Key Differences between Short-Term and Long-Term IRS Payment Plans

Key Differences between Short-Term and Long-Term IRS Payment Plans

• Oct 01, 2021

Paying taxes is certainly never enjoyable. But when that tax bill is much larger than you expected, you might find yourself without the funds to pay it off by the deadline. What can you do when you can’t afford your taxes? Your best course of action is to openly approach the IRS and discuss your options for a payment plan. Here’s what you need to know about both short-term and long-term payment plans, so you can determine which option might best fit your needs.

Your First Step: Be Straightforward about Your Needs

First and foremost, we cannot overstate the importance of being straightforward regarding your ability to pay your taxes. When taxpayers make a sincere effort to settle their tax debt, the IRS is often very willing to work out a payment plan; but if you simply avoid filing your return or don’t pay without trying to work out a method for repayment, things can become very messy very quickly.

As soon as you are aware of your tax bill and your own inability to pay it in full, you should reach out to the IRS or apply for a payment plan, either via the IRS’s website or through your CPA. Making a good-faith effort to settle your tax debt significantly improves your situation with the IRS.

Important Details for Short-Term Payment Plans

A short-term payment plan is also called an extension of payment. Much like an extension for filing your taxes, a short-term payment plan simply gives you more time to pay your tax bill—up to 180 days, to be precise. Individuals can apply for a short-term payment plan online without having to pay a setup fee. You can also apply by phone, mail, or in person.

It’s important to choose your application method carefully, based on when you believe you will be able to pay your debt. While the online application is certainly convenient, it’s currently limited to a 120-day extension on your payment. If you need more time than this, you’ll need to apply by phone, mail, or in person to get the full 180-day extension.

While you do have more time to pay, you will have to pay for accrued penalties and interest on your taxes until the balance is paid in full, so it’s to your benefit to pay the tax debt off as quickly as you can. Individuals on a short-term payment plan can pay directly from a checking or savings account, electronically online, over the phone after enrolling in the Electronic Federal Tax Payment System, or by check, money order, or credit/debit card.

You can make the payments in installments over time, or pay in a lump sum once you’ve accumulated all the necessary funds. Again, please note your debt will be adding penalties and interest each month, so if you can pay a large portion early on, it’s best to do this to reduce those fees while you try to gather the remaining amount you owe.

Important Details for Long-Term Payment Plans

A long-term payment plan is also called an installment agreement, and as the name implies, involves setting yourself up to pay regular installments to the IRS over an extended period of time. There are actually two separate types of installment agreements.

The first is called a Direct Debit Installment Agreement, or DDIA. This type of payment plan involves setting up automatic monthly payments to the IRS from your checking account. If you apply online, this plan requires a $31 setup fee; applying by phone, mail, or in person involves a $107 setup fee, though this fee can be waived for low-income individuals.

The second installment agreement does not set up the automatic drafts from your accounts, which means you’ll have to remember to make the payments each month via the same methods we mentioned for short-term payment plans. A long-term payment plan without direct debit costs more to set up: $149 to apply online, or $225 to set up via phone, mail, or in person. For low-income individuals, the setup fee is $43, which can be reimbursed if certain conditions are met.

Regardless of which type of long-term payment plan you select, you’ll also need to pay accrued penalties and interest until the amount is paid in full. However, if this is your first time on an IRS payment plan, you can request a first-time abatement of those fees once you’ve paid off your initial tax debt.

If you need assistance applying for an IRS payment plan, contact the IRS Advocates today. We’ll support you throughout the process and be your advocate in settling your tax debts.