How to Use IRS Payment Plans – 6 Ways to Get Out of Federal Debt

Chad Silver

Chad Silver

Managing Partner of Silver Tax Group, author of the book "Stop the IRS". Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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You open your mailbox.

You find a letter from the IRS.

“Great!” you think, “my tax return is here!”

But when you open the letter, you find some incredibly sad news.

Suddenly, you owe the IRS a lot of money.

Maybe you forgot about the capital gains tax on the stock you sold last year.

You can’t afford what the IRS is asking for because you used your stock earnings to pay for a medical bill.

You have two options at this point:

A.) Ignore your new problem and pretend it doesn’t exist.

B.) Figure out how to pay the IRS what you owe them.

People who take the first option usually end up owing more or eventually going to jail. We don’t think that’s a great option to choose. Instead, let’s go with option B and learn about IRS payment plans, shall we?

1. Why Might You Owe the IRS Money?

When tragedy strikes most people immediately want to know why. As humans, we crave reason and order. If you suddenly find out that you owe the IRS money, you, as well as thousands of others in your shoes might be wondering why.

Often, taxpayers owe money to the IRS just because they didn’t know what they should report. Sometimes it’s a mistake on their form, and they need to appeal to correct the error.

Maybe You Withheld Too Little on Your Paycheck.

It might seem excellent to have as little as possible held on your paycheck each pay period. And if you’re sure you can pay what you owe at the end of the year, then go ahead and claim as little as possible. Some people need that money now instead of as a refund next year.

But if you don’t know how much you’ll owe the government, it’s better to have more withheld than too little. And it will feel good when you get that tax return in the mail next April.

You Forgot About Income Not Subject to Withholding

You can’t have taxes withheld from things like stocks and bonds. Thus you have to count these things when filing your taxes. You need a completely separate form when submitting capital gains.

You will likely need to make quarterly payments on this income. If you’re living paycheck to paycheck, this could be difficult to do. Be sure to do the research before investing in these kinds of assets and hold onto enough each quarter to pay your estimated payments.

You Were Subject to Self-Employment Tax

When employed, your employer has to pay payroll tax. You only have to pay income tax when you file if you’re employed. But if you’re self-employed, you don’t have a boss, and you don’t have someone paying that share of your income.

You may not know, but your employer pays payroll tax quarterly. And if you make enough while self-employed, you should be paying an estimated quarterly amount to the government to avoid penalties.

You can minimize this tax burden by itemizing if your business expenses exceed your standard deduction. Otherwise, hold back 30% of your income each quarter and pay that to the government to be safe.

2. Does Owing the IRS Affect Other Aspects of Your Life?

Often, not paying off your debts can affect your life adversely. For example, if you have high credit card debt and you miss a payment or two, your credit could suffer. If your credit is low, you may not have as much purchasing power as you did before.

If you have IRS debt, you might not be able to purchase a house. Even if your credit is good and you have a good income and enough saved up for a down payment, the loan officer could choose not to approve your loan.

But you can get an FHA loan if you’re already in a payment agreement with the IRS. You’ll need to wade through some red tape if you want to get the loan.

First, you need to call the IRS. Set up a repayment plan (we’ll go over how to do this later). Be sure you ask the IRS for a copy of the repayment agreement. The repayment agreement should specify the total amount you owe and how much your monthly payment will be.

Be sure you keep the letter in a safe place. When you apply to the mortgage, give it to your lender.

Then you need to make three consecutive payments. Do this on time. You shouldn’t apply for the FHA loan until you’ve done this.

Request a payment history document from the IRS before you do apply for the loan.

This document will help in gaining approval.

There is only one reason you need to pay off the entire amount you owe the IRS before applying. If they filed a tax lien against you, you would need to pay off the IRS immediately.

3. How Do I Know If I Should Apply for IRS Payment Plans?

Some people may not qualify for a repayment plan. If you haven’t filed all tax returns or you owe more than $50,000, you might not get approved.

Let’s say you owe around $30,000, but you’re late in filing your return. If you request a repayment plan before turning in your most recent return, the IRS will deny you.

If you’re missing any returns from prior years, the IRS will require you to file the backlog before approving your request.  

Think about if you can afford the minimum payment each month on a repayment plan. You want to choose the smallest amount the IRS is willing to accept each month and then pay extra if you can. To figure out what your payment will likely be, take the total amount due and divide it by seventy-two.

If you can afford the payments, the payment plans are better than a credit card (unless you can get a zero interest card and pay it off in the allotted time). The interest rates and penalties are more lenient on IRS repayments.

If you don’t have any missing returns and you can afford to pay the monthly amount, it’s time to schedule your payment plan.

