Top Mistakes to Avoid When Applying for an IRS Payment Plan

If you owe taxes you cannot afford to pay in full, the IRS offers installment agreements, or payment plans, that allow you to make payments on your balance over time until it’s paid off. 

These plans are fairly easy to qualify for, especially if you owe $50,000 or less. To set up payments, you can simply head to http://irs.gov/opa to submit your application. Applying online helps you avoid phone call wait times, and you usually can view the decision immediately.

Unfortunately, however, although the setup process is fairly straightforward, there are still a lot of mistakes that can be made in the process. These errors could get in the way of approval or compromise your ability to stay compliant with the agreement. Sometimes, the mistake taxpayers make is choosing a payment plan when they could have qualified for a settlement.

Key takeaways – common mistakes to avoid

• Choosing the wrong type of IRS payment plan.
• Overlooking the total costs of the agreement.
• Choosing an unaffordable monthly payment amount.
• Ignoring tax compliance requirements or getting behind on future tax returns.
• Setting up payments when you might qualify for a settlement.
• Failing to modify your agreement when needed.

To help you avoid common errors with online payment plans, this guide covers how applying online works and the top mistakes to avoid in the process. Contact us today at the W Tax Group to get help now.

How to Qualify for an Online Payment Plan

Not all taxpayers are eligible for online payment plans, though most are. If you can’t pay off your balance in one lump sum, your plan options are:

• Short-term payment plan: Under this plan, you’ll pay off your balance within 180 days of the due date, but you don’t have to make monthly payments during that time. To apply online, you must owe less than $100,000 (including penalties and interest).
• Long-term payment plan (or installment agreement): These are longer plans where you’ll pay off your balance monthly. To apply online, you must owe $50,000 or less (including penalties and interest) and be up to date on your tax filings.

Meeting these requirements is a must to be able to apply for a plan online. If you owe more than $50,000, you may still qualify for a payment plan, but you won’t be able to apply online.

Online Payment Plan Requirements

You may also have to pay a setup fee to apply online. For lump-sum payoffs and short-term payment plans, there isn’t a setup fee, but for installment agreements, the IRS charges a $22 setup fee unless you have low income. This set-up fee applies to direct debit plans, where your monthly payment is automatically deducted from your account.

If you choose to do non-direct debit for an installment agreement, the setup fee is $69, or $43 if you have low income. With both short- and long-term plans, penalties and interest continue to accrue until you pay off the balance in full.

Benefits of Online Payment Plans

One of the biggest benefits of applying online is that you find out the decision right away. The IRS says that as soon as you submit your application, you’ll immediately be notified of whether or not your plan was approved.

Other benefits include:

• More time – You have more time to pay off your balance rather than all at once
• Affordability – Your monthly payment is more affordable than full payment
• Compliance – You stay in good standing with the IRS
• No risk of collection actions – The IRS won’t take further collection actions if you comply with your installment agreement terms

If you’re not sure if you qualify to apply online, or if you are considering other options for payoff, talk to a tax professional about your situation.

Common Mistakes When Setting Up an Online Payment Plan

Even with a simple online application process, mistakes do happen when it comes to payment plans. Unfortunately, taking a misstep can lead to even more penalties, further collection actions from the IRS, or the rejection of your request. Consider these common mistakes and how to avoid them:

Choosing the Wrong Type of Plan

Some taxpayers start applying online without fully understanding the different types of plans available. Make sure you review the eligibility requirements for each option, and consider how much you owe and whether you are applying for a short- or long-term plan. 

Research your options and talk to a tax professional to confirm you’re applying for the right type of payment plan.

Overlooking the Total Costs of the Agreement

Many people mistakenly think that if they set up an installment agreement, they will no longer accrue fines and interest. For instance, one Reddit user wasn’t aware that interest would continue to accrue, even if they had an active long-term payment plan in place. 

Be sure to factor in all costs that come with these plans: setup fees, penalties, and interest that continue to build until you pay everything off in full. Otherwise, fees will come as a surprise.

The IRS provides an online calculator to help you estimate your total agreement cost before committing to a plan. It’s important to never underestimate how much a plan will cost you in the long run.

Agreeing to Unaffordable Monthly Payments

Another common mistake: taking on payments that are just too high. This is setting yourself up to default and get into even deeper trouble with the IRS. 

Don’t overcommit to higher monthly payments just to get debt paid off faster. Make sure you take a close look at your expenses and income to calculate how much you can actually afford to pay each month. You may want to start with lower, more management payments, and increase what you pay later if you’re able.

Not setting up direct debit

When you apply for payments online, you can request to have them directly withdrawn from your bank account. A direct debit installment agreement has lower fees and, because payments are automatic, it can reduce your risk of default.

Beyond that, agreeing to direct debits can reduce the need to provide the IRS with financial details. If you owe over $25,000 ($10,000 for businesses), you will have to complete a very detailed collection information statement unless you set up direct debits.

Ignoring Tax Compliance Requirements

Even while you have a payment plan in place, you still have to stay current with your tax returns. Make sure you file on time, and if you’re self-employed, make your quarterly tax payments as normal.

