| August 29, 2016

IRS Revises Installment Agreement Fees

Online payment convenience may also mean lower fees.

Crunching numbers on installment agreement fees

The Internal Revenue Service (IRS) has proposed a new fee structure for installment agreements that, if approved, would take effect January 1, 2017 and could have a notable impact on the fees taxpayers have to cover to enter into an installment agreement. What’s more, taxpayers who opt to use online payment services could be in for a happy discount on fees just for using those kinds of services.

An installment agreement (IA) is a repayment plan you can enter into with the IRS to repay back-taxes from one or more years that were unpaid. The IA breaks up tax debt into manageable monthly payments that work for your budget. If you owe multiple years of back-taxes it can consolidate them into a single simplified repayment structure. So with the signoff of the IRS you can pay back everything you owe with penalties and interest in a way that works for your budget.

What the IRS wants to revise is the fee structure that applies to IAs. To set up an IA you have to pay a certain fee. Even if you’re facing financial distress or have low income, the IRS  is required by law to charge a fee, although the IRS takes steps to reduce or eliminate fees when they can to encourage repayment.

Those efforts will continue and the IRS will continue to subsidize part of the cost for low-income taxpayers. However, they hope this new fee structure will eliminate some of the complexity in the current system.

Bad news for traditionalists

There’s an upside and a downside to this new structure. Starting with the downside, standard fees for installment agreements set up in person, over the phone or by mail are actually set to increase. Fees can currently be up to $120.

Under the new system a regular installment agreement would have a fee of $225. Restructured or reinstated installment agreements would have an $89 fee, if you have to add another year into your IA or reinstate an IA that lapsed due to nonpayment.

If like setting things up in person or over the phone, then plan to make your payments by mail you can expect to pay more next year OR you have to change your payment preferences to be more technology based. Why? Because while there are ways to cut the fees you owe, most are based around jumping online.

Good news for online banking lovers

If you prefer to do everything online these days, the IRS not only seems to agree with you, they’re giving you incentive to do so in the form of lower fees.

  • If you set up your IA in person, over the phone or by mail, but sign up for direct debit to transfer payments automatically from an account to the IRS, your fee drops to $107 instead of $225
  • If you set up your IA online, you pay $149 instead of $225
  • If you set up your IA online AND set up direct debit, then your fees drop all the way to $31

Direct debit is the opposite of direct deposit that most employers use to transfer paycheck amounts directly into your bank account. Direct debit is where you automatically make payments, in this case for your IA.

Essentially, the IRS is giving you incentive to use online automated systems that cut out a need for an agent to review your agreement or process your payments. They save on cost of manpower, which they’re transferring on to taxpayers who opt to use these services.

Low-income rates and potential for reduction

The proposal sets fees for low-income at $43. However, given that fees drop significantly for online signup AND for direct debit, it seems to follow that a low-income taxpayer who signed up for an IA and set up direct debit would pay less. This is, in part, likely how the IRS plans to continue to ensure a fair, payable system for people with an extremely limited budget.

Fees for low-income IAs set up online with direct debit were not specifically outlined but the IRS also reassures, it “will continue subsidizing part of the cost of providing installments agreements to low-income taxpayers.”

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