4. A Payment Extension is an Option

If you can’t pay your entire bill on time, you can request an extension. You will have more time to pay, and the interest will be less during this time.

The 120-Day IRS Payment Extension

If you owe less than $100,000 to the IRS, then you can request an extension. The 120-day payment agreement allows you to extend your payment deadline up to 120 days.

You’ll still accrue some interest during this time, but it will be less than a full repayment agreement over seventy-two periods.  You can use the same online payment application as you would with an installment plan.

The IRS Hardship Case Payment Extension

The IRS Hardship Case Payment Extension is rare. With the IRS Hardship Case repayment extension, you can get a six-month extension. Some can even get protection for up to 10 years.

What qualifies someone for a Hardship Extension? A severe hardship.

What is “a severe hardship”? A severe hardship is a significant financial loss and anything that would affect your ability to live.

For example, if you would have little or no funds left after paying for necessary living expenses, you might qualify. Living expenses include clothing, food, housekeeping supplies, and personal care products. Also included are out-of-pocket health care expenses, housing and utilities, and transportation.

If you qualify, the IRS can’t garnish your wages, file a levy or a lien against you, or take your property.

5. Pay As Much as You Can First

Getting an extension plan is like a mortgage. The more you pay at the beginning, the less you’ll end up paying in the end. Even if you can’t pay the entire amount you owe, pay as much as you can right now.

Again, don’t do this on a credit card unless you have zero interest for a certain amount of time. Credit card interest can be atrociously high and failing to pay will affect your credit. We can’t stress this enough.

6. Apply for the IRS Fresh Start Program

IRS fresh start for people

Back in 2012, the IRS instituted an expansion of their Fresh Start initiative. The original Fresh Start initiative was a response to the 2008 financial crisis. Americans were out of work and suddenly couldn’t pay their taxes.

Instead of merely arresting or penalizing those who couldn’t pay, the IRS decided to make the tax lien minimum $10,000. It’s rare that the IRS will now file a lien on amounts less than $10,000. The Fresh Start program allows taxpayers to request the IRS withdraw the lien. You’ll be more likely to have the lien removed if you are already in an installment agreement.

Back in 2012, the IRS instituted an expansion of their Fresh Start initiative. The original Fresh Start initiative was a response to the 2008 financial crisis. Americans were out of work and suddenly couldn’t pay their taxes.

Instead of merely arresting or penalizing those who couldn’t pay, the IRS decided to make the tax lien minimum $10,000. It’s rare that the IRS will now file a lien on amounts less than $10,000. The Fresh Start program allows taxpayers to request the IRS withdraw the lien. You’ll be more likely to have the lien removed if you are already in an installment agreement.

The Fresh Start program streamlined the installment agreements system. Because of this program, you can take 72 months and pay monthly on your taxes.  You can only take advantage if you owe less than $50,000.

Offer in Compromise

It also expanded the Offer in Compromise or OIC program. The OIC lets you settle your tax debt for less than you owe. But you must qualify if you want to take advantage.

The IRS considers your income, your ability to pay, your asset equity, and your expenses when deciding whether you qualify. It’s not unlike the IRS Hardship Extension as far as qualification goes.

Often, the IRS will require a downpayment, and there will be a fee involved. But there are several types of offers you might receive if you qualify for an OIC.

Doubt as to Collectibility

The most common type of OIC is doubt as to collectibility. If you owe the IRS back taxes and you can’t pay them after selling off your assets even with installments, you could qualify for this type.

Doubt as to Collectibility is essentially a counter offer system. You calculate how much you can pay the IRS and offer that amount. Doubt as to Collectibility is a settlement like you see in court between two parties.

Doubt as to Liability

Doubt as to liability is another way you can challenge the IRS’ findings. You must be sure the IRS was wrong in their findings. You must gather documentation and know the law.

Again, you send a counteroffer along with your evidence. If the IRS agrees, then the OIC will trigger a mini-audit by the IRS.

Effective Tax Administration

If you have exceptional circumstances, the IRS can settle your tax bill for less. You would need a legitimately extraordinary situation to qualify. For example, if you were ill for many years and you had to sell your assets to pay medical bills, the IRS might settle your tax bill for you.

Apply for an Installment Plan

If you can’t pay all of your tax burdens at once, it’s time to look at IRS payment plans. If you owe less than $50,000 and you need more than 120 days to pay it off, fill out the IRS form 9465 Installment Agreement Request.

The IRS will set up the plan for you for an initial fee depending on your situation. Remember, you must have a reason why you can’t pay all at once. But the Fresh Start Program makes it easier than ever to get an extension.

If you need to make a settlement with the IRS, get the full force of the law on your side. Contact us for a free case evaluation.


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