When Tax Debt Looms Large: IRS Offers Payment Relief

Last Updated Apr 13, 2011 7:48 AM EDT

A few days ago I wrote about what to do if you owe the IRS and how to pay tax over time for folks who can't afford to pay in one lump sum.

Some folks end up owing a significant amount of additional tax. If you owe more than $25,000, the IRS's Online Payment Agreement Application may not be an option.

But you may still be able to request and qualify for a payment plan. The process requires filing several additional forms. You'll need to attach a completed Collection Information Statement, Form 433F and include a payment proposal on a Request for Installment Agreement, Form 9465 with your tax return. The IRS will reply with a written notification letter explaining the proposed payment terms have been accepted or need to be changed.

The IRS charges a user fee for setting up an installment agreement of up to $105 ($52 if payments are set up to be automatically deducted from your bank account, and even less for folks with incomes below certain levels.) You have up to five years to pay under the Installment Agreement and you'll have to pay all future taxes in full and on time.

You'll pay penalties and interest on the taxes you owe until the agreement is paid off.

Depending on your individual circumstances, the IRS could offer a payment plan at a reduced interest rate. Also, as a condition of the installment agreement, any future tax refunds will be automatically applied against the amount you owe until the balance is paid off.

If the IRS determines that you cannot pay your tax debt, they may temporarily delay collection until your financial condition improves. During the payment delay, your tax debt will continue to increase due to the penalties and accrual of interest until your balance is paid in full. The IRS may also file a Notice of Tax Lien to assert the government's interest in your assets. But recently the IRS is more lenient on tax liens.

Check back in later this week and I'll write how to settle a tax debt with the IRS.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.