If you use an installment agreement to pay your tax debt, one option you have is to make your monthly payments via payroll deduction. Here’s how it works.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
What is an installment agreement?
An IRS installment agreement lets you pay off back taxes over time. This is one of the most common options that people use to solve a tax debt.
There is a reduced penalty when you sign up for automatic payments through a direct debit installment agreement. Many people choose to pay from their bank account.
If you prefer to have your payment amount taken out of your paycheck for budgeting or other reasons, you can use a payroll deduction agreement form.
How do you set up a payroll deduction agreement?
In addition to the usual installment agreement application, you will need to complete Form 2159.
Your employer is also required to sign Form 2159. You can’t use a payroll deduction agreement without your employer agreeing to participate. Your employer has to agree to submit payments to the Internal Revenue Service according to your payment schedule.
You can download Form 2159 on the IRS website.
Will I get a tax lien?
While the payroll deduction form references tax liens, you generally won’t get a tax lien unless you owe more than $25,000.
If you do owe more than $25,000, keep in mind that tax liens no longer impact your credit score. You can also ask to have the lien removed once you reduce your balance to $25,000.
What happens if you get a raise?
The terms of an IRS payroll deduction payment plan say that they can increase your payments if your financial situation changes. However, payroll deduction installment agreement payments are for a fixed amount and not a percentage of your income.
The IRS usually won’t increase your monthly payment if you get a raise. This is especially true if you have a normal payment timeline of 72 months or less.
If you have other tax problems or a large balance, there is a higher chance the IRS will increase your payments.
Since interest and penalties apply until your tax debt is paid in full, you might want to consider making additional payments on your own.
What happens if you change jobs?
If you change jobs, your payroll deduction agreement won’t automatically transfer to your new job. You will need to set up a new one or switch to direct debit.
Contact the IRS immediately to request the needed adjustments to your payment plan. Additional user fees may apply.
Because of the potential cost and hassle, many people prefer to use direct debit or personal loans.
What happens when you pay off your tax debt?
When your tax debt is paid in full, payments may not always stop right away. The IRS must notify your employer to stop payroll deductions.
It can take several weeks for the IRS to update your account to reflect a zero balance and notify your employer. They typically send a letter in the mail, so it could take additional time.
If your employer takes out extra deductions, contact the IRS for a refund. Your employer can’t refund money they sent to the IRS. They also can’t end the deductions without confirmation from the IRS.