What is the Interest Rate on Installment Agreements?

Taxpayers who owe taxes to the IRS usually end up owing more than just taxes. When you are not able to pay the income tax you owe 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 the tax debt. Many people that 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 tax debt owed down into affordable minimum monthly payments.

The interest rate on overdue tax payments differs significantly if you have an installment agreement in place with the IRS and if you don’t.

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 +3%, 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.

So, how much interest does the IRS charge on installment agreements?

Interest Rate with 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 continue to accrue until the total outstanding tax balance is paid in full.

Fees Charged On Installment Agreements

Many installment agreements with the IRS require payment of additional fees, in order to set up plans and arrange payment methods.

Set Up Fees

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.

Installment Agreement Types

Guaranteed Installment Agreement

If you’re able to repay your income tax debt 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:

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)

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 debts over $25,000 require direct debit withdrawal from your monthly account.

Low-income individuals might qualify for a reduced fee of $43 by filing Form 13844, the Application for Reduced User Fee For Installment Agreements.

How to reduce the amount of interest and penalties due

The interest rates for IRS Installment Agreements accrue daily on your debt until it’s paid off. The sooner you pay off your tax debt, the more you save in interest charges.

You can pay the full amount (or a portion) of your balance online and/or with the help of a dedicated tax attorney.

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 1.99% to process these types of payments.

Offer in Compromise

An Offer in Compromise is an IRS agreement that resolves your tax liability by payment of an agreed-upon settlement for less than the tax amount owed. There is a one-time $186 to settle your taxes with an Offer in Compromise and you can apply through IRS form 656.

If 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.

With the lump sum option, you will be required to pay 20% of the specified offer amount when applying. 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.

Currently Not Collectible

If you cannot pay any amount of the outstanding tax balance, you can request that the IRS delay collection until you can pay.

If the IRS determines you have a financial hardship, they may deem your account currently not collectible and you may delay payment until your financial condition improves. There is no fee associated with a Currently Not Collectible payment agreement.

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 debt.

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.

What is The Interest Rate on IRS Installment agreements?