Do You Owe Taxes?
The very first step in this process is to be certain of how much you owe the IRS. Recheck your figures. Consider having a CPA or tax professional review your return to see if you may have missed a deduction, credit, or new tax law treatment of an item on your tax return.
If the balance due is a result of receiving a notice from the IRS and you are not sure how it was calculated, then you should also consult a tax professional. Often the IRS notices show taxes that are higher than what you may actually owe.
File the Return or Extension by April 15th
This is an extremely important step and can save you a considerable amount of tax penalties. If you have a balance due, the penalty for failure to file a timely tax return is 5% per month or partial month of the balance due. This means that if you owe $2000.00 and simply don’t file until May 29th, then you owe 5% for the partial month of April plus another 5% for the partial month of May, for a total late filing penalty of $200.00.
Ouch! You will continue to owe this 5% penalty until it reaches a maximum of 25% of your original balance due. So that same $2000.00 balance due can quickly become a $2500.00 balance due. Filing either the return or an extension by April 15 (April 18th in 2011) will save you the late filing penalties.
Even returns with small balances due can have proportionately large penalties if the return is filed more than 60 days late. The minimum penalty for filing more than 60 days after the filing date is the smaller of $135 or 100 percent of the tax owed.
Consult with your CPA or tax professional about which one to file. The extension can buy you a few months of time before the taxes get officially assessed and the IRS begins sending notices of collection. It is important to note that the extension DOES NOT give you an extension of time to pay. Only an installment agreement or a temporary hold specifically authorized by the IRS can give you an extension of time to pay.
Penalties and Interest Still Apply
Penalties and interest for paying late will still continue, even with an extension. The penalty for paying late is .5% per month or partial month of the balance due. It is waived for each month that you owe the late filing penalty. You may be able to reduce even this penalty if you pay 90% of the amount owing by April 15th.
Interest is mandatory and is updated quarterly. The interest rate dropped on Jan 1, 2011 to 3% (previously was 4%).
Do You Need an IRS Payment Plan?
If you can pay the balance in full within 120 days, then you probably do not need an installment agreement. This may be a good reason to file the extension and then pay in full with the timely filed return. Yes, you will still pay late payment penalties and interest, but you will avoid the fees for getting an installment agreement and you will also avoid the onslaught of letters and notices that the IRS sends out when a balance due return is filed without payment.
Request an IRS Payment Plan
You've decided that the balance due is accurate and you are not able to pay it in full anytime soon. What do you do now? It's time to request an IRS payment plan. And relax; it's actually a very easy process.
There are four ways to request an installment agreement.
1) File a Form 9465 with your tax return.
2) File a Form 9465 separately from your tax return
3) Set up a payment plan online at www.irs.gov or
4) Call the IRS and arrange for an installment agreement on the phone.
Option 1 or 2: Filling Out the Form 9465
FIRST THE BASICS
This is a simple, one page form. Fill in the tax year for the balance owing, and your name, address, social security number (Line 1). Then fill out the total amount that your tax return shows that you owe (Line 7). Next enter the amount that you are paying with the IRS Payment Plan or tax return (Line 8).
Determine the Monthly Payment
Line 9 now asks for the amount that you can pay each month on this agreement. Here are the guidelines to help you determine this payment:
If the balance due is less than $10,000.00 and your monthly payments will have the balance (including penalty and interest) paid within 3 years, then the IRS will usually automatically accept your installment agreement. Of course, there are exceptions. If you have prior unfiled or late tax returns or other outstanding taxes owing, then the automatic acceptance will not apply. Additionally, if the IRS determines that you have sufficient funds to pay the taxes when they are due, then you will not automatically receive the approval for making installment payments on your tax debt.
In some cases, the IRS will call you or write to you and ask you to provide more information on your assets and your monthly income and expenses. If so, you must provide this information in order to receive the installment agreement. For most cases, though, on balances less than $10,000, requesting and receiving acceptance for an installment agreement is fairly automatic.
If the balance due is over $10,000 or your proposal of payment plan stretches further than 3 years, then you will most likely need to provide further detailed information of your available assets, and monthly income and expenses. In this case, the IRS will determine how much you are able to pay each month and how much you are able to pay with the return.
If the balance due is over $25,000, then you will be required to fill out the Form 433F and you may also consider getting the assistance of a CPA or tax attorney.
