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How an IRS payment plan works

For those who are unable to make their tax payments all at once, an IRS payment plan may be the preferred option.

People in Massachusetts who do not have the money on hand to pay off their taxes all at once may be concerned about the consequences. In circumstances like this, avoiding contact with the IRS and failing to pay at all can lead to severe penalties. Fortunately, there is another option. By setting up a payment plan, individuals can maintain their financial integrity while still satisfying the requirements of the IRS. So how do IRS payment plans work, and what are the advantages and disadvantages?

Short-term payment plans

Depending on which payment plan someone chooses, there may be fees and costs associated with it. The payment plan that allows someone to avoid a startup fee is known as a short-term payment plan. Only individual taxpayers are eligible for a short-term plan, which means that businesses will need to look at a long-term plan. To qualify for a short-term payment plan, an individual must be able to pay off the full amount owed in 120 days or less. While there is no startup fee involved with this, there will still be accruing interest on any balance that remains unpaid, and penalties may be assessed for late payments.

Long-term payment plans

A long-term payment plan is for businesses, but it can also be used by individuals who will not be able to pay off the full amount owed within 120 days. There are different setup fees for this kind of plan depending on how someone goes about the application process and what form of payment he or she elects. For those choosing to pay by debit card, money order, check or through the Electronic Federal Tax Payment System, or for individuals choosing to use Direct Pay, the setup fee to apply in-person, by mail or by phone is $225. Applying online can reduce the setup fee to $149. Those who meet certain low-income requirements may be able to pay a reduced fee of $43.

Anyone who chooses to pay through Direct Debit can expect to pay a $107 setup fee if applying in-person, by mail or by phone. The fee to apply online for this payment option is $31. Low-income individuals applying for this payment option may be able to have the setup fee waived. In any case, people who choose the long-term payment option will still need to pay interest and any accrued penalties.

While people do get to choose how much they can pay each month, those who do not choose will be assigned a minimum payment amount equal to the total amount owed divided by 72. Negotiating with the IRS can be tricky, and some people may wish to dispute the amount they are told they owe. In cases like these, it may be helpful to contact an attorney in the local area who practices tax law.