Due to changes in federal income tax withholding, more Americans are paying Uncle Sam this year. In fact, 23.4 million Americans owed a balance to the Internal Revenue Service (IRS) for 2018.
This was nearly a 5.5 percent increase from the prior tax season. The impact of this unanticipated increase is striking.
When To Think About Payment Plans For Taxes
For starters, the IRS projects nearly 15 million extension requests. In addition, its telephone hotline was saturated with a 13 percent increase in help calls.
Some tax filers owe significant back taxes. The weight of this financial burden is crushing. The good news is that a tax payment plan can reign in an out of control balance.
Read on for a comprehensive guide to starting a tax payment plan. Explore tax payment plan details and learn more about the required terms and conditions.
Why Are Payment Plans Necessary?
Sometimes, Americans find themselves in a very unfortunate financial situation. They perform their annual tax calculations and learn they owe an enormous amount.
This situation commonly occurs for occupations such as small business owners or independent contractors. These are job examples that require upfront tax planning by a certified professional.
Tax filers that submit a W-4 form to their employer are less likely to have issues. However, it is still possible if there are insufficient withholdings in a biweekly check.
With a payment plan, the IRS extends the timeframe in which a tax balance is due. You should only proceed down this route if you believe you can make the payments.
What Are Common Reasons for Owing Taxes?
It is not uncommon to owe the IRS during tax season. For some, tax preparation is easy as they work a traditional employer-based job and complete a W-4 form.
The concept behind the W-4 form is straightforward. The IRS allows you to claim allowances for dependents and children.
Your employer withholds your earnings for tax purposes based on the number of allowances you claim. The more dependents and children you claim, the less money that your employer withholds.
One common mistake that tax filers make is failing to update their W-4 form for life changes. Consider a situation in which your oldest child turns 18 and moves out of the house. He or she is now independent and you cannot claim this child for tax-purposes anymore.
Another mistake that tax filers make is failing to consider extra income. Good examples of extra income are stock transactions or freelance work. If you earn extra money, it is wise to make quarterly estimated payments to the IRS.
Lastly, it is important to monitor your deductions. If there is a significant change, it will have an impact on your tax return calculation.
For instance, your child starts attending public school and is no longer attending paid childcare. This reduces the amount that you can claim for the childcare tax credit.
Another example of a deductions change is a home refinance or tax assessment change. If the amount of property taxes or mortgage interest declines, you need to revisit tax withholdings.
What Are the Consequences of Not Paying Taxes?
Not paying your taxes is not an option. There are grave consequences for failing to do so.
In some cases, Americans file their taxes but then fail to pay. For this scenario, the IRS starts by assessing a 0.5 percent fee on your unpaid taxes each month. Like the failure-to-file penalty, the IRS charge maxes out at 25 percent.
Also, the IRS also collects interest on unpaid taxes. The interest charge tracks with the short-term federal interest rate, which is typically greater than 3 percent.
As non-payment continues, the penalties grow in severity. The IRS has the power to submit a federal tax lien and seize your property. They can also take action like forfeiting future tax refunds, revoking passports, and filing legal charges.
What Type of Tax Payment Plans Are There?
The federal government’s intent is to receive the full payment. For this reason, they allow for some flexibility in the type of tax payment plans offered. For instance, there are both short and long-term payment plans available.
1. Short-Term Plans
Short-term plans are designed for Americans that pay unpaid taxes in 120 days or less. The short-term option is only available to filers that owe less than $100,000.
2. Long-Term Plans
Long-term plans, on the other hand, were built for filers with unpaid taxes of $50,000 or less. There are a few differences between the short and long-term plans.
Of course, the long-term plan gives Americans more time to pay it back. A long-term plan is a good route to take if you need more than 120 days to repay your tax obligation.
Another difference is that the IRS charges setup fees for a long-term plan. It is possible to get the setup fees waived if you qualify as a low-income earner.
The setup fee calculation depends on whether you elect for automatic withdrawals or not. If you choose to get recurring payments automatically withdrawn from your checking account, the setup fee is $31.
If you choose another payment option, the fee increases to $149. This is for payers that want to use a money order, credit card, or a check. Again, low-wage earners can apply for a waiver or reimbursement on this fee.
The fees outlined above are specifically for online applications. If you choose to apply in person or by mail, the fees increased substantially regardless of tax payment plan.
3. Restructured Plans
The final option is to restructure an existing tax payment plan. This is for tax filers that have another tax repayment obligation.
A restructured tax payment plan is possible for those with new unpaid taxes. You may have unpaid taxes in a prior year. With a restructured plan, you can roll other unpaid balances into one tax payment plan.
There is a $10 fee for an online application. The phone, mail, or in-person rate increases to $89, which can be waived for low-income earners.
