Do Penalties Still Accrue From the IRS When There Is a Payment Plan?
Having the highest possible monthly payment amount with the IRS can be the difference between an extended period of economic hardship and moving on with your life, and checkbook. According to the IRS, there are charges that continue to accrue during the tax repayment period. If you want to mitigate these costs, there are a few things you should keep in mind about how these penalties are calculated and what your alternatives are.
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Significance
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All taxpayers who meet the filing requirements are required to file their returns and pay any tax owed on or before the April 15th deadline. Those taxpayers who do not pay their tax owed before the deadline are subject to IRS penalties and interest, as well as enforcement action such as liens and levies. An installment agreement allows taxpayers who cannot pay the balance due in full to pay the tax with monthly payments and eliminate enforcement action.
Process
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To set up an installment agreement, complete IRS Form 9465 and mail it to the address listed in the instructions. You can also use the Online Payment Agreement found on the IRS website if you owe less than $25,000. The IRS will contact you within 30 days to advise whether your request was approved.
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Penalties and Interest
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Penalties and interest charges are added to the amount of tax that remains unpaid, and both accrue daily. The most common penalty which is assessed to unpaid tax is the Failure to Pay penalty. The FTP penalty is one-half of 1 percent of the unpaid tax for each month the tax is late. The interest rate is determined quarterly, and it is the federal short-term rate plus 3 percent. If you are late paying your monthly installment payment, then you may also be charged a late payment fee, and if the check bounces for your installment payment, you will be charged a dishonored check fee. The amount of the dishonored check fee is $25 or the amount of the dishonored check, whichever is less, as of 2010.
Alternatives
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An extension is preferable to an installment agreement because it does not require you to pay a fee and reduces your payment period to 120 days. The shorter period means that you pay off the debt in a shorter period of time, thereby reducing the overall penalty and interest charges. Also, if you can pay the entire amount off with a credit card that has a lower interest rate than the IRS, then you should do so.
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