Installment Payment Options: Short Term Extension, Installment Plan Agreement, Offer in Compromise
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Should I Wait to File a Tax Return Until I Can Pay the Taxes I Owe?
It is better to file or efile a tax return on time (and pay as much as you can) than face expensive penalties for filling a tax return late.
To find out how you can pay your taxes when you file your return, review these primary tax payment options.
What If I Cannot Pay All the Taxes I Owe When I File My Tax Return?
You may qualify to set up an installment payment plan with the IRS. You have three installment payment plan options:
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).
Once you submit an online approval of your short-team extension request, you should receive immediate notification of approval. 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).
You may also apply for an installment plan by filling out and mailing Form 9465, Installment Agreement Request.
Does it cost anything to apply for an IRS installment plan agreement?
The IRS will charge a one time user fee of $120 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.
What Are the Requirements to Apply For a Tax Installment Plan Agreement?
In order to be eligible for an installment agreement you must have filed all of your tax returns that are due. You might be eligible for an installment agreement if:
- You owe $50,000 or less 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
What if I Don't Meet the Installment Plan Agreement Qualifications? Will the IRS Reject My Application?
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.
Will My Tax Refund Be Affected If I'm on an IRS Installment Plan?
While participating in an installment agreement, any tax refunds which you claim will still be applied to your outstanding tax debt.
Information 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.
Tax Tip: 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.
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
What Claim Can I Use As My Basis For My Offer in Compromise Application?
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.
May I Qualify For an Offer in Compromise If I'm Unemployed or Have Specific Tax Debt?
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
How Can I Pay Off My 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.
How Do I Apply For an Offer in Compromise?
To apply for an Offer in Compromise an an individual taxpayer, prepare and file Form 433-A, Collect Information State for Wage Earners and Self-Employed Individuals. Include any required documentation described on Form 433-A.
You may apply for an offer in compromise based on doubt as to collectability or effective tax administration by also 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).
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.
Is There a Fee to Apply For an Offer in Compromise?
There is an application fee of $186 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.
Why Was My Offer in Compromise Application rejected? What Happens When the IRS Does Not Accept my Offer in Compromise?
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.
May I Contact the IRS to Let Them Know I Disagree with Their Rejection to My Offer in Compromise?
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.
What If I Default on an Offer in Compromise Payment Plan?
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).
Where Can I Find More Information About the IRS Offer in Compromise?
Please see Form 656-B, Offer in Compromise Booklet.
What is the Fresh Start Initiative?
The Fresh Start Initiative which was started by the IRS in 2011, helps taxpayers who are struggling to pay their taxes. This program 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.
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.
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.
More Information about Paying Taxes Owed
Read IRS Publication 594-The IRS Collection Process for details on tax payment options.
If you can pay the taxes you owe when you file your tax return, consider these main tax payment options.
Facing financial hardships? Here are some tips for dealing with tax debt.
Consider these tips on how to avoid owing taxes.
Check out these stories about famous tax evaders!