IRS Installment Agreements Interest Rate & Penalties

By Shari Caudill
The IRS offers taxpayers the opportunity to pay off the balance via payment installments over three to six years.
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Debts to the Internal Revenue Service (IRS) can add up quickly. Not only must you pay the tax you owe, but you face penalties and interest. Ignoring the debt will not make it go away. The IRS can seize checking, savings and retirement accounts, attach your wages, and seize all of your personal belongings. The IRS offers taxpayers the opportunity to pay off the balance via payment installments over three to six years, depending on various factors.

Filing

Even if you cannot pay the amount of taxes that are due, you must still file the return on time. Failing to file a return can result in criminal charges.

The IRS recommends you take out a loan and/or a cash advance on your credit cards. According to the IRS website, the interest rate and any applicable fees charged by a bank or credit card are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code.

If you are unable to pay the balance immediately, an IRS agent can grant you up to 120 days to raise the amount due. No fees will be charged during this grace period.

Fees

The IRS charges a one-time fee of $105 for an installment agreement. The fee is reduced to $52 if you agree to make your payments via direct debit from a bank account.

An Application for Reduced User Fee for Installment Agreements can be filed to have the user fee reduced to $43. Only those with an income at or below 250 percent of the U.S. Department of Health and Human Services poverty guidelines qualify.

If the agreement must be restructured at any point, the taxpayer must pay a $45 fee regardless of income level or payment method. The $45 fee is also charged for reinstatement of the agreement. Reinstatement becomes necessary if the taxpayer defaults on the agreement by missing a payment.

Interest

If you fail to file on time, you will be charged a penalty of 5 percent of the tax that is due and 5 percent per month for each month the return is late.

In addition to the penalty fees for filing late, the IRS charges an additional 1/2 of 1 percent for each month the tax is due. Once an installment agreement is in place, the monthly interest changes to 1/4 of 1 percent. The maximum charge is 25 percent.

If the tax return that was due prior to Dec. 31, 2008, but was not filed within 60 days, there is a minimum penalty of the smaller of $100 or 100 percent of the taxes.

The minimum penalty for a return that was due after Dec. 31, 2008, the minimum penalty is the minimum of $135 or 100 percent of the amount due.

About the Author

Shari Caudill began writing professionally in 1985 with the "Portsmouth Daily Times." Her work has also been published in the "Community Common" and "Cleveland Plain Dealer." Caudill has a writing certificate from the Institute of Children's Literature and a photography certificate from the New York Institute of Photography.