How Are IRS Installment Payments Calculated?
Setting up an installment agreement with the IRS can be the difference between being in compliance with the IRS or having your assets garnished. Most taxpayers qualify to set up a monthly payment amount that is within their budget. If you wish to repay your taxes in an organized manner, without surprise garnishments, then it's best that you set up an installment agreement with the IRS.
Other People Are Reading
-
Significance
-
Preferably, your IRS monthly payment amount should be low enough so that it does not create an economic strain and high enough that it pays off your debt as soon as possible. Penalties and interest continue to accrue during the repayment period, so the higher your payments, the better. The more tax you pay, the more you reduce your penalty and interest charges, as they are based on the overall tax amount owed. The failure to pay penalty is 0.5 percent of the unpaid tax for each month the tax is late. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent.
Cost
-
There is a $105 fee to initiate an installment agreement. The fee is reduced to $52 for taxpayers who agree to have their monthly payment be direct debited from their bank accounts. If your income is low, you can request a reduced fee of $43 by completing IRS Form 13844.
-
Process
-
If you owe $25,000 dollars or less in tax, penalties, and interest, then you qualify to use the IRS's online agreement to set up your installment agreement. The tool can be found on the IRS website. You can also complete IRS Form 9465 and mail it to the address listed in the instructions for the form.
Calculation
-
You are allowed to choose a monthly payment amount that best fits your budget. The only requirement is that your monthly payment amount must be enough to pay the debt off completely in 60 months (5 years). If you are using IRS form 9465, enter the amount you wish to pay each month in Line 9.
Considerations
-
If you are able to pay the amount you owe in 120 days or less, then it may be in your best interest to request a 120-day extension instead of an installment agreement because extensions do not require the payment of a fee. You can request an extension by calling the IRS at 800-829-1040.
Warning
-
Even if you set up an installment agreement, this does not ensure that the IRS will not issue a lien against your assets. A lien ensures IRS interest in your property until the tax is paid in full. Unlike a levy, a lien is not a seizure of your property. However, it may prevent you from securing a loan, line of credit or refinancing your property.
-