How Can I Apply for a Tax Payment Plan?
Now that you understand the different types of plans, the next step is the application process. The cheapest and most efficient way to apply is online on the IRS website.
In order to receive approval for a tax payment plan, you need to meet a number of different conditions. Owing less than $10,000 improves your odds of acceptance.
While reviewing an application, the IRS looks at the last 5 years of your tax history. They want to see that you have paid on time and did not owe taxes. In addition, the IRS prefers applicants that have not already entered into a tax payment plan.
Also considered is a future promise to the IRS. The government asks you to agree to comply with all tax laws and pay all outstanding balances in 3 years.
What Information Is Required for an Application?
The IRS does not require complex information or documents to apply for a tax payment plan. First, they ask for basic contact information like name, address, and e-mail address.
They will ask for some personal information. This includes your filing status and date of birth. Also, an individual tax ID number (ITIN) or social security number is required.
The IRS is sensitive to identify theft and asks you to confirm your identity. This is accomplished through a registered mobile phone or financial account number. Another way to confirm identity is by mailing an online activation code.
The required information is slightly different for businesses. Here, you are asked for an employer identification number (EIN) and the business establishment date. The government also asks for the Caller ID from your IRS tax notice.
In some cases, a Power of Attorney (POA) will try to apply for an individual or business. This is appropriate and can be achieved with the right set of information.
For a POA, the IRS is going to ask for identity verification and credentials. Much of the same information is requested for individuals and businesses. The IRS also asks for a Centralized Authorization File (CAF). Lastly, you will need an individual’s Adjusted Gross Income (AGI) from the prior tax year.
Can You Default on an IRS Repayment Plan?
You can absolutely default on a tax payment plan. If you reach a default status and your tax payment plan is terminated, the IRS can take enforced collection actions. This involves worst-case steps like seizing property or filing charges.
To avoid default, the IRS has a number of recommendations. Of course, you should make on-time monthly payments.
Also, the IRS has the right to apply future refunds towards unpaid tax debts from prior years. If this occurs, you are still obligated to make your recurring monthly payment.
Lastly, some Americans choose to make tax payments via check. For this option, it is imperative to provide all agreement information such as SSN and tax year.
What If You Are Ineligible?
Some taxpayers are ineligible for a tax payment plan. When the person fills out the Online Payment Agreement tool, they receive an ineligibility notice. In other cases, they cannot log in or fail to complete online registration.
As alluded to earlier, the IRS accepts tax payment plan applications via mail. You want to download IRS form 9465, which is an Installment Agreement Request.
We recommend that you carefully read the instructions contained in the IRS form. In some cases, you are required to complete IRS form 433-F Collection Information Statement as well.
If all else fails, you can always call the IRS hotline provided on your unpaid taxes notice.
What Is an Offer in Compromise (OIC)?
What happens when you simply cannot pay back the unpaid taxes? Perhaps there are some special circumstances in your life preventing you from paying. For some, even a long-term tax payment plan is not feasible.
In this scenario, a possible solution is called an Offer in Compromise (OIC). Here, the IRS will consider settling for a smaller amount than your outstanding balance.
Under existing law, the IRS is restricted to a 10-year period for tax collection. As this milestone approaches, the IRS grows more willing to accept a compromise position.
The IRS conducts an appraisal to see what amount they can realistically expect to receive. This includes an evaluation of several different factors.
Of course, the IRS looks at the taxpayer’s current income. In addition, they also appraise assets that can be potentially liquified, such as a property or vehicle. The agency reviews monthly expenditures as well, including childcare and living expenses.
Will the IRS Accept My OIC?
There are a few different ways in which the IRS will accept an OIC. The first is called Doubt as to Liability. This is a scenario in which the government cannot establish whether the taxpayer is actually responsible for the outstanding balance.
Another way is referred to as Effective tax administration. This occurs when the IRS acknowledges special circumstances that are preventing you from paying.
Lastly, the final designation is called Doubt as to Collection. This is when the IRS recognizes that they can never collect the outstanding balance. The financial definition is when your assets and future income are less than unpaid taxes.
There are a number of things that will prompt the IRS to reject your OIC. For starters, failing to make the first payment earns you a rejection.
Also, failing to provide financial information promptly is looked upon unfavorably. Finally, if the IRS determines that a lump sum or tax payment plan is feasible, an OIC request is rejected.
Wrapping It Up
A tax payment plan gives delinquent or distressed taxpayers a fighting chance. Whether it is due to inadequate withholdings or extra income, unpaid taxes are far more common than you think.
To collect taxes, the IRS employs short and long-term tax payment plans. You can apply for these installment programs online for a small fee. Some pursue the OIC route in an attempt for the IRS to collect a lesser amount.
If you need help applying for a tax payment plan, contact us today to schedule an appointment.