Tax season can often feel like a tightening noose around your finances, especially if you owe more than you bargained for.

Business owners are not sure what they owe since they complete their year-end bookkeeping and record year-end entries, such as depreciation and accruals.

No one wants to miss out on their taxes, yet you cannot control unforeseen life events.

So, you may find yourself short on cash to pay your tax bill when it’s due on April 15. This happens to millions of entrepreneurs each year.

The IRS is aware of this and will let you request a payment plan to pay your tax bill in monthly instalments. You can use this to spread out what you owe in taxes over a more manageable timeframe. 

If you feel yourself drowning in tax debt, doola’s Tax Package could be your lifeline.

Imagine easing your financial burdens while keeping your peace of mind intact—sounds tempting, right? That’s what we do for you.  

In this blog, we’ll break down everything you need to know about setting up a payment plan with the IRS.

From eligibility requirements to step-by-step application processes, we’re here to guide you towards regaining control over your finances. 

So grab your monocles, and let’s dive in—your path to financial relief starts now!

Get Out of Your Tax Predicmant with IRS Tax Payment Plans

As an American citizen, it is your civic duty to pay your taxes on time. By paying your taxes on time, you won’t accrue additional interest and penalties, which can accumulate up to 25% of your total income.

You’ll also get to enjoy future tax refunds without late fees offsetting them. 

If you get way behind on your tax payments, the IRS can take legal actions against you and your business, such as a lien or levy on your assets.

They also charge a 5% penalty for every month you don’t file your taxes, which is in addition to the tax bill.

However, the IRS understands that there may be circumstances where you are unable to pay up due to financial difficulties.

In such cases, they allow self-employed individuals and businesses to pay their taxes in instalments instead of making one lump-sum payment.

An IRS tax payment plan, also known as an instalment agreement, is an arrangement between you and the IRS that allows you to pay your taxes in monthly instalments instead of paying them all at once. 

Both individuals and business taxpayers can apply for this payment plan, though eligibility requirements vary between the two.

Types of Tax Payment Plans: Find the Right One for You

The IRS offers different types of payment plans, depending on your business type, the amount you owe, and how quickly you can pay your tax bill. 

You can use a short-term or long-term payment plan, depending on your financial capacity, to prevent the repercussions of defaulting, such as tax liens or wage garnishment.

Short-Term Payment Plan

A short-term payment plan gives you an additional 180 days to pay the balance in full, plus any accrued penalties and interest.

If you owe less than $100,000 in combined tax, penalties, and interest, you may qualify to apply for a short-term payment plan.

This is a good option if you usually pay your taxes on time but experience financial hardship that prevents you from paying everything in full. With a few extra months to recover, this plan can get you back on track.

Long-Term Payment Plan

If you need more than 180 days to pay off your tax bill, the IRS offers long-term payment plans of up to 72 months. You can either pay directly each month or have a monthly automatic withdrawal taken via Direct Debit.

However, individuals and businesses have different eligibility requirements.

While individuals with a total balance of less than $50,000 in combined tax, penalties, and interest can apply, businesses’ total tax balance must be less than $25,000.

Also, business taxpayers have up to 24 months to make monthly payments. If your business owes more than $25,000, you should call the IRS directly to speak with a representative about setting up a payment plan.

What Does the IRS Charge on a Payment Plan?

While short-term payment plans don’t require a setup fee, you may have to pay one for a long-term payment plan. The charges for long-term payment plans are:

• $31 for online application and direct debit

• $107 for applications not submitted online but using direct debit

• $130 for online applications with payment by money order, credit card, or debit card

• $225 for applications not submitted online and payments by money order, credit card, or debit card

The setup fee may be waived if you qualify as a low-income taxpayer. However, you must pay accrued penalties and interest until you pay the entire balance. This is because the IRS starts charging interest on the day a payment is due.

So, even though you have started paying the IRS through a payment plan, you will still be expected to pay interest on your unpaid taxes and penalties.

Late-payment penalties and interests continue to accrue during tax payment plans, too.

While short-term payment plans have a 0.5% late payment fee for each month, long-term plans accrue the penalty at a 0.25% monthly rate.

