When you’re staring down a tax bill from the IRS, the stress can swallow you whole. For many taxpayers, an installment agreement offers a good path forward. The agreement allows you to spread your payments over a period of time. This means you can tackle your debt in bite-sized chunks.
What the IRS Looks For
The IRS will not let you choose any number you want. Instead, they calculate your ability to pay based on your disposable income (i.e., what’s left after covering necessary living expenses). You’ll need to complete a form that outlines your income, assets, and expenses.
But here’s the catch: the IRS doesn’t always use your actual costs. They rely on standardized allowances. If your expenses exceed the allowance, you may need to justify the difference. Luckily for those under $50,000 in debt, you may qualify for a streamlined agreement, which comes with fewer hoops to jump through in this regard. For larger debts, though, expect a deeper dive into your finances.
How to Find a Number That Works
Begin with a clear-eyed assessment of your income and spending. Be honest and detailed. Use the IRS’s online Payment Plan tool and its published standards to estimate your disposable income.
Then, aim for a monthly payment you can both realistically afford and stick to. If your calculation shows $550 in disposable income, consider proposing $450. This leaves room for unexpected costs. Whatever amount you propose, keep thorough documentation. The IRS may request bank statements, pay stubs, or bills to verify your claims.
When Exceptions Apply
There are situations where the IRS may show flexibility. If you’re facing serious financial hardship, such as job loss, medical issues, or a natural disaster, you may qualify for a partial payment installment agreement. This lets you pay less than the full amount over time, based on your current ability to pay.
Businesses can also seek temporary relief if they’re facing a short-term cash flow crunch. In either case, be prepared to provide detailed evidence, such as bank records, medical bills, or other relevant documentation, that supports your request.
Moving Forward
The right monthly payment satisfies the IRS without putting your finances in a chokehold. Taking time to get it right can save you from bigger problems down the line. If you’re unsure where to start or want guidance through the process, reach out to the experts at Highland Tax Group.