Direct Debit Installment Agreement

Types of IRS Installment Plans in Los Angeles

At the moment, the Internal Revenue Service offers four different types of installment agreements depending on how much you owe and your financial situation. They include guaranteed, streamlined, partial payment, and non-streamlined installment agreements.

1. Guaranteed Installment Agreement

This is available to individuals who owe $10,000 or less, excluding interest and penalties. It is also known as an automatic or basic installment agreement. The IRS guarantees approval of this agreement as long as you have filed all required tax returns and have not entered into an installment agreement within the past five years. If you apply for this, you must agree to pay the full amount of the debt within 3 years (36 months).

2. Streamlined Installment Agreement

Most taxpayers who qualify for a guaranteed installment agreement also qualify for a streamlined installment agreement. A streamlined installment has some requirements, including:

• Your tax liability, interest, and penalties must not be more than $50,000;
• You can pay off the balance within 6 years (72 months);
• Your proposed payment must be more than or equal to the “minimum acceptable payment,” which can be calculated by dividing the tax liability, interest, and penalties by 50.

3. Partial Payment Installment Agreement

Unlike other agreements where the goal is to pay off the full debt, partial payment installment agreements enable you to make monthly payments based on what you can afford. At intervals, the IRS will review your financial situation to check if it’s necessary to make adjustments to the payments. Because this payment plan focuses on what you can afford instead of the full repayment, it provides relief to individuals facing financial hardship.

4. IRS Non-Streamlined Installment Agreement

If you owe more than $50,000 but can stick to a monthly payment plan, a non-streamlined agreement might be a good option for you. Here, you will submit detailed financial information, including income, expenses, and assets, for the IRS to review. The IRS will calculate a monthly payment amount that aligns with your ability to pay based on the financial information you provided. Although this installment agreement takes more to set up, it helps those with large tax debts find a manageable way to make payments over time.

What Is a Direct Debit Installment Agreement?

A direct debit installment agreement (DDIA) is a payment plan with the IRS in which a taxpayer agrees to have the payments required for their monthly installments automatically withdrawn from their checking account. When you sign up for a DDIA, you give the IRS permission to withdraw a fixed amount from your checking account every month until your tax debt is paid off. Unlike other setups, this setup eliminates the need to schedule payments manually and avoids processing fees and misplaced payments that often happen when using other payment methods.

Applying for a DDIA is pretty straightforward. You can apply online through the Online Payment Agreement tool or by mail through Form 9465 (Installment Agreement Request). If you’re requesting a partial payment installment agreement, you’ll also need to submit Form 433-A Collection Information Statement along with details of your income and assets. The IRS may ask for additional documents depending on your financial situation. Taxpayers who prefer to apply by phone can also contact the IRS directly to request a payment plan.

In your application, you’d be required to provide your personal information together with your checking account number and your bank routing number. You’d also need to provide written authorization to initiate the automated payment withdrawal. 

Some taxpayers opt to set up their payments through 3rd party payment services like Stripe and PayPal instead of giving the IRS direct access to their bank account. These services act as intermediaries or middlemen and handle the payments while keeping the taxpayer’s banking details private. This can add an extra layer of security and simplify the process.

Who Qualifies for a Direct Debit Installment Agreement?

The IRS has specific eligibility rules for setting up a Direct Debit Installment Agreement (DDIA) based on the amount you owe. If your total balance, including tax, penalties, and interest, falls between $25,000 and $50,000, the IRS requires you to use direct debit for your payment plan. For balances under $50,000, you can set up a DDIA and spread your payments over a maximum period of 72 months. However, if you owe more than $50,000, you will need to submit a Collection Information Statement (Form 433-A) detailing your financial situation before the IRS will approve your request.

Businesses can also set up direct debit payments if their balance is between $10,000 and $25,000. The IRS allows businesses to make monthly payments for up to 24 months under this arrangement. Regardless of the amount owed, the IRS requires all applicants to be up to date on tax return filings, estimated tax payments, and any existing IRS agreements before setting up a DDIA.

Where and How Direct Debit Installments Are Used

Direct debit, also known as bank or ACH debit, isn’t just useful for tax payments. It’s a common payment method widely used across different industries to set up recurring payments.