However, the penalty amount gets reduced each month since paying back a portion of your tax bill will save you interest next month.

What Do You Need to Apply?

To apply for an instalment agreement, you must fill out Form 9465—Installment Agreement Request and submit it along with all required documentation to the IRS.

The application process can vary depending on your specific financial situation and the amount owed.

To be eligible for an instalment agreement with the IRS, you must meet the certain requirements below:

1. You must have filed all required tax returns.

2. You cannot have any unpaid employment or income taxes.

3. Your total tax liability must not exceed $50,000.

4. You must demonstrate that you are unable to pay the total amount owed in one lump sum.

Individual taxpayers must provide photo identification, bank routing and accounting numbers, and the balance due shown on their tax returns. In addition to these, business taxpayers must also provide a few more documents and information.

Apart from some basic information about your business, you may also need to provide the balance due based on the agreement you requested. 

This may include your IRS username or ID.me credentials, Employer Identification Number (EIN), business establishment details, and the Caller ID provided on your balance due notice.

How to Apply for Tax Payment Plans With the IRS 

Applying for an IRS tax payment plan is a simple and straightforward process. You can submit your application online, by phone, or by mailing the forms and documents. 

The easiest, quickest, and cheapest method to apply for an IRS payment plan is on the IRS website through the Online Payment Agreement Application. 

However, you can also request a payment plan by calling the toll-free number on your tax bill to apply by phone or request an in-person appointment. 

If you are an individual, call 800-829-1040, and businesses must call 800-829-4933. If you prefer to mail your application, you must submit Form 9465, the Installment Agreement (IA) Request, and other documents to the IRS address. 

If applying online, you will receive immediate notification if your application has been approved. However, the process can take up to 60 days for mailed or phoned applications.

How Does an Installment Agreement Work?

An IA is an agreement between the taxpayer and the IRS to pay off their tax liabilities in smaller, more manageable amounts. Once the IRS accepts your application, you will receive a payment plan that outlines the terms and conditions of the IA.

There are different types of instalment agreements available depending on specific circumstances:

1. Guaranteed Installment Agreement: This type applies to taxpayers who owe $10,000 or less in taxes and have filed all required tax returns on time in previous years.

2. Streamlined Installment Agreement: This is available for those who owe between $10,000 and $25,000 in taxes but cannot afford to make a significant initial payment.

3. Partial Payment Installment Agreement: For taxpayers who cannot pay their full tax liability but also do not meet the criteria for a guaranteed or streamlined agreement.

4. Non-Streamlined Installment Agreement: This type of IA is for those who owe more than $25,000 in taxes or do not qualify for any other type.

How to Manage Your IRS Payment Plan

The IRS doesn’t have any explicit guidelines for the amount you should pay under their tax payment plan. So, it’s best to consult a tax professional to calculate what to pay every month.

We recommend that your monthly payments should be what you can afford within the timeline. 

Once you have decided on the monthly payment amount, you must set up automatic monthly payments through direct debit or the electronic federal tax payment system (EFTPS). This ensures timely and consistent payments, which are crucial for completing the program. 

If you feel like you can pay more, you can adjust your payment plan after a few months. However, revising your payment plan incurs a $10 fee, which may be reimbursed under specific conditions.

Go with doola to Stay On Top of Your Taxes

Ignoring your tax debt problem is not a good solution. If you feel your tax bill is getting out of your reach, tax payments are here for your rescue. However, the entire process can be a bit overwhelming if you are new to this process. 

From reconciling your books to calculating your tax bill, filing tax returns, and managing your tax payment plan, there is so much to do in such a short time.

You need an expert to guide you through all these complex obligations. Look no further because doola is here.

We prepare all necessary documents for you, such as income statements, receipts, and deductions, and then work diligently to organize this information into clear and concise forms required by the IRS. However, we go beyond just preparing and filing your taxes.

We streamline your finances to keep your bookkeeping cleaned up and completed, ensuring that all deductions and credits applicable to your situation are included in your return. 

Our bookkeeping services save you money, time, and energy by maximizing your potential refund or minimizing any taxes owed.

Book a consultation with our experienced CPAs to simplify your tax payment plans and make the experience as seamless and stress-free as possible.