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Setup Fees
You will have to pay a fee to set up the installment agreement. If you plan on having the payments automatically deducted from your account, you will be able to pay only $52. Otherwise, your fee will be $105 unless your income is below the government's poverty line by 250 percent or more. In that case, you can apply to pay only $43 (figures current in May 2011). In any case, the setup fee amounts to extra money you are paying the government—for the opportunity to pay the government.
Interest Fees
You will also have to pay interest on the taxes you owe. This interest rate will be compounded daily, based on the short-term federal funds rate. The IRS will add 3 percent to this federal funds rate to compute how much to charge you in interest. In most cases, it will add up to between 9 and 12 percent per year.
Late Fees
If you for some reason cannot make your payment one month, the IRS will charge you a "failure to pay fee." This will usually be .5 to 1 percent of the total balance that you still owe. If you forget your payment a few months, this can really add to the balance you owe the government.
Consider Other Options
With these factors in mind, you should consider other, less expensive options for paying your tax debt. For example, you might be able to secure a personal loan from a bank at a lower interest rate. You could also look into getting a home equity loan, which would almost assuredly be less expensive and provide you with a lower payment.
If you will be able to pay off the bill within 1 year, you might even
consider putting the balance on a credit card with a zero percent
introductory rate. This method can be dangerous if you do not pay the
balance off before the rate goes up, but if you can put yourself on a
strict payment schedule, you can avoid paying as much as you would
through the IRS installment agreement.
What is the smallest payment amount I can make on an installment agreement to the IRS?
The smallest payment you can make on an IRS installment agreement is
determined by the negotiations you, your lawyer or a judge carries out
with the IRS. The IRS approaches this determination using an "allowable
living expenses" measurement for your geographic area and family size.
Any amount not qualifying as an allowable living expense will be handed
over to the IRS each month. However, you and your attorneys can argue
for a lower sum. You will have to prove that the sum the IRS has
requested would place undue hardship on you, your family or your
financial situation.
Can the IRS change my installment agreement?
If you have missed a payment on your IRS installment agreement, you will be sent a form CP 521. This notice will include a deadline for you to
make the late payment, and it may also include details about fees and
interest you may be charged. The IRS can change your installment
agreement if you fail to make payments, and this CP 521 is the first
notice that a change may be pending. To maintain control over your
agreement, pay the past due amount by the date noted on this form.
Failing to act may lead the IRS to send your debt to collections and
alter your agreement.
What happens to an IRS installment agreement for a business if the company folds?
An IRS installment agreement is added to the total debts your company
owes when it folds. If you are not declaring bankruptcy, you will have
to pay the installment agreement in full prior to closing your business
books. If you are declaring bankruptcy, then a judge will determine the
order of importance of your debts. IRS debt is the most senior form of
debt. Judges are instructed to force the repayment of this debt,
typically by liquidating your business assets, prior to allowing you to
repay any other loans. If the IRS debt is in your name rather than the
business name, you may remain liable even after the bankruptcy has been
resolved on the business end.
