Everything you need to know before establishing a payment plan to repay your tax debt.
In general, you’ll need to do all of your inquiries via phone. I can hear people groaning about this — yes, it’s true, hold times are extremely long at the IRS. Moreover, you might sit on hold for hours only to have the IRS hang up on you. Or, after your patience is tested, you get challenged by a jerk IRS representative who has no interest in helping you fix your tax debt. Psych yourself up! Make sure you have the energy to go through this process; otherwise, you might fail.
Preparation before the call
Before calling the IRS, you should have some basic awareness of your situation. You should know the answers below. If you don’t, you might waste a bunch of time and not get the outcome you are looking for.
Have you filed all of your returns?
Are you certain the IRS has processed all of your tax returns?
This is a very important question because you might make a plan to repay some (but not all) of your tax debt. The part that was not included in the payment plan will remain in collections and could default any arrangements you make, forcing you to start over. Moreover, if tax is in collections, that means your wages could be garnished or bank account frozen while making payments to the IRS. No one wants that.
Do you know the exact amount that you owe?
Are there any statute of limitations issues (this applies for older tax debt)?
If you don’t know the amount you owe, then it is very difficult to calculate the payment the IRS will accept. If your tax debt is older than 5 years, you might run into a statute of limitation issue. It’s possible (but not easy) to determine the assessment date from your transcripts. If the assessment date of your oldest tax debt is less than three years ago, you shouldn’t have any statute of limitations issues. Assessment means the IRS puts your debt in the books and starts counting the 10 year period where they are able to collect from you.
For example, today is November 2020. And, if you have a tax debt from 2016 that was assessed in November 2017 or later, then there’s no issue. If your tax debt is from 2008 and assessed in November 2011, that means there’s about 2 years left that the IRS can collect from you.
If you know the amount owed and if there’s no statute of limitations issues, here’s a table to figure out what to offer the IRS when you talk to them.
|Amount Owed||Payment Period||Monthly Payment|
|$25,000 or less||60 months||$417|
|$25,001 to $50,000||72 months||$347 – $695|
|$50,001 to $100,000||84 months||$596 – $1,190|
You should be able to call the IRS and offer a payment from this table. I must reiterate that, in order to do this, the following assumptions should have been met.
- You reached a helpful IRS representative.
- All of your tax returns are filed.
- There are no statute of limitations issues.
- You can actually afford the payment without incurring new tax debt.
Do you want to do electronic payments?
It’s more convenient if the IRS simply debits your account monthly on the day of your choice. You can request for the IRS to set it up. Fair warning: The IRS is notoriously bad at this. You’ll have to submit a completed 433-D form. There’s no guarantee they’ll receive it unless you fax it to the representative while they wait. Even then, three out of ten times, it will fail. So you’ll have to go through the process again, spending more hours on the phone.
A better bet is to set up your account with the Electronic Federal Tax Payment System. It’s a little clunky. You sign up online but then the government mails you your PIN number so that takes about a week or so. But, once you set it up, it just works. You can set up your installment agreement payments to happen automatically. It’s free, gives you control, and you can use it to make estimated tax payments as well, if you need to do that.
Is your payment plan formalized?
Within 6 weeks of so, you should be getting correspondence from the IRS formalizing your repayment. You should be getting a statement with a request for payment that you tear off and mail in with your payment. You won’t have to do this if you make your payments via EFTPS.gov. You can also make your payment using one of the options on the IRS website. (See below, 2nd column of white boxes, 4th down.)
Is the money coming out of your account in the way you expected?
If you signed up for the IRS to take the money using the 433-D, is it happening according to plan? If not, you’ll have to call the IRS and restart the process.
Did you get something totally unexpected from the IRS instead?
As described above, there’s a ton of potential landmines you can step in; sometimes you can see them and sometimes they are totally a surprise. Deb Stuart, of Jupiter, FL called the IRS to set up a payment plan after her wages were being garnished. The IRS representative was sweet as pie. He offered to stop the garnishment and offered Deb a manageable monthly repayment plan of $230 a month. Deb was excited to share that news with me. Six weeks later, she received correspondence from the IRS thanking her for her promise to pay the debt off in full, which is totally not what she promised. Needless to say, but Deb had to go back to the drawing board with the IRS and had to start the promise again.
Do you owe a smaller amount; $5,000 or less?
If you owe a smaller amount and are eligible for refunds annually, then you might not need a formal payment. You can send in monthly, voluntary payments of $100 or so. That plan will have you paid off within 4 years or less, depending on how big your refunds are.
Did you request First Time Penalty Abatement (FTPA)?
The FTPA is a guaranteed reduction or removal of penalties on one year of taxes owed assuming the tax year qualifies. In order to qualify, the tax year cannot have any tax owed for the 2 years prior to the year where you are requesting the FTPA. It’s a 0 or 1 situation. You either qualify and will get the relief if you request, or you don’t.
Can you pay more?
If you’re reading this guide, it means you intend to repay your tax debt. As described above, you can pay over time but there is a cost to that convenience, i.e. interest. The IRS will charge you interest on your tax debt until it is paid off. Currently, that interest is 6% per year. Not a credit card rate but not nothing either. If you can pay more, you’ll pay the debt off faster and save a little money. The plans described above are minimal payments with no financial disclosure. There’s no penalty for paying more or paying faster.
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