Never offer a larger monthly payment than you are actually able to pay. Once you default on an installment agreement, it becomes more difficult to negotiate with the IRS. At best your installment agreement may be automatically revoked and you will have to pay another fee to reinstate it. At worst, the IRS will start the process to levy your assets. Offer an amount that you know you will be able to pay each and every month, on time and without fail. You can always make larger payments or even pay the balance early.
Determine the Date for the Payment
Use Line 10 to choose the day of the month that your payment will be due. Again, consider this carefully and coordinate it with your other monthly expenses. Installment agreements should never be late. Even a late payment may result in your agreement being cancelled.
Decide How to Make the Payment
Now, choose how you will make your payments. Line 11 can be filled out with your bank information if you want to have the IRS make automatic monthly withdrawals to pay your installment payments. If you choose this payment method, the fee for the installment agreement is lowered to $52.00. If you prefer not to give your regular checking account number, then consider setting up a separate savings account just for this purpose. Be absolutely sure that the funds are in the account on the date of the automatic payment.
You may also mail in your payments, pay by credit card, or arrange for a payroll deduction agreement.
Now sign and date the Form 9465. Either attach it to the front of your tax return, or mail it to the address shown on the Form 9465 if you have already filed your tax return.
You should receive a reply showing the status of your request in about 30 days.
Note that there are also Lines 5 and 6 on the installment agreement. These ask for your bank information and your employer information. Although the IRS can easily obtain this information from other sources, consider carefully before you fill this in. The IRS will use this information to contact your bank and your employer if a lien or garnishment becomes necessary. If your installment agreement is accepted and your payments are timely, the IRS should not have to contact either one. You may prefer to wait until the information is needed or requested before you provide it.
Option 2: Request an Online IRS Payment Plan
You may prefer to request the installment agreement online. This method speeds up the approval; often it is received as soon as you finish the application online. You may also use this online service to request a short term extension of time to pay your taxes.
Option 3: Call the IRS for Payment Options
With this method, simply pick up the phone and call the IRS at 1-800-829-1040. Review the above sections so that you are prepared to decide on the payment amount, method, and day of the month for the payment.
Watch the Mail
The IRS will send you a written notice regarding your installment agreement, regardless of the method that you use to apply. If you will be mailing in your payments, you will receive a monthly letter with payment instructions. With all of the methods, you should receive a yearly summary of your payments and how they were applied.
NOTE: The IRS will NOT send you email requests for information, such as your social security number. Consider any such email to be fraudulent. Report it. The IRS operates by regular mail and sometimes by phone.
Expect to Pay Fees
The IRS charges a fee for granting an installment agreement. The standard fee is $105.00, but if you agree to an electronic funds withdrawal, (automatic withdrawal from your bank account) the fee is reduced to $52.00.
If your income is low, you may qualify for a reduced fee of $43.00. Use Form 13844, Application for Reduced User Fee For Installment Agreements, to request this reduced fee. If you mail the Form 9465 with your tax return, the IRS should automatically check to see if you qualify for this reduced fee.
Do not send the fee with the Form 9465. The IRS will send you a letter telling you how and where to send your payment. They may allow the fee to be added to the installment agreement.
Will an IRS Payment Plan Stop Liens?
If a Federal tax lien has already been filed, the IRS will usually not remove the lien until the tax is paid in full. Further, the IRS may file a Federal tax lien, even when you have a valid installment agreement, if they believe it is necessary to protect their interest in collecting your tax debt.
Can I keep Future Tax Refunds?
No. In general, the IRS will take any future Federal refunds and apply it against your balance due on the installment agreement. You will then continue to make your regular monthly payments until the tax balance is paid in full.
Keep the Terms of the IRS Payment Plan
Once you get your approved agreement, make your monthly payments on time each month. You must also stay current with any future tax returns, tax balances due, and any required estimated tax payments, or your installment agreement will be revoked. If you do owe any future tax balances while the installment agreement is in effect, you will need to renegotiate a new agreement.
IRS Form 9465 https://www.irs.gov/pub/irs-pdf/f9465.pdf
Online Payment Agreement with the IRS https://www.irs.gov/individuals/article/0,,id=149373,00.html
IRS Form 13844, Application for Reduced User Fee For Installment Agreements https://www.irs.gov/pub/irs-pdf/f13844.pdf
This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.
CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding tax penalties.