Pros and cons of IRS payment plans

Pros of an IRS payment plan

While an IRS payment plan is not the perfect or most affordable solution for paying your tax debt, there are many benefits to using one. Plus, if the choice is between not paying taxes or using an IRS payment plan, the latter will keep you out of trouble.

• Automatic approval: Taxpayers can get automatic approval if they owe less than $10,000 when they apply online.
• Customizable: You can select from different repayment plan options, choose your monthly payment amount and change your plan if needed. You can also decide to pay the balance in full if your financial situation improves.
• More time: Setting up a payment plan with the IRS gives you up to 72 months to pay back taxes. If you can’t repay this debt within six years, the IRS might grant you one more year to modify your expenses.
• Avoid failure-to-pay penalties: The failure-to-pay penalty is 0.5% each month, up to 25% of the amount of unpaid taxes, until the balance is fully paid.
• Statute of limitations: Entering an installment agreement causes the IRS statute of limitations to start tolling. After 10 years, the agency can’t attempt to recover the debt.

Cons of an IRS payment plan

The biggest drawback to setting up an IRS payment plan is that there are still fees, interest and penalties involved.

“Penalties for failure to pay are normally 0.5% per month, and interest is determined by IRS proclamation, and for the first quarter in 2023, the interest rate is 7% per annum but calculated monthly,” said Kevin Matthews, a certified public accountant and accounting professor at George Mason University.

Other cons include:

• Not everyone qualifies: You are disqualified from tax payment plans if you haven’t filed the current year’s taxes. You are also ineligible to enroll in certain programs if you have an open bankruptcy proceeding or owe more than $100,000.
• Enrollment fees: Sign-up fees can total up to $225, though most fees are significantly less if you sign up online. Keep in mind that the IRS charges additional fees to pay with a credit card.
• Vulnerable to liens: Entering into a payment plan or installment agreement doesn’t always stop the IRS from filing a federal tax lien against you.

» MORE: How to set up a payment plan with the IRS

When to get tax relief help

A common mistake of many taxpayers is that they don’t reach out for help when they need it.

“Setting up the payment plan is easy if the amount owed is under $50,000 [for] individual taxpayers,” said Matthews. “An online process exists to accomplish this.”

However, for those who have more than $50,000 in tax debt or are struggling to set up an IRS payment plan on their own, a tax attorney or tax relief professional can help. Yes, this will add an additional fee to your expenses, but it can save you a lot of stress and time in the long run.

One ConsumerAffairs reviewer owed over $100,000 in tax debt from their time as a 1099 contractor.

“[The tax relief professional] quickly got a stop put on all IRS collection efforts while he worked with them to get an affordable payment plan setup,” they said. “Trying to set up a payment plan on your own with the IRS is a nightmare. Hours of calls, endless paperwork …”

» MORE: How to file back taxes

Bottom line

An IRS payment plan or installment agreement can be a useful tool for managing tax debt. However, it's important to carefully consider the pros and cons before you apply. If you're unsure whether a payment plan is right for you, consult a tax attorney or tax relief professional for guidance.