Have you been faced with a large tax bill and do not have the funds to pay the entire balance? Do you have prior tax returns that have not been filed and there are outstanding balances calculated by the IRS? There is a solution to this dilemma. The important thing to remember is that the entire installment agreement process with the IRS needs to be broken down into steps and each step needs to be addressed before an installment agreement can be approved by the IRS.
The first and most important step is to ensure that the current tax year and all prior tax years returns are filed. The questions that come to mind are: I do not have a copy of my W-2 from prior years or I do not know how much interest I earned on my bank account. There is a simple solution to these issues. Your tax advisor can obtain the wage/income information reported to the IRS under your social security number. To do this, your advisor will discuss Form 2848 (Power of Attorney) with you. Form 2848 allows your advisor to obtain this missing information for you and relieve the stress of digging through old documents to locate these items.
It may take the IRS six to eight weeks to process the prior year(s)’ tax returns. Any outstanding tax returns must be on file with the IRS before the installment agreement process can begin. During this time, it is important to discuss with your tax advisor the amount that you will be able to pay each month to the IRS, the length of time that you expect it will take for you to pay off your debt to the IRS and the day of the month that you plan on making the payment.
Once the IRS processes all current and prior year tax returns, your tax advisor can assist you with setting up the installment agreement process, or you can choose to apply for the installment plan yourself. You or your advisor may apply by walking into your local IRS offices (just make an appointment first!), by phone, by U.S. mail or applying online. If choosing to apply by phone, U.S. mail or in person, please fill out Form 9465, Installment Agreement Request. If you would rather apply online, visit the Online Payment Agreement tool. Some of the information you should have on hand when applying includes:
- Current mailing address (if any changes since filing of tax returns)
- Current contact phone numbers
- Your and your spouse’s (if applicable) social security numbers
- Total tax due by tax year
- Amount you plan to pay initially with the application
- Bank account routing number and checking account number if paying by automatic debit
- Amount that you are planning to pay each month
- The day of the month for payment
- The length of the agreement
If you choose to pay by check (assuming you are not required to pay by automatic debit), please make sure you include the following information on the memo field of your check:
- Your social security number
- The tax year the debit is applied to (please use the oldest unpaid tax year)
- The phase “Form 1040”
There is a user fee to setup an installment agreement. The amount of fee depends on the payment plan chosen and if your application was made online or not. It is cheaper if you apply online!
Some final items to be aware of are:
- Penalties and interest continue to accrue until the entire balance is paid in full
- Any future refunds will be applied to the oldest outstanding balance
- Any amounts remaining will be refunded to you
- You must pay by debit for individual income tax due that is greater than $25,000 or for businesses that owe more than $10,000
- You can view your current amount owed and payment history by viewing your tax account. Viewing your tax account requires identity authorization with security checks. Allow one to three weeks (three weeks for non-electronic payments) for a recent payment to be credited to your account.
- No payment agreement may mean no passport! Effective 2015, your passport may be revoked or denied if you owe the IRS more than $50,000 and are not entered into an agreement to pay.
If you have any additional questions, please contact your Henry+Horne tax advisor.
Danette Holguin, EA