Paying off tax debt with an installment agreement: 5 things to know
You may have heard that it’s pretty easy to set up an online payment plan to pay your tax debt over time.
That statement is generally true. But there are some specific things to keep in mind as you consider your options.
In this post, we will give you five useful things to think about as you do so.
There are limitations on the amount of debt that is eligible for an online payment plan.
For individuals, it is possible to make an online application for an installment agreement if the amount you owe is under $50,000. For businesses, the amount is $25,000.
Interest and penalties still apply.
Keep in mind that even if put a payment plan in place for your unpaid taxes, you still face penalties and interest on what you owe. This is true even if you filed for an automatic six-month extension.
With the IRS interest rate at 4 percent a year, this can add up to a substantial amount. Especially when there is also a penalty of 0.5 percent per month (or part of a month) that your taxes aren’t paid.
The IRS can take your future refunds until your debt is paid off.
This speaks for itself. You won’t be able to get tax refunds for future years until your tax debt from the past is paid off in full.
An offer in compromise (OIC) may be available if you have significant financial hardship.
Unlike an installment agreement, an offer in compromise (OIC) can allow you to resolve your tax debt for less than the full amount you owe. This is often an option worth exploring for people experiencing financial hardship.
There is no guarantee, however, that the IRS will approve an OIC application.
An attorney can help you understand your options.
You may be uncertain about what step to take next to put your tax debt behind you. An attorney knowledgeable about tax issues can help you understand which option makes the most sense for your particular situation.