Installment Agreements Explained: Everything You Need To Know
When you owe money to the IRS but can`t pay your taxes in full, an installment agreement might be a solution. An installment agreement allows you to pay off your tax debt over time in regular monthly payments. It`s a good option for people who can`t afford to pay their taxes all at once but want to avoid penalties and interest.
If you`re considering an installment agreement, here`s what you need to know:
1. Eligibility
To qualify for an installment agreement, you must owe less than $50,000 in combined tax, penalties, and interest. If you owe more than $50,000, you`ll need to provide additional financial information to the IRS to prove that you can`t pay your tax debt in full.
In addition, you must be current on all your tax returns and not currently in an open bankruptcy proceeding.
2. Types of Installment Agreements
There are different types of installment agreements, depending on your financial situation:
a. Guaranteed installment agreement: If you owe less than $10,000 and can pay your tax debt in full within three years, you`re eligible for a guaranteed installment agreement. You don`t need to provide any financial information to the IRS to qualify.
b. Streamlined installment agreement: If you owe between $10,000 and $50,000, you can qualify for a streamlined installment agreement. You`ll need to provide some financial information to the IRS, but you won`t need to submit a financial statement or provide supporting documents.
c. Partial payment installment agreement: If you can`t pay your tax debt in full within three years and owe more than $50,000, you can apply for a partial payment installment agreement. This type of agreement allows you to pay your tax debt in monthly installments that are lower than what you would pay under a traditional installment agreement. However, interest and penalties continue to accrue on the unpaid balance.
d. Non-streamlined installment agreement: If you owe more than $50,000 and can`t qualify for a partial payment installment agreement, you`ll need to apply for a non-streamlined installment agreement. This type of agreement requires you to provide detailed financial information to the IRS, including income, expenses, debts, and assets.
3. Payment Terms
Under an installment agreement, you`ll make monthly payments to the IRS until you`ve paid off your tax debt. The minimum monthly payment is determined by the amount you owe and the length of time you need to pay it off. Generally, the longer your payment plan, the lower your monthly payment.
Interest and penalties continue to accrue on the unpaid balance, so it`s important to pay off your tax debt as quickly as possible to minimize your costs.
4. Applying for an Installment Agreement
To apply for an installment agreement, you`ll need to fill out Form 9465, Installment Agreement Request, and submit it to the IRS. You can apply online, by mail, or by phone.
If you`re applying for a non-streamlined installment agreement, you`ll also need to submit Form 433-F, Collection Information Statement, which requires detailed financial information.
5. Advantages and Disadvantages
An installment agreement can be a good option if you can`t afford to pay your taxes in full. It allows you to avoid penalties and interest and pay off your tax debt over time.
However, there are some disadvantages to consider. Interest and penalties continue to accrue on the unpaid balance, so you`ll end up paying more in the long run. In addition, if you miss a payment, the IRS can terminate your installment agreement and take collection action against you.
Overall, an installment agreement can be a good option if you`re struggling to pay your taxes. However, it`s important to weigh the pros and cons carefully and consider all your options before making a decision.