If you owe back taxes that you can’t pay in a lump sum (or you don’t want to have to liquidate assets to make an immediate lump sum payment) and you don’t qualify to reduce the amount owed through an offer in compromise, you should be able to set up an installment agreement to pay the debt off over time.
As creditors go, the IRS is not going to be the warmest, friendliness entity you’ll ever owe money to. The IRS isn’t designed to be in the credit business and so it doesn’t make it easy for you to owe back taxes or pay your tax obligation off over time. However, the government has come to recognize that there are circumstances when it must offer taxpayers alternatives to lump sum, on-time tax payments.
Installment agreements (IA) are generally available to all taxpayers and for all classes of tax with the basic requirements that you be current on all filing requirements and not have defaulted on a previous installment agreement. If you are not in compliance—that is, up to date with filing all your tax returns—and/or if there is a record of default on an installment agreement in the past, the IRS will not establish an installment agreement until you are compliant.
Expat IRS Payment Plan
The general rule is that an OIC is not available to taxpayers who can afford to pay their liability by installment. Remember, if your monthly disposable income is sufficient for you to fully pay the amount owed over the remaining time left on the collection statute of limitations plus five years, you will not qualify for an OIC, but you will probably qualify for an installment agreement.
If you have access to other credit sources, you may want to seriously consider borrowing elsewhere to pay your IRS debt instead of arranging an installment agreement. Here’s why: When you are paying on an installment agreement, the IRS—like most creditors who offer revolving credit arrangements—will assess interest and, if applicable, penalties on the unpaid balance of your tax debt. IRS interest rates are subject to change quarterly and may increase, which means your payment could go up. If you miss a payment, you could be subject to an additional failure to pay penalty of up to 1 percent each month. On top of this is the user fee the IRS charges to set up the agreement, which is $52 for agreements where payments are deducted directly from your bank account or $105 if you’d rather write a check each month. Certain low income taxpayers may qualify for a reduced user fee of $43.
The IRS will normally file a Notice of Federal Tax Lien against your property to secure the government’s interest against other creditors while the installment agreement is in effect. This could seriously hinder your ability to obtain credit for other reasons during the time you are paying off your tax debt. Defaulting on the agreement could prompt the IRS to take aggressive collection action, and the IRS will typically be less agreeable to negotiating with you if you are unable to make your installment payments as originally agreed than other creditors might be.
You may find that the interest, fees, and other terms associated with a traditional loan or credit card may be more advantageous than what is offered by the IRS—and would not include the federal tax lien. If you have assets you have been trying to avoid liquidating, you may want to reconsider that when you see the total picture of an IRS installment agreement. Having said all this, it may be that an IRS installment agreement is your best or perhaps your only—option.