How To Handle a Federal Tax Payment Plan Balance

Andrea Miller

Expert Contributor
Last Updated: December 19, 2021

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A federal tax payment plan lets you repay tax debt over time in monthly installments.
You can receive automatic approval from the IRS if you owe less than $10,000 and are otherwise in compliance.
Taxpayers who cannot afford to pay their Federal payment plan balance must explore other settlement options to avoid collection actions.

If you owe the IRS, you’re not alone. Making arrangements to pay your taxes can protect you from federal income tax collection actions, up to and including seizing your assets, wages, or property.

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1 What Should I Do If I Owe Taxes I Can’t Pay?

2 How Do I Apply for a Payment Plan?

3 What Is a Guaranteed Installment Agreement?

4 What If I Can’t Afford to Make Payments?

5 What Happens If I Do Not Repay My Payment Plan Balance?

If your IRS tax bill is more than you can pay at one time, you may be able to set up an IRS payment plan. Your IRS payment plan balance indicates the full amount of tax debt, interest, and penalties on your account, which you will pay over time, typically no more than 60 months. In some cases, an IRS payment plan balance can be paid off in as little as four months.

What Should I Do If I Owe Taxes I Can’t Pay?

First, make sure to file your return even if you know you can’t pay your taxes. The failure to file penalty is 5 percent of your balance each month or partial month until your return is filed, up to a maximum penalty of 25 percent. In contrast, the failure to pay penalty is just 0.5 percent of your balance. For example, if you owe $10,000 you will be fined $500 per month if you do not file your tax return but just $50 per month if you have filed but not yet paid.

Some taxpayers opt to use a credit card to repay their tax debt instead of choosing an IRS installment agreement. Using a credit card carries a fee of approximately 2 percent of the total payment. However, you should only go this route if you have a credit card with a lower interest rate than the IRS interest rate for installment agreements. IRS interest adjusts each month based on the federal short-term rate. As of January 2019, the current rate is 6 percent. Most credit card companies charge a higher interest rate unless you have excellent credit.

If you have retirement savings, you could borrow from your 401(k) or similar plan to repay your taxes if the rules of your plan allow you to take out a loan. This is often a good option since you are repaying yourself with interest. However, it’s important to be aware of associated fees, which vary by plan. Also, if you lose your job before the loan is repaid, the entire balance may become immediately due.

How To Handle a Federal Tax Payment Plan Balance

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How Do I Apply for a Payment Plan?

The IRS offers various types of installment agreements depending on your total balance and the amount of time you will need to repay it in full. Taxpayers who need less than 120 days can simply apply for a payment extension, which does not carry a fee.

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The fee to arrange a payment plan for longer than 120 days is $31 for electronic direct debit agreements, $43 for taxpayers who establish low-income status, and $149 for other forms of payment.

You can either apply for an IRS installment agreement online or complete and mail Form 9465. If you owe less than $50,000 and can repay your payment plan balance in less than 60 months, you can qualify for a streamlined agreement. This means you can be approved without submitting financial documentation.

If you owe more than $50,000, you will need to submit Form 433 along with your payment plan request. This form requires detailed financial documentation that the IRS will use to determine whether you are approved for a payment plan.

What Is a Guaranteed Installment Agreement?

A guaranteed installment agreement will be automatically accepted by the IRS without additional financial disclosure. To qualify, you must have filed all outstanding tax returns, owe less than $10,000 in taxes, be able to pay the full balance within three years, and not currently have an open bankruptcy filing.

What If I Can’t Afford to Make Payments?

If making payments toward your tax liability would create a financial hardship, you can request an extension of one year without collection actions from the IRS. To apply, you must complete and submit Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, which requires detailed financial information. After one year, the IRS will resume activity to collect your balance unless you submit an updated Form 1127 indicating that your situation has not changed.

You can also attempt to negotiate an offer in compromise with the IRS. This program allows you to settle your tax debt for less than you owe. To qualify, your offer must represent the highest amount the agency can reasonably expect to collect from you before the statute of limitation on your debt runs out. This number is based on IRS calculations and is known as your reasonable collection potential (RCP).

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The statute of limitation on most types of tax debt is 10 years. Although it’s possible to wait out this deadline, keep in mind that the IRS will make aggressive collection attempts.

What Happens If I Do Not Repay My Payment Plan Balance?

If you do not arrange to pay your tax debt over time with an installment agreement, or if you default on an existing installment agreement, the IRS will make further attempts to collect these funds from you. Collection actions can include:

A federal tax lien, which is a public record that gives the IRS claim over your assets. The lien can be placed on bank accounts, future wages, homes, vehicles, and other items of value. Having a tax lien will damage your credit, making it difficult to qualify for mortgages and other loans. A tax lien is usually only issued when an individual owes more than $10,000 to the IRS.
Although a lien gives the IRS the right to seize your property, the federal tax levy is the seizure itself. If you do not make payment arrangements after a lien is issued, the IRS can garnish your wages or sell your property and use the proceeds to repay your tax liability.

Solvable can help you resolve your federal tax debt by arranging a payment plan, applying for hardship status, or negotiating for an offer in compromise. Fill out our form today to be matched with vetted companies who specialize in assisting taxpayers like you.

Andrea Miller

Expert Contributor
Last Updated: December 19, 2021

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