Can Taxes Be Paid in Installments? Understanding Payment Options
If you're faced with a big tax bill that you aren't sure you can afford, you might be looking for options of how you can pay it. Can taxes be paid in installments?
You’re in luck. The IRS offers installment plans on tax bills for those who qualify.
The IRS offers short-term and long-term payment plans.
According to the IRS website, taxpayers should request a payment plan if they don't think they can’t pay their taxes in full within the extended time frame. The IRS offers short-term payment plans and long-term payment plans.
With the short-term payment plans, you have up to 180 days to pay your taxes, and you aren’t charged a setup fee. You still have to pay interest on the tax amount until it's paid in full.
Long-term payment plans are paid in 72 monthly installments.
Long-term payment plans are for taxpayers who can’t pay their tax bill off within 180 days. Under a long-term payment plan, you gradually pay off your tax bill in monthly installments over a maximum of 72 months. The amount of your payments is based on how much you owe on your tax bill.
The minimum amount that the IRS will require you to pay each month equals how much you owe divided by 72. For example, if your tax bill is $10,000, your monthly installment payments will be about $139. You can choose to pay more than this, but you can’t pay less than this amount.
What are the fees for tax installment plans?
There's a $31 setup fee for a long-term payment plan done through a DDIA (Direct Debit Installment Agreement). The fee can be waived for low-income taxpayers. Low-income taxpayers are those whose adjusted gross income is at or below 250 percent of the federal poverty level. In 2022, the federal poverty level is $32,200 for an individual, $54,900 for a family of three, and $88,950 for a family of six.
If you prefer that your tax installment payments aren't automatically withdrawn from your account, the added flexibility of when and how you pay your bill is going to cost you. The setup fee increases to $149, and even low-income taxpayers will have to pay a $43 setup fee.
You still have to pay interest on taxes due.
No matter how you choose to pay your tax bill, you're still responsible for paying the interest on the amount you owe until the balance is paid. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily.
You’ll face penalties for not filing or not paying taxes.
Whatever you do, don’t neglect to file your taxes if you think you owe money. The IRS failure-to-file penalty will charge you 5 percent of your unpaid taxes for each month that your tax return is late. That penalty can go as high as 25 percent of your due taxes.
If you file your return but don’t pay the taxes you owe, the IRS will charge you a failure-to-pay penalty of one-half of 1 percent for each month that you don’t pay your bill up to a maximum of 25 percent of the tax amount due.