• Government Payments: The IRS and other government agencies use direct debit installment agreements to collect taxes from non-filers. Taxpayers who owe a balance can set up automatic withdrawals to make their tax payments. Many states also offer direct debit options for state tax liabilities and other government fees.
• Loan Repayments: Direct debit is also quite popular in the financial industry. Banks and lenders rely on direct debit to automate everything from personal loans to mortgages and auto loans. It’s not rare to see lenders offering lower interest rates or incentives for setting up auto-pay as it reduces the likelihood of the borrower defaulting on their payments.
• Subscription Services: From Netflix to health insurance and gym memberships, direct debit plays a huge role in subscription-based services. Many businesses that run on a subscription model use automated payments to ensure continuous service while minimizing administrative costs. At the end of the day, it’s a win-win for everyone; the customers don’t have to manually process payments, and businesses can also reasonably predict their revenue.
• Business Payments: Businesses also use direct debit for supplier payments, software subscriptions, and recurring service contracts. Instead of issuing manual invoices or checks every month, some businesses simply choose to set up recurring payments to keep their operations running without glitches. This is especially common for SaaS (Software-as-a-Service) businesses, cloud storage providers, and other B2B services.

Benefits of a Direct Debit Installment Agreement

Opting for a Direct Debit Installment Agreement (DDIA) comes with several advantages. Here are some of its benefits:

1. Convenience: Paying your taxes manually every month means setting reminders, logging into the IRS portals, and double-checking the different payment details and required forms, all of which can increase the chance of human error. A DDIA removes this burden entirely. Once it is set up, it runs in the background, allowing you to focus on more important financial priorities so that you never have to worry about IRS deadlines or missed payments.
2. Lower Fees: If you’re paying by credit card, you’re likely dealing with processing fees as high as 1.5% to 3.5% per transaction. Over time, the fees add up. Even mailing a check comes with delays, you could easily default on your payment plan if you forget to set a reminder, and you could end up paying unplanned potential bank fees if any challenge comes up. A DDIA bypasses these costs by ensuring every dollar goes toward settling your tax balance rather than being taken up by administrative fees. Since the IRS directly debits your account, there are no extra transaction costs, which helps you save money.
3. Reduced Risk of Default: The IRS has no issue stepping in if you default on your payments. If you miss a deadline, you could be at risk of terminating the installment agreement, attracting penalties and interest hikes, and even triggering collection actions like a Notice of Federal Tax Lien from the IRS. When you set up a direct debit, you don’t need to worry about any of these. The IRS automatically takes out your payment from your account on the agreed date, effectively minimizing the risk of default on payment.
4. Improved Credit Impact: Although taxes do not directly impact your credit, federal tax liens reflect on public records and can make it difficult for you to get credit. A tax lien is a charge by the government on your property when you fail or refuse to pay your back taxes. With a direct debit installment arrangement, you can stay off the radar and maintain a clean sheet.
5. IRS Leniency & Better Negotiation Power: If you ever need to renegotiate your payment terms with the IRS, having a DDIA in place may work in your favor. The IRS prefers direct debits because they’re more reliable than manual payments, meaning taxpayers who opt for them might have an easier time modifying agreements or requesting penalty relief in the future.

How to Set Up a Direct Debit Installment Agreement

To set up a direct debit installment agreement, follow these steps;

1. Determine Your Payment Amount and Frequency

Before applying, calculate how much you can reasonably afford to pay each month. You don’t want to start off too high and get yourself in an uncomfortable place in the following months, neither do you want to go too low that you drag on your tax payments unnecessarily when they could have been paid faster. The IRS typically requires that you offset your unpaid balance within 72 months (i.e., six years) if your tax balance is less than $50,000. If your balance is higher, you may need to provide additional financial details to the IRS to qualify for a longer-term plan.

Be clear about when you expect to be debited as well as how long you want the arrangement to go on for. If you owe $5000 in taxes, for instance, you can decide to set a $100 withdrawal on the 30th day of every month for the next 50 months. The essence of DDIA is to offer you convenience while offsetting your tax debts, so consider your financial situation and choose what works for you.

2. Choose Your Payment Method and Bank Account

Now that you know how much you want to pay and how often you want to make payments, choose a payment method. Confirm that you don’t prefer mailed checks or payroll deductions for whatever reason over a DDIA. A DDIA requires you to link your checking or savings account to authorize automatic withdrawals. If you’re going with a DDIA, you want to make sure that the account you’d be linking to has sufficient funds each month to cover the payment, also make sure that the bank allows IRS debits.

