If you’ve found yourself facing an overwhelming tax bill, you may need to set up a payment plan with the IRS. Currently the IRS payment plan interest rate is 0.25% per month (equal to an annual rate of 3%).
Installment Agreement Interest Calculation by Amount Due
The ultimate amount of interest you will pay is based on the amount you owe. The figures below are based on the current IRS interest rate of 3% as of 2022.
Note that the interest calculations above do not include additional penalties that will accrue if you do not file your tax return by the deadline (or extended deadline if you filed an extension). These penalties be up to 5% of the amount due.
For taxpayers with $5,000 in IRS debt, the annual amount of interest is $150.
For taxpayers with $10,000 in IRS debt, the annual amount of interest is $300.
For taxpayers with $20,000 in IRS debt, the annual amount of interest is $600.
For taxpayers with $50,000 in IRS debt, the annual amount of interest is $1,500.
When Does the IRS Begin Charging Interest?
The IRS calculates interest on any balance due from the original due date of your return. Filing an extension extends the amount of time you have to file the return, but it does not extend the time you have to pay the return.
If you were required to pay estimated tax payments but underpaid them, you will incur interest on the underpaid amount from the due date of the estimate.
The IRS calculates interest on a daily basis, so if you realize you have missed a payment, you can make a payment as soon as your remember and will only pay interest for the exact number of days you are late.
Installment Agreement Fees
There is no fee to make an ACH payment to the IRS for the entire balance due. The payment can be scheduled through IRS.gov.
Short-Term Payment Plan
You can set up a short-term payment plan if you can pay the entire balance due within 180 days. There are no fees for a short-term payment plan.
Long-term Payment Plan (Installment Agreement)
For payment plans over 180 days, there is an initial $130 fee if you set up the plan online using the IRS online portal. If you setup your payment plan over the phone, the fee is $225. For low-income tax payers, there is a reduced fee of $43 which may be waived depending on your personal circumstances.
Change an Existing Payment Plan
The fee to change an existing payment plan online is $10. If you need assistance over the phone, the payment plan fee increases to $89.
Credit Card Fees
Fees will apply to any payment made by credit card. Credit card payment fees range from 1.87% to 1.98% of the payment amount.
How Much Will My Monthly Payment Be?
Your monthly payment amount is calculated on the balance due. Higher IRS debt amounts will result in higher payments, although all balances are subject to the same interest rates.
The long-term payment plans for balances under $50,000 can receive streamline approval for 72 month repayment plans.
For taxpayers with $5,000 in IRS tax debt, the monthly payment is $75.97.
For taxpayers with $10,000 in IRS tax debt, the monthly payment is $151.94.
For taxpayers with $20,000 in IRS tax debt, the monthly payment is $303.87.
For taxpayers with $50,000 in IRS tax debt, the monthly payment is $759.68.
For balances greater than $50,000, taxpayers will need to negotiate repayment terms directly with the IRS.
What if I Can’t Afford to Make a Monthly Payment?
If you can’t make your monthly payment on your IRS payment plan, you should contact the IRS immediately to request a reevaluation of your payment amounts. You will be required to provide proof of financial hardship.
When you find yourself with a log of back taxes but without the ability to pay, you should consider making an offer in compromise which reduces the amount of tax you owe. The IRS will perform a full analysis of your current financial position and determine the amount they expect to collect from you.
A tax resolution firm can assist you through the process of filing an offer in compromise and negotiating with the IRS.
How to Reduce the Amount of Interest and Penalties Due
Making the largest payments you can as soon as possible with minimize the interest and penalties charged on your account.
Penalties for late payment can make up a significant portion of your balance due with the IRS. The IRS does allow relief for first time late filings and payments. To qualify for first-time penalty abatement, you must have:
- Not have any incurred any penalties for the previous 3 tax years.
- Be current on your tax filings (or extensions).
- Paid all taxes due or be current on any existing payment plans.
Example: If a taxpayer owes $20,000 in outstanding taxes to the IRS, the late payment penalty is 0.5% for each month or partial month that the debt is outstanding up to a maximum of 25%. Each month month you will accrue a penalty of $100. After 50 months, you will have the maximum late payment penalty of $5,000. If you meet all the criteria above, you will be eligible to have the penalty removed under the first time abatement and save up to $5,000.
Questions about allowances on Form W-4? We have the answers.
For short-term payment plans lasting less than 180 days, there are no fees. For long-term plans, the standard fees range from $43-$225 depending on your financial circumstances and whether you set up the plan online or over the phone.
No, you will be charged a 0.25% per month interest rate on any outstanding debt included in your IRS payment plan.
The IRS considers any payment plan over 180 days a long-term payment plan. For balances less than $50,000, the IRS has a streamlined approval process for 72-month repayment plans.
The IRS does not report tax debts to credit agencies, so outstanding tax debt does not affect your credit score.
The minimum payment the IRS will accept is your balance due divided by 72.