Should I Enter an Installment Agreement with the IRS?
An Installment Agreement (IA) is the most commonly used method of paying off back taxes. If you owe $50,000 or less, you should be able to get an installment plan set up by simply asking. Once it’s set up, you have up to 72 months to pay off the balance of your debt. However, while this may seem like a pretty good deal, there are some things you should take into consideration before agreeing to an IA with the IRS.
Before requesting an Installment Agreement, make sure you are current on your tax return filings. The IRS won’t approve you for an IA if they see that you haven’t filed all of your past returns. If you are self-employed, you must be current on all of your quarterly estimated tax payments, and if you have employees, you must be current on your payroll tax deposits.
The other thing to consider is whether or not an installment plan is actually going to save you money in the long run. Interest and penalties add up quickly with IA’s, and many people find that they actually owe more after a few years of paying than when they initially signed on. For example:
Mr. and Mrs. Smith owe the IRS $40,000 in back taxes. They agree to pay $300 a month. With 10% interest and penalties, an additional $4000 is added to their balance. At the end of one year, they will have paid off $3,600. However, while Mr. and Mrs. Smith’s balance should now be $36,400, it’s actually $40,400 after the $4,000 penalty and interest charges are tacked on.
Last but not least, make sure you have enough money to pay the IRS after all of your living expenses. Payment plans don’t work if you can’t afford them – if anything, your debt becomes much worse and the IRS becomes much more difficult if you agree to pay them and then don’t. If you simply cannot afford the taxes owed, there are alternatives. You may qualify for an offer in compromise, to be declared non-collectible or even to discharge the tax debt in bankruptcy.
Before entering an IA with the IRS, visit us at http://www.irsallstar.com/our-services#5 to see how we can help you work out the best deal.