As much as we’d like to, sometimes it just isn’t possible to pay your entire tax bill all at once, especially if you owe a few thousand dollars. Borrowing money from a bank or family members may not be an option.If you can’t meet your tax bill obligation, what can you do to avoid wage garnishment by the IRS?It might sound surprising, but the IRS has a relatively taxpayer-friendly payment plan. If that wasn’t enough to make you ask which universe this is true in, most people will actually qualify for the plan.For those of us who are unlucky enough to fall into the 21% who will owe taxes this year (according to ), the IRS’ payment plan can be a good option for paying down a large tax bill.
For individuals, the IRS has two payments plans. One is long-term and the other is short-term. There are actually two long-term options — one with automatic withdrawals and the other without.
If you owe less than $100,000 and can pay your tax bill in 120 days or less, there won’t be any setup fee for your payment plan. Interest and penalties will still accrue. You can pay with automatic payments using your checking account, check, debit card, or credit card.You’ll incur additional fees when using cards.
Long-term plans are for taxes owed of less than $50,000 and paying over a period that is longer than 120 days. Long-term payment plans have setup fees. These fees can be waived for low-income earners. The fee for this plan is $31. Payment is done by direct debit.
This plan is for those owing less than $50,000 and needing more than 120 days to pay their tax bill. If for whatever reason you can’t use direct debit and would rather pay by check, card, or money order, this is the payment plan you’ll want to choose.For that convenience, you’ll pay a setup fee of $149 instead of $31. Make sure the non-direct debit option is worth the $118 extra. Low-income earners will pay a setup fee of $43, but may have it waived if they meet certain conditions.
An installment plan means you have filed your return but failed to pay. You’ll incur a penalty for failing to pay on time and interest will be due amount on the amount owed.
If you don’t pay in full by April 15 and are accepted into an installment agreement, you’ll pay a 0.5% penalty on the amount not paid. If you owe $1,000, that’s a $5 penalty.You’ll also pay 0.25% each month on the unpaid balance. Let’s say on $1,000 you set up an installment plan to pay $100 each month. After the first payment, the balance is $900. Interest on this amount will be $2.25.
In addition to penalties, you’ll also pay interest on any unpaid taxes and penalties. The interest rate adjusts every three months. The interest rate is the federal rate plus 3%. If the federal rate is 2%, the interest rate will be 5%.
You can apply for an installment plan online at the IRS website: https://www.irs.gov/payments/online-payment-agreement-application. If you owe less than $10,000, your plan will automatically be accepted if you also meet the following conditions:If you had an installment agreement during the previous year, it wouldn’t prevent you from entering into another installment agreement for the next tax year as long as you’ve paid the installment in full before taxes are due.An installment plan with the IRS can result in high fees, but the sooner it is paid off, the fewer fees you’ll pay. If you can pay off your taxes due in 120 days, you won’t incur a setup fee. That’s an extra four months to pay your bill.Penalties and interest will still accrue on the unpaid balance. As a last resort, you can pay the installment past 120 days, but this is the most expensive option.Also, try to have it paid before April 15 of the next year or you’ll have difficulty trying to set up a new installment plan.
While owning money to the IRS isn’t a good thing, setting up a payment plan is a smart move. Furthermore, make sure you file your taxes on time to avoid even more penalties. The absolute worst thing you can do is simply ignore it or avoid it because you can’t pay. They only thing that will come of that is owing more money in the future, or worse – you could actually go to jail. Now, that’s rare, but honestly, don’t mess with the IRS!