3. Submit Your Application

You can apply for a DDIA through multiple channels:

• Online: Most taxpayers use the Online Payment Agreement (OPA) tool on the IRS website.
• By Mail: Submit Form 9465 (Installment Agreement Request) if applying offline.
• By Phone: Call the IRS directly to request an installment plan.
• For Businesses: Use Form 433-B instead of Form 9465 if you’re applying as a business entity.

If you’re applying for a partial payment installment agreement, include Form 433-A (Collection Information Statement) to supply details on your income, expenses, and assets.

4. Authorization and Verification

Once you’ve submitted your application, the IRS will verify your eligibility and request authorization to debit your account. To do this, you’d have to provide your bank routing and account number, agree to the IRS’s terms and conditions, and confirm the date and amount of each withdrawal.

To finish up things, you’ll sign a “direct debit mandate form” also known as an ACH authorization form. This is what authorizes the IRS to automatically take payments from your account. Your signature on the document confirms that you understand the terms and conditions of the direct debit arrangement and authorize the IRS to access your bank account. The direct debit mandate can be a physical paper form that you sign and return, or it can be an electronic form that you sign digitally, depending on the company and your bank’s process.

Tax Payment Plan Calculator: Estimating Your Monthly Installments

In setting up a Direct Debit Installment Agreement (DDIA), one thing you need is a solid estimate of your monthly payment to avoid running into problems with the IRS. The IRS Payment Plan Calculator simplifies this process for you. Here’s how to get it done:

1. Confirm how much your balance is. To do so, log into your IRS portal or check your Notice of Balance Due. You’ll get a picture of your total tax debt, including the original tax debt and any other interest or penalties that have accrued.

2. Spread it over 72 Months. The IRS generally allows those owing a tax debt of $50,000 or less to divide their payments over a maximum of 72 months (i.e, 6 years). So if you owe $10,000, for instance, your minimum payment would be approximately $10,000 ÷ 72 = $138.89.

3. Assess what you can realistically pay. If $138.89 feels like a long shot based on your current financial situation, you can request a lower monthly amount based on your income and expenses. But you’ll need to submit Form 433-A or Form 433-F, which will give the IRS an estimate of your income, expenses, and assets.

4. For debts under $50,000, you may not need to submit extensive financial documentation if you agree to pay up your balance within 72 months. However, if your balance exceeds $50,000, you may need to justify your proposed payment and possibly provide more documentation.

How to Manage Your Direct Debit Installment Agreement

Managing your direct debit payments effectively is essential as it reduces the chances of default. Here are some tips to help you manage your direct debit installment agreement:

• Track your payments: An effective way to manage your direct debit agreement is to track your payments to avoid default on payments. You can use a calendar to mark upcoming tax payments and deadlines. Using digital apps and tools, however, makes tracking payment a breeze – easier and more efficient.
• Adjust your payment schedule when necessary: If at any time during the payment period, your finances change, adjust your terms to suit your current financial situation. You can make some types of changes online, or you may need to contact the IRS. 

• Keep your bank details up to date: Proper documentation is required whenever the topic revolves around the IRS. If issues arise at any point in the payment process, it can be easier to reach you and sort things out if your bank details are up to date.

Cancel or modify the agreement if necessary: If there’s a need to cancel or modify your agreement with the IRS, do it as quickly as possible so as not to default on payments. If you need to make any changes to your payment plan, log into the Online Payment Agreement tool and effect the changes.

Get Help from a Tax Lawyer with Your Direct Debit Plan

Direct debit installment agreements can be a powerful tool when dealing with the IRS. It’s a convenient payment plan and helps you stay current with your installment agreement terms to avoid defaults and their consequences. If you have trouble paying your taxes on time, this is a great option to consider. Thankfully, it doesn’t require excessive paperwork. However, it requires a thorough understanding and careful guidance, which a skilled tax lawyer can offer.

Our legal team at Victory Tax Lawyers brings both professionalism and skill to that table. We will first review your tax situation and then help you apply for a direct debit installment agreement if it’s the best bet for your unique situation. Otherwise, we can recommend other payment plans to get back in good standing with the IRS. When it comes to the IRS, procrastination can be deadly; schedule a free tax attorney consultation with us now, and let’s sort out your tax trouble.