Simply not seeing a way you can make your tax payments on time? Sometimes there’s just no way to pay the government in full and on time every year. Luckily, the IRS thought of this ahead of time. They allow you to set up an IRS payment plan.
However, while the government doesn't pay you interest on the money they owe you if you get a refund, they do charge you interest when you set up an IRS payment plan. (Doesn't seem fair, does it?) This is the penalty you pay for not getting rid of the whole debt at once. This interest can run at 5%, with an additional failure to pay penalty of 1% per month. This is on top of the fee you will have to pay just to set up the plan, which is $52 for agreements automatically deducted from your bank account, and $105 for an agreement paid any other way. In other words, an IRS payment plan can mean a big additional amount on top of what you already owe to Uncle Sam.
Pros and Cons of an IRS Payment Plan
On one hand, an IRS payment plan can help anyone who simply does not have the money to pay their taxes. This can include someone who has suffered a job loss or personal tragedy, or a business owner who's profits are sharply down.
On the other hand, failing to pay taxes can become a chronic problem. In fact, if you accrue other fees, such as failing to file a return in the first place, the IRS can also charge you penalties that can increase your tax bill by 25% or more for a single year. Combine this with the fact that the IRS will let you pay your taxes over a three year period, and some people fall deeper into the tax hole year after year.
Nonetheless, sometimes an IRS payment plan is in order just to stay afloat after a bad year. In this case, make sure to set up the best possible IRS payment plan you can. Figure out exactly how much you can pay each month without going under. However, don’t say you can pay more than you owe simply to get approved. Once the IRS payment plan is locked in, more penalties apply if you fail to live up to the terms you and the IRS agreed on.