In recent years, the Internal Revenue Service has implemented a number of initiatives to increase flexibility or otherwise make life easier for struggling taxpayers who have fallen behind in their tax payments. You can ask for a streamlined installment plan. You can request an appropriate tax payment amount under the IRS Collection Financial Standards. As a last resort, you can offer the IRS an offer in compromise (OIC).
Streamlined installment plan
You may qualify for a streamlined installment plan if you are employed, self-employed, or unemployed, if you owe less than $25,000 when you file your offer, and if you can pay off the tax bill within 5 years. Your payments will be based on the amount owed, the interest on the unpaid taxes, and any penalties incurred.
Unfortunately, interest and penalties continue to pile up on the unpaid portion of an installment agreement. The user fees and application fees will also add up. Thus, if at all possible, it’s usually better to take out a loan rather than apply for a streamlined installment plan. It may even be cheaper to pay your taxes upfront with a credit card and accept the credit card interest instead.
To file a request for a streamlined installment plan, you must submit Form 9465, Installment Agreement Request, along with your application fee. If you will be paying by electronic funds withdrawal, your application fee is $52. Otherwise, it is $105.
Do not file this form if you are already on a streamlined installment plan or offer in compromise, if you can pay your balance in full within 120 days, or if you are also filing for bankruptcy. Instead, call 1-800-829-1040.
If you don’t meet the criteria for a streamlined agreement but still need to pay your owed taxes in installments, you can set up monthly payments with the IRS under their Collection Financial Standards. File as for the streamlined installment plan, but do not submit the application fee with your form. It will be deducted from your first payment.
Offer in compromise
An OIC is an agreement between a taxpayer and the IRS to settle for less than the full amount which is owed by the taxpayer. You may qualify for an OIC if you are employed, self-employed, or unemployed, if your total household income is $100,000 or less, and if you owe less than $50,000 when you file your offer.
To be eligible for an OIC, you must demonstrate that you are genuinely not able to pay the full amount within the remainder of the statutory period for collection. The IRS will also take into account extenuating circumstances, such as if you are caring for a dependent child with a serious long-term illness and will require the equity in your assets to pay for that care.
Barring extenuating circumstances, you will still be expected to pay an amount equivalent to what a collection agency could get from all your assets and income, including any anticipated future income. From this, you can subtract a basic living allowance, but nothing else. If this amount is greater than the amount of tax you owe, you probably won’t be eligible for an OIC.
To file an OIC, you must submit Form 656, Offer in Compromise, along with an initial payment and a $150 application fee. If you think you have been overcharged in your taxes, submit Form 656-L instead. You may offer to pay the OIC as a lump sum cash offer of 5 equal monthly payments or less, a short term periodic payment offer to be paid off within 24 months, or a deferred periodic payment offer which allows regular payments over up to 5 years.
Always start by filing the tax return on time, even if you know you won’t be able to pay. That way, you won’t have to add a late filing penalty to the rest of your tax woes.