If you find yourself getting hit with a big tax bill and no way to pay it, don’t worry, the IRS actually gives you options for paying your tax bill over time. Most people will have no problem paying their taxes using an installment agreement from the IRS. Qualifying is simple, and everything can be done online.
For some, they may need to file IRS Form 9465 to set up the installment agreement. Who should and shouldn’t file Form 9465 is what this article is about.
No Form Necessary
If you owe less than $50,000 on your taxes, you don’t need to file Form 9465. The formal conditions from the IRS website to qualify for an installment agreement without filing Form 9465 are the following:
- “Long-term payment plan (installment agreement): You owe $50,000 or less in combined tax, penalties and interest, and filed all required returns.”
- “Short-term payment plan: You owe less than $100,000 in combined tax, penalties and interest.”
You can go to the IRS website to set up your installment agreement. The URL is https://www.irs.gov/payments/online-payment-agreement-application.
Just because you file your installment application doesn’t mean it will be approved. However, if you owe less than $10,000 in taxes, you’re eligible for a guaranteed installment agreement.
There are three options for paying your tax bill. Fees are listed with each:
- Pay it in full.
- Short-term payment plan — paying in 120 days or less. There is no setup fee. Plus, accrued penalties and interest until the balance is paid in full.
- Long-term payment plan — this is an installment agreement and involves paying in more than 120 days. There is a $149 setup fee (low-income: $43 setup fee that may be reimbursed if certain conditions are met). Plus, accrued penalties and interest until the balance is paid in full.
If you can’t pay your bill within 120 days, you’ll need to set up an installment agreement using the long-term payment plan option. The long-term installment agreement is also known as the streamlined installment agreement. On this plan, you have 72 months or 6 years to pay your tax bill.
As you can see from the above fees, an installment agreement isn’t free. In fact, it’s a fairly expensive arrangement.
Installment Agreement Fees
Installment agreement fees start with a $149 setup fee. That fee can be cut to only $31 by choosing the direct debit payment option.
Next, come penalties and interest. The “failure-to-pay penalty” is 0.5% per month. To put that into perspective, that’s an interest rate of 6%. But once you enter an agreement, it comes down to 0.25% per month or 3% annualized.
When you send in a payment, or rather when the IRS drafts a payment, it is applied in this order:
- Other fees and expenses
Note that the IRS has already proposed a fee increase for installment agreements. This increase would bring the setup fee to $225 and the direct debit option to $107.
Who Should File Form 9465?
From the IRS website, file Form 9465 if you are one:
- “Who owes income tax on Form 1040 or 1040-SR,
- Who is or may be responsible for a Trust Fund Recovery Penalty,
- Who owes employment taxes (for example, as reported on Forms 941, 943, or 940) related to a sole proprietor business that is no longer in operation, or
- Who owes an individual shared responsibility payment under the Affordable Care Act (this payment won’t be assessed for months beginning after December 31, 2018). See section 5000A.”
Types of Installment Agreements
There are six types of installment agreements:
- Guaranteed — owe less than $10,000 in taxes.
- Streamlined — owe less than $50,000 and can pay within six years.
- Expanded (new) — owe between $50,000 and $150,000 and can pay within seven years (84 months). There isn’t an in-depth review of your finances with this plan. Little financial information is disclosed.
- Graduated — starts off with lower payments for the first six months then goes up. The increase depends on what the IRS believes you can pay.
- Regular full disclosure — the IRS does an in-depth review of your finances and determines what you can pay. It’s best to avoid this plan if possible.
- Partial Payment — When all of the other plans fail, this might be your only option. The IRS does an in-depth review of your finances to determine what you can pay. One benefit to this plan is that any tax balance remaining after the plan terms expire is forgiven.
Once you recognize that your tax bill is too large to be paid in full or within 120 days, you might consider an installment plan. It’s important to set up the plan as quickly as possible to reduce the cost of additional penalties.
The last thing you want to do is continue letting your taxes go overdue. The IRS is not an organization that you want coming after you.
If you don't know where to start, check out Solvable and see if you can find professional help for your tax issues.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.