In Part 1 of this blog series, we discussed when taxes are generally due for the average individual taxpayer, as well as some tips if an extension needs to be filed. We also discussed the 120-day payment extension the IRS provides some taxpayers if they need additional time to pay the tax due.
When I think of IRS installment agreements, I can’t help but think about the local neighborhood ice cream truck. As a kid who grew up in the 1980s in small-town America, I remember the music box melody of the ice cream truck meandering its way through the neighborhood.
Ah, the choices nestled in that small truck! Depending on the intensity of the afternoon sun and whether or not my team was winning the latest epic battle of Capture the Flag, my ice cream choice would vary from a comforting ice cream sandwich to an atomic rocket popsicle. This same concept holds true when it comes to the myriad of installment agreements the IRS offers to taxpayers. Depending on the needs of the taxpayer, the IRS provides not just one, but many kinds of installment agreements. In this blog series, we are going to focus on installment agreements available for individual income tax taxpayers. Other options may apply to business or payroll taxes, but will not be part of this blog.
The first type of installment agreement is called a Guaranteed Installment Agreement. Taxpayers who owe $10,000 or less (excluding penalties and interest) cannot be turned down for this type of installment request. This means that even if a taxpayer has the ability to currently pay their entire tax due, the IRS will generally still grant a guaranteed installment agreement. In addition to the amount owed being $10,000 or less, taxpayers must have timely filed and paid any income tax that was due for the previous 5 years, not entered into an installment agreement in the last 5 years, and agree to pay the entire balance due within 3 years. Suffice to say, taxpayers must adhere to all income tax laws during the installment period.
As with all installment agreements, the IRS does impose a processing fee. The good news is that this processing fee is only $31 if the agreement is applied to online via the IRS’s website and the payments are made by way of direct debit from your bank checking account. If reaching out and touching the IRS by phone or in person is more your style, the processing fee increases to $107, providing the payments are still made via direct debit. The IRS’s online installment agreement website page can be accessed by clicking HERE.
So, what happens if a taxpayer does not want to pay their installments using direct debit? There are other payment methods the IRS accepts. However, just like adding gummy bears to your soft-serve ice cream, these alternative payment options come at a premium. If a taxpayer enrolls into a guaranteed installment agreement by phone or in person, and prefers to pay via paper check, money order or credit/debit card, the processing fee is a whopping $225. This cost is reduced to $149 if the agreement is applied for online. As tempting as it may be to reach for a credit card to pay the monthly installments (those credit card rewards and miles are as tempting as homemade hot fudge), additional credit card fees will apply and credit card interest will accrue if the amount charged to the credit card is not paid in full by the next credit card payment cycle. This can make paying by credit card considerably more expensive, once the IRS’s fee, penalties and interest are also considered.
The IRS provides for a reduced fee for certain taxpayers who have challenges making ends meet. If a taxpayer meets the financial criteria, the IRS will reduce the installment agreement processing fee to $43. To meet the criteria, the taxpayer’s income will need to fall below the 250% U.S. Department of Health and Human Services annual poverty guideline. Before the IRS will agree to a reduced setup fee, a taxpayer will need to fill out Form 13844, Application for Reduced User Fee for Installment Agreements. A copy of this form can be found HERE. Keep in mind that if a taxpayer applies online for a guaranteed installment agreement and agrees to pay via direct debit from their checking account, the processing fee is only $31.
In Part 3 of this series we will be exploring Streamlined Installment Agreements. Until then, remember that with all IRS payment plans penalties and interest will continue to accrue until the entire balance of what is due is paid.