Do you have a client who can’t pay their tax bill? You may need to help them set up a payment plan with the IRS. A payment plan, such as an installment agreement, generally decreases penalties and prohibits the IRS from levying assets.
Read on to learn how to help clients set up a payment plan with the IRS.
What is an IRS payment plan?
A payment plan with the IRS is an agreement a taxpayer makes with the agency to pay owed taxes over an extended period.
Taxpayers set up a payment plan if they cannot pay their balance in full when it’s due. Unpaid taxes are subject to interest and a monthly late payment penalty. There is also a penalty for late tax returns.
Owing taxes is stressful. Your clients may turn to you to help them set up an IRS payment plan. You can advise your client on eligibility requirements, explain options, and help them set up the payment plan.
There are two types of IRS payment plan options:
- Short-term payment plans: For taxpayers who can pay their tax bill within 180 days. There is a $0 setup fee, and taxpayers have several payment options (e.g., EFTPS).
- Long-term payment plans (installment agreements): Monthly payment plans for taxpayers who need more than 180 days. The setup fee depends on how you apply and how your client pays their monthly installment.
Does the IRS charge interest and penalties on payment plans?
Yes, the IRS charges interest and some penalties on payment plans. Payment plans can help reduce penalties.
In addition to interest and penalties, long-term payment plans also have a setup fee. This setup fee covers the cost of processing installment agreements.
How much is the setup fee?
Again, the installment agreement setup fee depends on how you apply and how your client pays their monthly installment.
Use this chart to determine the setup fee your client will owe:
| Payment Option | Setup Fee (For Those Who Apply Online)* | Setup Fee (For Those Who Apply by Phone, Mail, or In-person)* |
|---|---|---|
| Direct Debit (automatic monthly payments from checking account) | $31 | $107 |
| Checking or savings account (individuals only), EFTPS, check, money order, or debit/credit card | $130 | $225 |
Sole proprietors and independent contractors should apply for a payment plan as individuals.
*The setup fee is reduced or waived for low income individual taxpayers.
There is no setup fee for short-term payment plans.
How to set up a payment plan with the IRS for a client
Setting up a payment plan with the IRS can help your clients manage their tax debts. You can set up a payment plan for your client using the following steps.
1. Discuss options with your client
How quickly can your client pay their tax liability? Does your client qualify for alternative arrangements with the IRS? These questions will help you and your client choose a plan that works for their situation.
Choose a short-term payment plan if your client can pay the full amount owed—including taxes, interest, and penalties—within 180 days. Otherwise, your client likely needs to make monthly payments through an installment agreement.
Other payment arrangements that may be available to your clients include:
- Offer in compromise (OIC): An OIC is an arrangement that lets a taxpayer settle their debt for less than the amount owed. Your client may qualify based on their ability to pay, income, expenses, and asset equity. You can learn more about OIC information here.
- Undue hardship extension: Your client may qualify for an extension if paying certain taxes (e.g., income or self-employment taxes) will cause them “undue hardship.” Your client must show that paying taxes on the due date will result in a substantial financial loss. Review Form 1127 for more information.
2. Ensure you can represent your client
You can handle the payment plan application and all communication with the IRS if your client authorizes you to represent them before the IRS.
Your client must fill out Form 2848, Power of Attorney and Declaration of Representative. As your client’s Power of Attorney, you will be able to apply online for a payment plan on your client’s behalf.
3. Gather information from your client
You must gather the necessary information from your client to help them set up a payment plan:
- Name and contact information
- Taxpayer identification number (Social Security Number or Employer Identification Number)
- Bank account and routing number (if setting up Direct Debit)
- Income, expenses, and tax debt details
4. Request the installment agreement
You or your client can request a payment plan online, by mail, or via phone:
- Online: Online Payment Agreement tool
- Mail: Complete Form 9456, Installment Agreement Request, and mail to the IRS
- Phone: Call 800-829-1040 (individual), 800-829-4933 (business), or the phone number on your client’s bill or notice
Applying online is the fastest way to receive your client’s payment plan application determination. But there are limitations to who can apply online.
Taxpayers and their representatives can apply online if the:
- Individual taxpayer—including sole proprietors and independent contractors—has a total balance of less than $100,000 (short-term payment plan). The taxpayer has 180 days to pay the balance.
- Individual taxpayer—including sole proprietors and independent contractors—has a total balance of less than $50,000 (installment agreement). The taxpayer can make monthly payments for up to 72 months.
- Business taxpayer has a total balance of less than $25,000. The taxpayer can make monthly payments for up to 24 months.
You and your client will select what payment option they want to use as well as the date they want to pay each month.
The IRS encourages taxpayers to set up payments using Direct Debit (automatic bank withdrawal) to reduce the chance of default and decrease the setup fee.
Make sure to comply with IRS requirements. Individual taxpayers must set up a Direct Debit Installment Agreement if the balance owed is over $25,000. Businesses must set up a Direct Debit Installment Agreement if the balance is over $10,000.
5. Wait for outcome
Online: The IRS immediately notifies you whether they approved your payment plan application.
Mail: The IRS typically lets you know if the agreement is approved or not within 30 days of receiving the request. During this 30-day window, the IRS’s time to collect is typically suspended or prolonged. If approved, the IRS will send a notice that lays out the terms of your client’s agreement and requests the setup fee.
6. Ensure your client makes timely payments
Advise your client to track payments so they are timely. Your client will not need to worry about scheduling payments if they are set up with Direct Debit (automatic bank withdrawals), but they will need to have enough money in their account to cover the withdrawal.
Talk to your client about revising their payment plan if their financial situation changes.
What if my client wants to revise their payment plan?
Taxpayers can revise their payment plan—including plan type, payment date, and amount—online or by calling the IRS.
- Online: Your client can use the Online Payment Agreement tool to make changes online. You can log in and make changes on your client’s behalf if you are an authorized representative (Power of Attorney).
- Phone: Your client can call the IRS at 800-829-1040 (individual) or 800-829-4933 (business) if they cannot revise their agreement online. You can call on their behalf if you are authorized.
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This is not intended as legal advice; for more information, please click here.