Taxpayers who owe taxes to the IRS usually end up owing more than just taxes. When you are unable to pay the amount of income tax owed by the due date, interest and late payment penalties are then added on top of the original tax balance.
The best way to stop the interest and penalties from building up is to pay off your unpaid taxes. Many people who can’t pay the balance in full immediately will take out an installment agreement with the IRS. This reduces the amount of interest and penalties that accrue and breaks the taxes owed down into affordable minimum monthly payments. The interest rate applied to overdue tax payments differs substantially when you have an installment agreement in place with the IRS.
Interest Rate on IRS Payment Plans
Your interest rate on your unpaid taxes varies depending on whether you do or don’t have an installment agreement and whether you do or don’t file on time.
Interest Rate Without an Installment Agreement When You Don’t File on Time
If you owe taxes and didn’t file a tax return or pay the amount due in time, you’ll receive an IRS notice and interest will be charged on the balance due.
This is compounded daily at an interest rate equal to the federal short-term rate plus 3 percentage points, which is currently approximately 5%. Additionally, the IRS will charge penalties for late filings.
Interest Rate Without an Installment Agreement When You Do File on Time
If you file your return on time but don’t pay the tax bill due, you’ll have to pay a failure-to-pay penalty. The failure-to-pay penalty is at a rate of 0.5% of the tax you owe per month until you pay the tax in full. You can be charged up to a maximum penalty of 25% of the tax due.
Interest Rate With an Installment Agreement
When you have an installment agreement, the failure-to-pay penalty is cut in half. The interest rate on the IRS installment agreement drops to 0.25%. Interest and failure-to-pay penalties will keep accruing until the total outstanding tax balance is paid in full.
Reach out to a tax attorney at Polston Tax so we can help you determine whether an installment agreement may be the right option for you.
Fees Charged on Installment Agreements
Many installment agreements with the IRS require payment of additional fees to set up plans and arrange payment methods.
Fees apply to set up an installment agreement. The initial cost for setting up an installment agreement varies depending on the type of installment agreement, how you set up the agreement and which of the payment options you choose. A setup fee covers the expense of processing an installment agreement.
Fees for Guaranteed Installment Agreements
If you’re able to repay your income tax balance of less than $10,000 within three years, you are eligible for a short-term payment plan. If you can repay in 120 days, you won’t be charged a setup fee. Monthly payment options for a guaranteed installment agreement include:
- Direct debit payments to your bank accounts
- Check or money order
- Credit or debit card — payment processing fees apply
- Online or phone payments via the Electronic Federal Tax Payment System (EFTPS)
Fees for Long Term Installment Agreements
If you have a larger tax debt and require more time to repay it, you always need to set up a long-term payment plan. All balances that exceed $25,000 require direct debit withdrawal from your monthly account.
Low-income taxpayers might qualify for a reduced fee of $43 by filing Form 13844, the Application for Reduced User Fee For Installment Agreements. If you have questions about the fees that may apply to your situation, reach out to us at Polston. We can further advise you on the details of your installment agreement.
How to Reduce the Amount of Interest and Penalties Due
The interest rates for IRS installment agreements accrue daily on your balance until it’s paid off. The sooner you pay off your unpaid taxes, the more you save in interest charges.
You can pay the full amount or a portion of your balance online or with the help of a dedicated tax attorney at Polston Tax. When you partner with us, we may be able to find ways to reduce the amount of interest and penalties you owe.
Are There Fees and Penalties on Other Payment Arrangements With the IRS?
The IRS does not charge a fee if you pay with a check or a direct debit from your bank account. If you choose to pay your installment agreement fees with a credit or debit card, though, the three payment processors approved by the IRS do charge a fee, which is typically 1.87% to 1.98% to process these types of payments.
Offer in Compromise
An Offer in Compromise is an IRS agreement that is used to resolve your tax liability via an agreed-upon settlement that is less than the tax amount owed. There is a $205 application fee to settle your taxes with an Offer in Compromise and you can apply by submitting IRS form 656.
If the IRS determines you have a legitimate reason for being unable to pay your taxes in full and qualify for an Offer in Compromise, you can either pay through a lump sum payment option or a periodic payment.
- Lump sum payment: With the lump sum option, you will be required to pay 20% of the specified offer amount when applying.
- Periodic payment: Alternatively, with the periodic payment you will be required to submit your initial payment with the application and make monthly payments according to the proposed terms and conditions.
Interest and penalties stop when the agreed-upon tax settlement amount is paid in full. The process for getting an offer in compromise can be complex, which is why we provide Offer in Compromise services to help you arrange a tax settlement with the IRS.
First, we’ll determine whether you qualify. Then, we’ll help you submit an application and send your offer to the IRS. Our next steps will vary depending on whether the offer is accepted, returned or rejected. In the event that your offer is rejected, we’ll help you file an appeal.
Currently Not Collectible
If you cannot pay any amount of the outstanding tax balance, you can submit a request for a delay to the IRS’s collection until you are able to pay. If the IRS agrees that you have a financial hardship, they may deem your account currently not collectible and you may delay payment until your finances improve. There is no fee associated with a currently not collectible payment agreement.
At Polston Tax, we can help you determine whether you are eligible for currently not collectible status. The following requirements are typically used to determine your eligibility:
- Your annual income is below $84,000.
- You’re unemployed and don’t have another source of income.
- You don’t have money left over after your basic living expenses each month.
- The 10-year statute of limitations on your tax debt collection is about to expire.
- Your income comes only from unemployment, Social Security or welfare benefits.
If the IRS decides you are eligible for currently not collectible status, your wages cannot be garnished and your bank accounts cannot be levied.
Advantages of Working With a Polston Tax Lawyer
Being unable to pay the taxes you owe to the IRS is stressful and it can be hard to choose which option is best to settle your balance. For many taxpayers, an installment agreement is an attractive option. With an installment agreement, you can pay your unpaid taxes in smaller amounts each month, making the payment more affordable. If you’re interested in getting an installment agreement, Polston Tax can help.
You owe it to yourself to speak to a Polston tax attorney who can apprise you fully of your tax rights and sort out debt repayment options available to you. They can also investigate your tax case’s details and negotiate directly with the IRS to get the best outcome for your situation.
Contact us at Polston Tax today to pay off your unpaid taxes and get your life back on track.