What Are Your Payment Options If You Can’t Pay the IRS in Full?

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By Alan Kalman, AARP

Every tax season I have some clients that are not able to pay the amount they owe the IRS (technically they owe the US Treasury, not the IRS) in full by the April 15 filing deadline and they are reluctant to file a tax return.  This is a big mistake because if you fail to file a tax return, you will ultimately be faced with failing to file penalties as well as the late payment penalties and interest. In addition, if you do not file a tax return, the statute of limitations clock that prevents the IRS from assessing penalties after the limitation period ends does not start to run. So, Rule #1 is always file a timely tax return even if you can’t pay the taxes you owe.

But what if you can’t pay what you owe? Fear not! The IRS can be very accommodating to you. They have both a formal and informal payment plan that can be arranged. Let’s discuss the informal plan first.

If you are able to pay what you owe within 60 to 120 days, the IRS will set up a payment plan for you over the telephone. You call the IRS at 1-800-829-1040, follow the prompts and then explain how much you owe, how much you can pay with your timely filed return and how you would like to pay off the balance within no more than 120 days from the filing deadline. You can’t avoid the late filing penalty or the interest for not paying on time, but the IRS will reduce the amount of the penalties under this plan.

If you can’t pay within 120 days and the amount you owe is $25,000 or less (our AARP Tax-Aide clients always fall into this category) you can arrange a monthly payment plan called an Installment Payment Agreement (IPA). IPAs can be arranged online, by phone or by formally submitting IRS Form 9465. AARP Tax-Aide volunteers can do this for you. The IRS will charge you a fee of $105 to open an IPA. They will reduce this fee to $52 if you agree to have the IRS debit your bank account each month. You will be subject to the full late payment penalty and interest.

For more information see IRS Tax Topic 202.