Options to Pay Taxes - IRS Installment Plans and Other Ways to Pay Taxes
Even if you do not have enough money to pay your total tax debt, a tax return should be efiled or filed on time to avoid penalties for failure to file. Once your tax return is filed, the IRS can assist you in setting up an alternative payment plan.
You can file an amended tax return later if you need to add or change something. Even if you owe more taxes than you can afford to pay, it is recommended that you file or efile a tax return by April 17.
Not sure whether to efile a tax return or a tax extension?
Tax Payment Options - Direct Bank Transfer, Pay by Credit Card, Debit Card or Check
If you owe taxes, you will have several options to pay them after you prepare your tax return:
- Pay by Direct Bank Transfer: While you are preparing your tax return online, you can enter your bank account information to pay your taxes via direct bank transfer to the US Treasury. Once you submit the tax payment, your bank statement will list “US Treasury” and a PIN or access code for referencing the transaction.
- Pay by Check or Money Order: You can mail a check or money order to the IRS. A payment voucher (Form 1040-V) will be generated with your tax return and you should include this form when you mail your check. The correct IRS mailing address to use is based on your state residence, and you can find the appropriate mailing address here or on your payment voucher [Form 1040-V sample]. Make the payment to "United States Treasury" and write your social security number, your phone number, the tax year, and which tax return form you filed on the check or money order. Do not staple or paperclip the payment to the voucher.
- Pay by Credit Card or Debit Card: During or after the efile process, you can make an online payment with a credit card or debit card. The IRS accepts American Express, Discover, MasterCard, and Visa through an authorized payment porcessor, Value Payment Systems. Note that the processing company may charge a "convenience fee" based on the amount of your payment (it is generally 1.90%-2.35% of the total for credit card payments and 1.90%-3.95% for debit card payments). The credit card interest and convenience fees may or may not be greater than the IRS interest, so compare your options before choosing the one most beneficial for you.
No Matter What: Still File on Time (if Possible)
Even if you cannot pay the full amount of your tax debt on time, you should file your tax return on time in order to avoid greater penalties. You may efile a tax extension by April 15 that will extend your filing deadline to October 15, but if you file one without paying your taxes, you will still incur penalties and interest until you pay the full amount owed. Penalties and interest are charged on unpaid taxes from the tax deadline until the day you complete payment. You should file your tax return on time even if you cannot afford to pay all of your tax debt in order to avoid the biggest penalties. The current failure-to-file penalty is 5% of your total taxes owed, applied monthly, but the failure-to-pay penalty is only 0.5% per month. Learn more about tax penalties.
Installment Payment Options: Short Term Extension, Installment Plan Agreement, Offer in Compromise
Installment Payment Option 1: Short-Term Extension of Time to Pay
If you think you will be able to pay the full amount of the taxes you owe within 120 days, you should call the IRS at 1-800-829-1040 and talk with a representative to see if you can qualify for a short-term extension of time to pay. You may also request a short-term extension using the Online Payment Agreement (OPA).
If the IRS grants you an online approval of your request, you should receive written confirmation within 10 days. There is no extra fee for an extension to pay. If you are granted an extension of time to pay, you may still owe interest on your tax debt, but you will avoid incurring the application fee for requesting an installment agreement.
Installment Payment Option 2: Installment Plan Agreement
If you are not able to make a single lump sum payment of your full tax debt, an installment plan will allow you to pay your debt over time in monthly installments. The easiest way to apply for an installment plan, and the fastest way to get approval, is to use the Online Payment Agreement (OPA).
The Fresh Start Initiative: Easier Payment Options and Penalty Relief
The IRS introduced the Fresh Start Initiative in 2011, and expanded it in 2012 to help even more taxpayers who are struggling to pay their taxes. This program is still available for 2013. The Fresh Start Initiative has expanded the availability of installment plans and offers-in-compromise, and has streamlined the application and approval processes for both.
Under the Fresh Start Initiative, you may use the OPA if you owe up to $50,000 in back taxes, penalties, and interest. If you owe more than $50,000, you can pay your balance down to $50,000 and then apply.
You may also apply for an installment plan by filling out and mailing Form 9465, Installment Agreement Request.
If you owe more than $50,000 in combined tax, penalties and interest, you may still qualify for an installment agreement, but you may also be required to complete Form 433-F, Collection Information Statement.
The easiest way to ensure timely payments is to have them directly debited from your bank account on a set schedule. If you wish to enter into an installment agreement, and you cannot use the Online Payment Agreement (OPA), you can fill out Form 433-D, Installment Agreement, and attach it to your Form 9465. If you wish to make your payments by having funds automatically withheld from your paycheck, fill out and attach Form 2159, Payroll Deduction Agreement.
Under the Fresh Start Initiative, if you use the OPA to apply for an installment agreement, you MUST agree to make monthly payments by direct debit. You can use the Online Payment Agreement (OPA) to enter your account information when you apply.
The IRS will charge a one time user fee of $105 for a request to enter into an installment agreement. If you set up a direct debit installment plan, the user fee will be reduced to $52. The user fee will generally be added to the total amount of back taxes, penalties, and interest that you owe. If you break your agreement by missing a payment but choose to reinstate it, or if you restructure the agreement, you will be charged an additional $45 user fee. If you default on an installment payment plan, additional penalties may be assessed and your credit score may suffer.