Many taxpayers may not realize that failing to be compliant with your taxes can void your installment agreement. In some cases, the IRS will let you add a new tax debt to an existing payment plan, but in strict terms, incurring new tax debt puts you into default. The IRS could then take additional collection actions like liens or levies on your property.

If you find it a challenge to keep up with deadlines on top of your installment agreement requirements, try setting reminders so you never miss anything.

Applying Online When It Isn’t the Best Option

The IRS’s online payment application tool isn’t always right for every taxpayer. For instance, if you owe more than $50,000, you won’t be able to qualify for an installment agreement online. 

If you’re dealing with a financial hardship that limits your ability to pay off your full balance, you may need to apply for a different tax solution, like currently not collectible (CNC) status or a partial payment installment agreement (PPIA), which requires more than just an online application. 

When the online tool isn’t sufficient for your needs, talk to a tax professional about how you should move forward with your request.

Failing to Apply for the Right Tax Relief Option

Remember: installment agreements aren’t for everyone. Say you have a very large tax balance, making monthly payments would be a struggle for you financially. You may be able to qualify for these other options to get additional relief:

• Offer in compromise: An offer in compromise may be better suited to your issue. This is when the IRS agrees to accept an offer you send them based on your current finances. If they accept, you will be able to settle your tax debt for less than the full balance.
• CNC status: This is a temporary status that indicates the IRS will not try to collect from you due to financial hardship. However, once your financial situation improves, you will have to pay what you owe — unless it’s been 10 years, which is the statute of limitations for collections.
• Innocent spouse relief: You may qualify for innocent spouse relief if you filed jointly and your spouse made an error such as underreporting income on your shared tax return. This type of relief means you won’t be liable for your spouse’s income tax in this case.
• First-time penalty abatement: If you have a history of tax compliance over the last three years, the IRS may grant you first-time penalty abatement when you receive a failure to file, failure to pay, or failure to deposit penalty.
• PPIA: This type of payment plan allows you to pay a partial amount of your overall balance by making monthly payments within a set time frame.

The right tax relief option will depend on factors like your tax history, the size of your tax bill, your financial situation, and others. When in doubt, ask a tax expert before applying for any of these solutions.

Not Modifying Your Plan When Circumstances Change

Your financial situation may change, even from one month to the next. The IRS will usually work with you if this happens, but you must be diligent in letting the agency know of a change to work out a new solution. 

For example, if you experience financial hardship, contact the IRS about reducing your payments until your situation changes. You may also want to pay off your debt faster if your financial situation improves. 

Don’t ignore the need for a change to your installment agreement. Doing so could lead to IRS agreement enforcement actions or default.

Get Payment Plan Help with W Tax Group

The IRS offers a quick and easy tool for setting up installment agreements — most of the time. Many taxpayers make mistakes like failing to apply for the right option, overlooking all costs of the agreement, failing to comply with tax requirements, and agreeing to monthly payments that are too high. Avoid these mistakes to make sure your payment plan process goes smoothly and you’re able to pay off your debt in no time.

Understanding your tax relief options can be easier said than done. When you don’t know if you qualify for an installment agreement or are looking to explore other forms of tax debt resolution, talk to the team at W Tax Group. Our legal experts will help you evaluate your situation and understand all applicable tax laws. 

Contact W Tax Group today for a consultation. View the IRS’s online application information at http://irs.gov/opa.

FAQs About IRS Online Payment Plans

Can I Apply for an IRS Payment Plan Online?

Yes, most taxpayers can apply online for an IRS payment plan through the Online Payment Agreement system. If you have a balance of $50,000 or more and are applying for an installment agreement, you won’t be able to apply online. 

What If I Owe Over $100,000 in Tax Debt?

If you owe the IRS $100,000 or above, you won’t be able to apply for a short- or long-term payment plan through the online system. You will use Form 9465, Installment Agreement Request, to send in your application along with your financial information on Form 433-F. You can also call 800-829-1040 for individuals or 800-829-4933 for businesses to apply over the phone.

Which Tax Relief Option Is Right for Me?

The IRS offers several tax resolution options when you can’t pay off your balance when it’s due. You can request a payment plan to pay it off in monthly installments, send an offer in compromise if your financial situation doesn’t allow you to pay in full, request CNC status if going through financial hardship, or request penalty abatement for reasonable cause or if it is your first time getting a penalty in the last three years.

Talk to a tax expert to determine which of these options works best for your goals and finances.

Do I Need to Send Financial Information to Apply for a Payment Plan?

Not all taxpayers need to provide financial information to the IRS. If you apply online for a payment plan and are approved, you will usually just follow the instructions to make your payments. However, in some cases, the IRS will ask you to provide your information, especially if you have a large tax balance or continue to have tax issues.

What Information Do I Need to Apply for an Installment Agreement Online?

You will first be sent to ID.me to verify your identity via photo identification and then can sign in with the IRS’s Online Payment Agreement system. For direct debit applications, you’ll need your bank information on the application. You may also be asked to provide the tax balance assessed on your latest tax return.