Pros and Cons of IRS Payment Plans

Pros of an IRS payment plan

While an IRS payment plan is not the perfect or most affordable solution for paying your tax debt, there are potential benefits to using one. Notably, if the choice is between not paying taxes or using an IRS payment plan, the latter will keep you out of trouble.

• Automatic approval: Eligible taxpayers can get automatic approval if they owe less than $10,000 when they apply online.
• Customizable: You can select from different repayment plan options, choose your monthly payment amount and change your plan if needed. You can also decide to pay the balance in full if your financial situation improves.
• More time: Setting up a payment plan with the IRS gives you up to 72 months to pay back taxes. If you can’t repay this debt within six years, the IRS might grant you one more year to modify your expenses.
• Avoid failure-to-pay penalties: The failure-to-pay penalty is 0.5% each month, up to 25% of the amount of unpaid taxes, until the balance is fully paid.
• Statute of limitations: Entering an installment agreement causes the IRS statute of limitations to start tolling. After 10 years, the agency can’t attempt to recover the debt.

Cons of an IRS payment plan

The biggest drawback to setting up an IRS payment plan is that there are fees, interest and penalties involved.

“Penalties for failure to pay are normally 0.5% per month, and interest is determined by IRS proclamation,” said Kevin Matthews, a certified public accountant and former assistant accounting professor at George Mason University.

Other cons include:

• Not everyone qualifies: You are disqualified from tax payment plans if you haven’t filed the current year’s taxes. You are also ineligible to enroll in certain programs if you have an open bankruptcy proceeding or owe more than $100,000.
• Setup fees: Setup fees can be more than $100, though most are significantly less if you sign up online. Keep in mind that the IRS charges additional fees to pay with a credit card.
• Vulnerable to liens: Entering into a payment plan or installment agreement doesn’t always stop the IRS from filing a federal tax lien against you.

» MORE: How to set up a payment plan with the IRS

Types of IRS payment plans

While the IRS offers multiple payment plan options, two major types available to individual taxpayers who apply for a payment plan online are short-term and long-term plans.

Short-term payment plans

A short-term payment plan gives you an extra 180 days to pay your balance in full. This plan is designed for taxpayers who owe less than $100,000 in combined tax, penalties and interest. If you don’t have the money to pay off your balance owed right away but are confident you can pay it off within six months, this may be a good option for you.

There is no application fee for a short-term payment plan, but penalties and interest accrue until the balance is paid in full.

Long-term payment plans

A long-term payment plan allows taxpayers to pay their balance in installments for up to six years. This option is designed for people who have a total balance of less than $50,000 in combined tax, penalties and interest.

The IRS requires taxpayers in this plan to pay via automatic bank withdrawal if they owe between $25,000 and $50,000.

Setup fees for long-term plans vary depending on whether you apply online, in person, by phone or by mail; setup fees may be waived or reimbursed for qualifying low-income taxpayers. Penalties and interest accrue until the balance is paid in full.

You can make payments directly from your checking or savings account, or pay by check; money order; debit or credit card; electronically online through your IRS account or by phone through the Electronic Federal Tax Payment System. With both short- and long-term plans, processing fees apply if you pay by card.

When to get tax relief help

A common mistake of many taxpayers is that they don’t reach out for help when they need it.

“Setting up the payment plan is easy if the amount owed is under $50,000 [for] individual taxpayers,” said Matthews. “An online process exists to accomplish this.”

For those who have more than $50,000 in tax debt or are struggling to set up an IRS payment plan on their own, a tax attorney or tax relief professional can assist you. While hiring professional help will add a fee to your expenses, it can save you a lot of stress and time in the long run.

One ConsumerAffairs reviewer owed more than $100,000 in tax debt from their time as a 1099 contractor.

“[The tax relief professional] quickly got a stop put on all IRS collection efforts while he worked with them to get an affordable payment plan setup,” they said. “Trying to set up a payment plan on your own with the IRS is a nightmare. Hours of calls, endless paperwork …”

» MORE: How to file back taxes

Alternatives to an IRS payment plan

The IRS payment plan is not the best solution for everyone. While it provides a structured way to pay off tax debt over time, it may not be viable for people who can't afford the monthly payments or who may benefit from other options.

Some of these alternatives include:

• Offer in Compromise (OIC): This allows you to negotiate with the IRS to pay less than what you owe. This option requires meeting strict criteria and can be a lengthy process, but it can be worthwhile for people with high amounts of tax debt.
• Apply for Currently Not Collectible (CNC) status: If approved, this would temporarily halt collection activities until your financial situation improves.
• Use a personal loan or credit card: These options could allow you to pay off the debt immediately. But keep in mind that they often come with interest rates and possible fees, which could increase your overall debt.

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Bottom line

An IRS payment plan or installment agreement can be a useful tool for managing tax debt. However, it's important to carefully consider the pros and cons before you apply. If you're unsure whether a payment plan is right for you, consult a tax attorney or tax relief professional for guidance.