A Step-by-Step Guide to IRS Payment Plans
A large, unexpected tax bill can be a nightmare for business owners. Oftentimes, businesses aren’t sure what they owe until they complete their year-end bookkeeping and record year-end entries, such as depreciation and accruals.
If you come up short at tax time, don’t panic. An IRS payment plan can help you pay off your bill over time with minimal penalties and interest.
Do you qualify for an IRS payment plan?
Businesses that owe less than $25,000 and can pay the entire balance due within 24 months qualify to apply for an IRS payment plan. The IRS does not require any credit checks or proof of income to set up this plan.
If your business owes more than $25,000, you should call the IRS directly to speak with a representative about setting up a payment plan.
The rules for business payment plans do not apply to sole proprietorships, independent contractors, or disregarded tax entities like single-member LLCs. If you fall into one of these categories, you should apply for an individual payment plan.
An important note about tax extensions
Tax extensions don’t extend the due date for your year-end tax payment. If you are prepared to file your return by the deadline, you should do it, even if you can’t pay the full bill. Just make sure you set up your payment plan before the deadline passes.
You can also file a six-month extension without penalty if your return isn’t ready. If you’re short, pay what you can when you send in your return to minimize penalties and fines, and apply for a payment plan to pay off your remaining balance over time.
What do you need to apply?
To apply for a payment plan, you need to have filed your tax return and the return must have been processed by the IRS. This ensures that the IRS has a balance due on your account.
You also need some basic information about your business to complete your application, such as your employer identification number (EIN), business establishment date, the Caller ID provided on your balance due notice, and some basic information about your taxes.
There’s an entire IRS webpage dedicated to additional information on payment plans, which you may also want to review.
What type of payment plan do you need?
There are several IRS payment plan options for businesses. The best choice for your business will depend on your available cash flow, ability to pay, and financing needs.
Short-term payment plans
Short-term payment plans are generally only available to individuals and last less than six months. Unfortunately, business filers cannot utilize this option, as it is exclusively available for individual taxpayers.
However, your business may qualify if it operates as a disregarded tax entity, like a single-member LLC, or a sole-proprietorship.
Individual payment plans give you the option to pay off your tax bill within six months without additional penalties or fines.
Long-term payment plans
Long-term payment plans can last for up to 72 months, or six years. However, your balance will continue to accrue penalties and interest over the course of your payment plan, albeit at a relatively reasonable rate.
As of 2022, the interest rates on IRS payment plans are hovering around 4%. The low rate makes the IRS payment plan one of the most cost-effective options for businesses looking for ways to finance their tax bill.
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Changing an existing payment plan
You can request changes to your payment plan online at IRS.gov, or you can contact the IRS directly to work out new terms with an agent. However, calling the IRS typically comes with long wait times and higher fees, so stick with IRS.gov whenever possible.
According to the IRS website, the agency will attempt to work with you if your financial circumstances have changed and the agreed payment becomes burdensome. However, you might be required to provide evidence of the changes in your financial situation, so make sure you have proof on hand before you reach out.
The fee to make changes to your plan online is $10, but you’ll pay $89 if you want to make changes over the phone. You can revise an existing payment plan on the same page where you apply for a new plan, which you can find in the next section.
How to apply for an IRS payment plan online
You can easily apply for a payment plan using this IRS webpage. It includes options for both individual and business payment plans, as well as modifying existing plans. You’ll also find lots of helpful information and FAQs about payment plans as well.
Once you start the application, the IRS will walk you through the process, step-by-step. It’s a relatively straightforward process that should only take about 15 minutes if you have all the information you need on hand.
Keep in mind, the IRS may ask for information from your prior year’s tax return to verify your identity, so it’s best to have your most recent tax return handy when applying. If you don’t have that info, you may want to read up on how to find your prior-year adjusted gross income (AGI) in case the IRS asks for it.
You should also know your max budget for making payments, so you can pay off your balance as quickly as possible to minimize penalties and interest.
How to make payments towards your payment plan
You have several options for making payments towards your payment plan balance, but automatic electronic payments are probably your best bet.
Paying via electronic fund transfer, or EFT, is convenient and virtually instantaneous. Plus, you’ll only pay a $31 setup fee, whereas other options can cost up to $130.
Additionally, there’s less risk of a missed payment with automatic payments. If you don’t use this option, you must manually pay on the IRS website or mail a check each month.
How to set up payments
To set up direct-debit payments, you must submit your bank account information and choose your monthly payment date. After you set it up, the IRS will automatically pull the money from your account on the specified day. All you have to do is ensure the funds are in your account ahead of each scheduled payment.
If you didn’t set up automatic payments, you’ll need to send a check, call the IRS, or go to IRS.gov each time you need to make payment. You can also make additional payments to work your balance down faster.
You can find all the information you need to submit payments on this IRS web page.
Make sure you have the necessary funds available to cover your scheduled monthly payments. The IRS might allow you to restart your plan after a missed payment, but it’s usually a one-shot deal.
If you’ve missed several payments, you’ve effectively broken your agreement, and the IRS could terminate the payment plan and demand the balance in full.
Prioritize covering these payments over all else, or it could be “collected” involuntarily, which is never ideal.
Ideally, you should pay your taxes when they’re due to minimize the added expense of penalties and interest. However, business can be unpredictable, and just one unexpected expense can throw off your entire budget. Fortunately, if you need time, the IRS makes it easy to set up a relatively fair payment plan, so you get yourself back on track.