By Bonnie Lee
Published February 17, 2011, FOXBusiness.com
If you owe current year taxes or liabilities from prior years, you may want to consider setting up an installment agreement with the IRS.
But know this: It’s a revolving payment arrangement and the interest and penalties that accompany the unpaid balance can be killers. Not only that, but there is a one-time user fee (currently $52 for direct debit agreements and $105 for non-direct debit agreements).
If you qualify as a low-income individual, the fee is $43, and if you default on the agreement, the IRS will charge you a $45 fee to reinstate the agreement and they may consider seizing your bank account or garnishing your wages.
Even if you set up an installment agreement, The IRS may still file a Notice of Federal Tax Lien to secure the government’s interest until you make your final payment. This could play havoc with your credit rating.
So if mom, dad, your BFF, the local loan shark, or your banker, is willing to cut you a deal to front the balance owing, take it. You will be better off.
If you owe for the current year only and need less than 120 days to come up with the money, don’t bother applying for an installment agreement. Simply pay what you can with the tax return.Then over the course of the next several months, continue paying off the balance. During the first six months of delinquency, your account is handled by Simon, a giant IRS computer, which generates letters requesting then demanding payment. Simon is nothing to fear.
A real person at the IRS will not be assigned to your account until you have fallen very far behind. It varies of how long the IRS waits until they send someone a callin;’ I’ve seen the IRS loom like predators over some taxpayers and ignore others for years and years.
All that said, if you are still interested in setting up an installment agreement, the process can be fairly easy. If you owe less than $25,000, go to www.irs.gov and complete Form 9465. If you propose a monthly payment amount that will satisfy the debt within a three-year period, your request will likely be accepted automatically.
If the debt is your current year liability, attach the Form 9465 to the front of your tax return. To limit interest and penalties, send as much money as possible with the tax return. Make sure you indicate the tax year and your Social Security number on the memo line of the check.
There are other ways to request an installment agreement. To set up a plan online go to www.irs.gov and from the pull down menu, select “I need to set up a payment plan.” Or call the phone number on the most recent collection letter and set up one over the phone.
I normally recommend you low ball the proposed monthly payment. This will give you some leeway if you experience a lean month and you can always pay extra each month. Just don’t try paying any less than what you propose or you will hear from them.
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