If your annual income is below 250% of the national poverty guidelines established by the Department of Health and Human Services, you may qualify for a reduced user fee of $43. To apply for the reduced user fee, use Form 13844, Application for Reduced User Fee for Installment Agreements.
In order to be eligible for an installment agreement you must have filed all of your tax returns that are due. The IRS guarantees not to turn down your request for an installment agreement if:
- You owe no more than $10,000 in taxes
- You have filed your tax return and paid your taxes on time for the last 5 years
- You agree to pay all of your outstanding debt within 30 days
- You agree to comply with all current tax laws during the period of the agreement
- You supply the IRS with all requested information while they evaluate your financial situation
- The IRS determines that you will be unable to pay the full amount due by the deadline without undue hardship
If you do not meet the above qualifications, it does not mean your application will be rejected. The IRS will still assess your case and may grant you an installment agreement. If the IRS approves your request for an installment plan, you will receive written confirmation within 10 days.
While participating in an installment agreement, any tax refunds which you claim will still be applied to your outstanding tax debt.
Learn more about the Online Payment Agreement (OPA).
Make an Online Payment Agreement (OPA).
Tax Tip: Compare Rates! After you have filed your taxes, calculate the interest rates on the taxes you owe. Interest rates are currently low, so see if you can borrow the money at a lower rate than the IRS interest rate.
Installment Payment Option 3: Offer in Compromise
An offer in compromise (OIC) should only be pursued after you have exhausted all other payment options. If special circumstances have arisen in your life which you believe will make it impossible for you to ever pay the full amount of taxes you owe, you may make an offer in compromise to the IRS. If accepted, an offer in compromise will allow you to settle your tax debt for a smaller amount than you owe (but not for "pennies on the dollar", as some television advertisements would have you believe).
In order for an OIC to be accepted by the IRS, the offer must be a realistic appraisal of what you can actually pay. By law, the IRS has 10 years to collect back taxes and they will only consider an offer in compromise if they believe they will be unable to collect the full amount owed within that period of time. The IRS will take many things into consideration when deciding if you can pay the full amount, including:
- your ability to pay (determined by prior-year earnings and your future earning potential);
- your current income;
- your expenses; and
- your currently held assets
There are three claims which may serve as the basis for your offer in compromise to be accepted:
- Doubt as to liability: There is doubt about whether you actually owe the taxes in question.
- Doubt as to collectability: There is doubt that you could ever pay off the full amount of your tax debt (your tax debt is greater than your assets plus your potential future income).
- Effective tax administration: There is no doubt about liability or collectability, but there are special circumstances affecting your ability to pay.
Generally, the IRS will NOT approve an offer in compromise if the agency believes, based on your income and assets, that:
- The amount you owe can be paid in a lump sum,
- Or, the amount owed can be paid in full through an installment agreement.
As part of the Fresh Start Initiative, the IRS has granted its agents new flexibility when considering your offer in compromise if you are recently unemployed or facing other financial hardships. When determining your ability to pay, and the amount of your payment(s), IRS agents will now take into account:
- Only 1 year of future income for offers paid in 5 or fewer months, and 2 years of future income for offers paid in 6 to 24 months
- Student loan payments
- State and local back taxes
- An expanded Allowable Living Expense
Paying Off Your Offer in Compromise
There are three ways to pay your offer in compromise, each with its own restrictions:
- Lump Sum Payment: The full debt must be paid in 5 or fewer installments.
- Short-Term Periodic Payment: The debt must be paid within 24 months.
- Deferred Periodic Payment: The debt may be paid in more than 24 months, but must be paid within the 10-year statutory period which the IRS has to collect the debt.
If the IRS approves your offer in compromise and your financial situation subsequently improves, they have the right to increase the amount of your installment payments.
You may apply for an offer in compromise based on doubt as to collectability or effective tax administration by filling out and mailing Form 656, Offer in Compromise.
If your offer in compromise is based on doubt as to liability, you should use Form 656-L, Offer in Compromise (Doubt as to Liability).
There is an application fee of $150 for making an offer in compromise. For the IRS to consider your offer, you must include the fee with your Form 656, as well as the first 20% of your Lump Sum Payment offer, or the first installment of your Periodic Payment offer. Also, you must have filed all of your currently due tax returns before submitting an offer in compromise. Furthermore, you must fill out and attach Form 433-F, Collection Information Statement, if you are requesting an OIC based on a claim of doubt as to collectability or effective tax administration. You do not need to include an initial payment if you are making a claim based on doubt as to liability.
If you fill out the forms incorrectly, fail to attach the correct forms, fail to include your first payment, or fail to provide the IRS with any requested financial information within the time they give you, the IRS will not accept your offer in compromise. If the IRS rejects your OIC for one of these reasons or because of the results of their financial analysis of your situation, they will keep your application fee and first payment and apply the funds to your outstanding tax debt. However, you may repel a rejection by filling out the Request for Appeal of Offer in Compromise, Form 13711. This must be done within 30 days after receiving the rejection.
If you default on an offer in compromise payment plan, the IRS may assess additional penalties and may inform the credit reporting agencies (thus damaging your credit rating).
To learn more details about offers in compromise, see Form 656-B, Offer in Compromise Booklet.
More Information about Paying Taxes Owed
For more information about the various ways to pay off a past due tax debt, see Publication 594 - The IRS Collection Process.
Learn about efiling a tax extension.