,000 in taxes and fees. Perhaps somewhat counterintuitively, the IRS offers long-term plans for those who owe less than $50,000. If you owe more than that, the IRS will not allow a long-term payment plan. The more you owe, the less time you’ll likely have to pay it.

This may seem backward, but it actually makes good sense. Getting on a payment plan doesn’t stop fees, penalties or interest from accruing on your IRS account. That means stretching out large tax debts over an extended period of time could put you on a financial treadmill that would be very difficult to get off of, much like paying the minimum payment on a credit card every month.

To be eligible for a payment agreement, you must also be current on your tax filings. You must file your tax return on time to qualify. This means you need to file your taxes even if you know you can’t yet pay them.

How Much Does an Installment Plan Cost?

When applying to the IRS for a monthly payment plan, know that making the request isn’t always free. You’re in the clear if you can pay your tax debt within 120 days. If you need more time, however, the rules change.

If you set your payment plan up online and plan on making your payment via direct debit, the fee is $31. if you set yourself up online but don’t use a direct debit plan, the fee increases to $149. If you want to make direct debit payments but set your plan up by phone, through the mail or in-person the fee is $107. Setting up a payment schedule via phone, mail or in-person and not using a direct debit system will cost you $225. Low-income taxpayers can ask the IRS to waive these fees.

The IRS does charge interest on late taxes, even if you have a qualified repayment plan in place. They’re fairly forgiving, however, if you have a plan. The IRS payment plan interest rate drops to 0.25% once you get on a payment schedule.

What Is the Minimum Monthly Payment for an IRS Installment Plan?

The IRS is fairly open to suggestions when determining the amount of your monthly payments. The catch is that you have to have the total debt paid — including any interest, penalties and fees — with 72 months at the latest. In general, the IRS will likely approve any payment agreement that gets the job done within the said 72 months.

If, however, you owe more than $50,000, expect the IRS to scrutinize your payment intentions a bit more closely. In this case, the IRS is likely to examine your financial situation carefully, forcing you to sell any meaningful assets if applicable.

Partial Payment Installment Agreement

So far we’ve discussed installment agreements, but you can also ask the IRS for a partial payment installment agreement (PPIA). If and when you owe the IRS money, they have 10 years to collect. After that, the debt essentially goes away.

Let’s say you’ve fallen into extreme financial hardship. You want to pay your taxes through an installment plan, but you know it will take you longer than 10 years to do so given what you can afford to pay each month. In this case, you can ask the IRS for a PPIA. If granted, a PPIA will let you make monthly payments for the next 10 years. After that, your payments will stop and any outstanding tax debt is forgiven.

The IRS will examine your finances very closely if you ask for a PPIA. You’re not eligible if you haven’t made any necessary estimated tax payments or if you filed your tax return late. You may not file for bankruptcy either. If you have any valuable assets, the IRS may require you to borrow against them to pay your tax debt. A PPIA is not easy to get but can be quite helpful if you’re eligible.

Be aware that you’re not necessarily done if the IRS approves your PPIA. They can, and likely will, review your financial situation every 2 years while your PPIS is in effect. If the IRS determines that your financial situation has improved, they may increase the amount of your payments. You can try to fight this payment increase yourself or hire a tax attorney to do so for you. The IRS probably won’t make it easy for you, however, once they’ve decided that you should be able to pay.

Offer in Compromise Agreement

Sometimes the IRS will accept what is called an offer in compromise. In this instance, the IRS allows you to settle your tax debt for less than you owe. If you owe $10,000, for instance, the IRS might agree to let you pay $8,000 and call it even.

There are essentially three possible payment terms available under an offer in compromise. One is a lump-sum payment in which you and the IRS agree on an amount and you pay it in 5 installments or less. You can also request a short-term periodic payment term. Under this arrangement, you pay the debt in 24 months or less.

If you need more time to pay, the IRS may grant you more time than 24 months. Your repayment plan cannot, however, exceed the 10-year statute of limitations during which the IRS can legally collect your debt. You also won’t get approval for an offer in compromise if you currently have an open bankruptcy case.

Temporarily Delay Collection

The best thing about life’s rough patches is that they don’t last forever. Perhaps your finances are tight right now, but hopefully, things will get better. If so, you can ask the IRS to deem you currently uncollectible. If you can prove that there is no way you can pay your current living expenses and your taxes, the IRS may set your account aside and declare it uncollectible. If so, they will stop all collection activities against you.

After branding you uncollectible, the IRS will reexamine your situation at least once a year. When your financial situation improves, the IRS will remove your uncollectible status and begin collection practices once again. At that time, you may be able to negotiate a payment agreement if you still can’t quite pay the debt in full.

Can I Negotiate Myself?

This is a very important question, and the answer is absolutely. Negotiating with the IRS may feel intimidating, but it’s actually quite easy most of the time. You can hire a tax-relief company to help you, but doing so isn’t necessary. In fact, the Federal Trade Commission warns you to move quite cautiously if you do. These companies don’t have any special powers or close relationships with the IRS.

Even worse, many are con artists who never even bother to send your paperwork to the IRS at all. At worst, these companies are a con. At best, they have the same negotiating powers with the IRS that you do. Be aware, as well, that if you hire someone to try and negotiate with the IRS on your behalf, you may need to give them a power of attorney to do so, and this can be a very risky proposition.

Even when they’re legitimate, these companies don’t tend to offer refunds. If you ask them to approach the IRS for you and the IRS turns down the payment proposal, you’re out of luck. Any fees you paid to the tax-relief company are gone, even if your tax situation remains unresolved.

Can A Good CPA Help?

Your best bet is to fill out the paperwork and talk to the IRS yourself. If you do want some help making sure you have everything filled out and filed correctly, a CPA like the professionals at Picnic Tax is your best option. We can take a look at your situation, help you determine which of the payment alternatives is best for you, and help you get the proper forms filed — all without asking for a power of attorney or any other shady business practices. Get in touch with us today and we’ll help you deal with your tax debt so you can stop stressing about it.