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When you pay your taxes on time, you avoid penalties and fees that the Internal Revenue Service (IRS) most certainly will slap on you. But even if you’ve implemented a plan to have the funds available by the April 15 due date, sometimes unexpected expenses come up that are just unavoidable, leaving you unable to pay your income taxes on time.
When that happens, you need to bite the bullet and accept the consequences — which may turn out to be an IRS installment agreement. Then you can pay the service until you’ve settled your debt. Charges you most likely incur include:
Accrued interest as high as 8 to 10 percent that begins on April 15, no matter if you filed for an extension or requested an IRS payment arrangement
Penalties such as: 0.5% of the tax you owe that’s not paid by due date, April 150.25% during an approved IRS installment agreement if your tax return was filed in a timely manner and the return is for your personal taxesA recurring charge levied on the unpaid taxes you owe each month or for part of the month after the due date, until the amount you owe is paid in full or the penalty reaches 25%
Future refunds held by IRS until the amount you owe is fully paid
Processing fees that could be as high as $3.95 per payment
A $149 setup fee for the IRS installment payment plan
A user fee, which for 2019 taxes is $52 if you set up a direct debit plan and $105 for a non-direct debit agreement — payroll deductions can be set up for a user fee of $225
Potential problems obtaining a loan while you carry an outstanding IRS debt
Lowered credit score due to the money you owe, even as you continue to make payments
Setting up an IRS Installment Agreement
When it’s determined that you owe taxes to the IRS, you have a few options:
Pay the amount in full by April 15.
Make a short-term IRS payment arrangement for fewer than 120 days.
Enter into an IRS installment agreement when you need longer than four months to pay it all.
Individuals can set up a short-term IRS payment arrangement online if you owe the government less than $100,000, which includes the tax, plus penalties and interest. You can make the arrangements for an IRS installment agreement online if your total debt is $50,000 or less.
If you’re requesting more time to pay your business taxes, you can set up a long-term IRS installment agreement payment plan online when your balance is $25,000 or less. Independent contractors and solo proprietors file as individuals.
If you owe more than the maximum allowed for an online payment agreement (OPA) or otherwise aren’t eligible to apply online, you still may be eligible for an IRS installment agreement. You just have to fill out the paper forms, attach documentation and mail it in. Setup fees may be higher than if you rely on electronic applications for extended payment plans.
If you want professional assistance in setting up IRS installment agreement our CPA professionals at Sarasota accountant office can help you with all paperwork.
How It Works
Once you’ve filed an application for an IRS installment agreement payment plan, they generally let you know within 30 days whether you’ve been approved or not. But if you wait until after March 31 to make the request for taxes due on April 15, you may have to wait longer for an answer. Once you’re approved, you’ll get a notice with the details of how much you need to pay each month, along with the due date. You’ll also get your bill for the user fee.
If you’ve set up a non-direct payment agreement, you get a notice each month that shows the remaining balance, as well as the date and amount of your next due payment. You don’t get notices for automatic payments, also called direct payments. Either way, every year, you get a statement showing the payments you’ve made.
Making Changes During Your Repayment Period
The IRS isn’t completely heartless; they allow for changes to be made during the life of your IRS installment agreement. But you better believe you’ll pay for them. For an $89 fee, you can change the amount of your monthly payment, the due date or make a conversion to a direct or non-direct payment.
If you’ve let your IRS installment payments lapse, you can apply to have your agreement reinstated for a larger fee. If you request a smaller monthly payment, note that it may be denied. An online prompt tells you when you reached an acceptable threshold. You can continue to ask that the changes be initiated.
Caveats to the IRS Installment Agreement Payment Plan
When you make a request for an IRS installment agreement on time and in good faith — and you meet the financial requirements — you have a good chance of getting your request approved. You can even pay off the balance ahead of time with no penalty, which also saves money in accrued interest.
A few warnings before you take the steps and apply for the payment plan:
You must not already owe back taxes from previous years.
You agree to pay your taxes on time in the future, even if you’re still making IRS installment payments.
You arrange to have sufficient withholdings taken out of your paycheck or you pay enough in quarterly tax payments to cover any future tax obligations.
You agree to have any future tax returns applied to the outstanding debt.
You continue to make your monthly IRS installment payment even when you have a refund applied.
You pay interest and possibly even a late payment penalty on taxes that aren’t paid by the due date, even when you’ve been granted an IRS payment arrangement.
You must respond to requests for financial updates when the IRS requests them, or your IRS installment agreement may be terminated.
If you stop making monthly payments, you’re subject to possible:
Legal troubles that could include jail time
Avoid paying more than your fair share and do your best to pay your taxes on time. With the assistance of a qualified accountant experienced in tax law and IRS payment arrangements, you’ll know what to do every step of the way. Your tax accountant can even file the necessary paperwork for you.
If you’ve reached the point where you need to seek an IRS installment agreement payment plan, talk to your accountant about the appropriate tax withholdings or quarterly payments you need to make to avoid it in the future. In New York City, Sarasota, FL and Washington, DC, rely on the expertise of seasoned tax accountants who keep up with all the current tax laws at Miller & Company, LLP.
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