Setting Up a Tax Repayment Plan

Using an Installment Agreement (IA) to consolidate and pay off tax debt.

If you owe one or more years of back taxes to the IRS, then one of the most common ways to get out of debt is to set up an Installment Agreement (IA). This is a tax repayment plan that allows you to pay off all your back taxes and penalties using fixed monthly payments.

But even once you set up an Installment Agreement, it doesn’t mean that you’re out of the woods with the IRS. There are some key things you need to know about IAs if you want to be successful at getting out of debt for the least amount of money possible.

How an Installment Agreement (IA) works

Before entering an IA, make sure you can fulfill the repayment requirements set! If you default on an IA, the IRS may find you for defaulting and add additional penalties. This will make it even more difficult to get out of debt, even if you enter into another IA.

  1. If you owe less than $50,000 and don’t want to apply for penalty abatement, then it’s possible to set up your IA through the IRS’ website:
    1. However, in most cases, you want to work with a licensed tax attorney, so they can negotiate to reduce penalties, allowing you to get out of debt faster and for less money.
  2. The IRS will thoroughly review your financial situation to determine what you can reasonably afford to pay each month.
  3. Then they set your minimum monthly payment requirement and the term of your IA. This tells you what you need to pay each month and how long it will take to eliminate your tax debt.
  4. Each month, you must make at least the minimum payment requirement by the due date. There are no early repayment penalties on an IA, so if you can afford to pay more, you should – this helps minimize the total cost for you.
  5. You keep paying until you are out of debt OR the 10-year statute of limitations on collections expires.
  6. If you have any remaining balances after 10 years, you will no longer be required to make payments and the remaining debt should be dissolved.

There is a $52 setup fee for an IA if you set it up with Direct Debit from one of your accounts, such as a checking account. If you want the IRS to take the money directly out of your paychecks, the fee is $102.

Important facts about setting up an IA

  • Penalties and penalty APR will continue to apply even after you set up your IA, so you want your monthly payments to be set as high as you can afford, or you won’t get out of debt effectively
  • If you default on an IA because you can’t afford to make the payments, the IRS will apply additional penalties. However, it will still be possible to set up a new IA.
  • Tax debt has a 10-year statute of limitations from the original filing date. You will only be required to make payments for ten years under an IA.
  • If you owe more than $50,000, the IRS will require a formal financial statement to prove you can make your monthly payments within a specific amount of time.
  • In some cases of extreme financial hardship, you may qualify for a Partial Payment Installment Agreement (PPIA). This allows you to pay back only a portion of what you owe. PPIAs always have a 10-year term, because you basically pay until the statute of limitations runs out.

Why it’s recommended to work with a third party to resolve tax debt

In 2013, the IRS created the Fresh Start Program (also known as the Fresh Start Imitative). The goal was to make it easier for tax payers who owed back taxes to get out of debt quickly and easily. The Fresh Start Imitative affected IAs, as well as other relief options like an Offer in Compromise (OIC).

  • Under the new law, you can set up an IA for tax debt up to $50,000 using the IRS portal. Under the old system only debt amount of less than $10,000 could be filed online.
  • It also expanded and improve access to OIC settlements. It’s now easier to qualify for an OIC.

Although the Fresh Start Imitative expands the number of taxpayers that can file for an IA online, it’s that second part that’s the reason you’re usually better off working with a tax debt resolution company. If you can get out of tax debt with a settlement, then it’s in your best interest to do so.

Even if you don’t qualify for an OIC, it’s possible to negotiate penalty abatement on an IA. This is where you negotiate with the IRS to reduce penalty fees and penalty APR applied to your back taxes. This also helps minimize your total out-of-pocket costs.