If you owe money to the IRS, they more than likely will ask you to set up a payment plan, also known as an installment agreement. These agreements require a number of set criteria, from having the payments directly drafted out of your bank account to charging you interest every month on your remaining balance. As a result, they aren’t always the best option available, since you are essentially placing control in the hands of the IRS.
For anyone who finds the IRS intimidating, this can be problematic. Thankfully, there are other payment options available that show why setting up an installment agreement with the IRS may not be in your best interest. Keep reading as we discuss some reasons why, and then go into depth on those additional payment options that may be available (and more beneficial) to you.
What You Need to Know About an IRS Installment Agreement
The IRS makes it easy to set up an installment agreement. You can apply for one online, as long as you qualify, and receive approval in the same manner. There are a number of different factors that go into the approvals, including the length of time that it will take to pay based on your income, as well as how much you owe the IRS in total.
On top of that, in order to get an installment agreement approved for a previous year’s taxes, you need to be up to date on your tax return submissions and have any new balances due paid up in full. Although these installment agreements can prevent the IRS from seizing your bank account funds and following through on tax levies on your other property, there are several reasons why you should consider another means of paying your back taxes, such as:
You May Have to Submit Your Budget to the IRS
In some cases, you may have to go through an examination of your current bills and finances in order to determine your allowable living expenses. A method of helping you decide just how much you are able to pay the IRS on a monthly basis, an allowable living expense standard examination has the IRS going through your budget, permitting you a certain amount to pay for things such as housing and living expenses, as well as car payments
The IRS has set amounts for these items, some of which are based on where you live in the country. For example, someone living in Los Angeles is allowed $313 a month to pay for auto expenses, such as car insurance, fuel, and any needed repairs. Going through this process can be painful, especially for people who have credit card debt, which the IRS doesn’t even consider or make allowances for.
The Funds Might Have to Come Out of Your Bank Account
Depending on how much you owe the IRS, you may have to partially surrender control of your bank account to them. This is less scary than it sounds because they’ll pull the agreed upon amount every month from your account, but it’s still one more bill to keep track of.
The requirements for setting up a direct debit payment plan with the IRS are debts over $25,000 for individuals and over $10,000 for businesses. Those who owe less than that amount can pay by check or money order, sending in their monthly payments to the IRS with their account number and other identifying information on them. However, the IRS encourages everyone to agree to a direct debit plan, because it’s easier on them as far as processing payments are concerned, and they are more likely to receive those payments on time, as opposed to having them sent through the mail.
You Are Charged Interest and Penalties Every Month, Adding to Your Debt
Not only does the IRS charge interest on your balance every month, but there are additional fees involved in arranging the payment plan. For example, the IRS charges a setup fee, also called a user fee, to defray their costs of setting up the plan. Some people, such those who qualify for low-income waivers, may be able to have that fee waived, but for everyone else, it’s just an additional amount owed to the IRS.
Not only does the IRS require a payment plan setup fee, but agreeing to and making those payments doesn’t make you exempt from interest and penalties. For every month that you owe the IRS money, they will charge you interest and penalties on that balance. The interest rate can vary, depending on the circumstances. For underpayments made by individuals and small businesses, the rate is the federal short-term rate plus 3%. Larger corporations must pay the short-term rate plus 5%. Penalty amounts can vary as well, and in some cases, the penalty fees compound every month, adding on the amount of your overall debt.
Missing a Payment Can Lead to Further Fines and Collection Efforts
Although the IRS prefers to receive their payments via direct debit, in some cases, those payments can accidentally be missed or skipped. If the account doesn’t have enough money in it to cover the payment, the IRS won’t receive their money. This can lead to additional financial consequences, including extra fines and increased collection efforts. Missing more than one payment can even lead to the IRS following through on the tax levies that they’ve placed on any of your properties and bank accounts.
You Have a Limited Time to Pay the Debt
The IRS prefers that taxpayers clear up their debt within 72 months or 6 years. They will divide the amount that you owe into these 72 payments, unless you inform them that you can pay more each month. If you owe a large amount of money, such as $50,000 or more, and will be unable to pay it off in that period of time, or will have problems paying a smaller amount back in the timeframe allotted, then the IRS will go over your expenses to break down your budget based on the allowable living expenses for that year. They will essentially tell you how much you can pay on your bills to ensure you have money left over to pay them.
An IRS Levy May Remain in Place
IRS levies are problematic. If you have ignored your unpaid tax amounts for years without contacting the IRS in order to work towards paying that amount due, they will place a tax levy on your property. They can put these levies on your vehicles, your home, your boat, your business properties (if your company owes the debt), and even your bank account. Going one step further, they can make it impossible to renew your passport or driver’s license, and even suspend your work licenses.
While working with the IRS in the early stages of your debt and setting up a payment plan can prevent these levies from being placed, once a levy is placed on your property, it will stay there until you have paid the IRS in full. This means that even though you have an installment agreement with them, the levy will remain. Once the debt is paid, you can petition the IRS to remove the levy, but until then, it stays in place as a kind of insurance for the IRS, should you miss several payments without contacting them.
What Can You Do Instead of Setting Up an Installment Agreement?
Since IRS installment agreements can be problematic, for all of the reasons explained above, it’s best to use one of these two payment methods instead. They ensure that the IRS receives all of their money, which makes them happy, and it prevents them from charging you additional fines, interest, penalties, and even the setup fee that goes along with choosing a payment plan.
- Pay the IRS Up Front – If you can pay the IRS the entire amount due all at once, then it is always best to do so. This will prevent them from adding on those monthly interest amounts and penalties, keeping the amount of your debt within a reasonable range. They accept debit and credit cards through their website, as well as bank account transfers.
- Request an Offer in Compromise – An Offer in Compromise is a way to pay the IRS some of what you owe them, allowing them to settle your debt. If you qualify for an Offer in Compromise, you will only owe a certain percentage of your overall debt, and they will erase or “forgive” the rest which benefits you and helps you avoid extra fees and penalties.
Contact Us Today
If you have an installment agreement with the IRS or are considering putting one into place, then you may have plenty of questions or need some professional advice. Reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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