The pros and cons of IRS payment plans for businesses

The IRS collects billions of dollars in delinquent tax payments each year, including a significant amount from businesses on payment plans.

Businesses typically choose to apply for a payment plan when they need an extension to pay money owed to the IRS. Being unable to pay the IRS on time is a common issue that can arise from cash flow issues or simply discovering unexpected tax bills.

How do IRS payment plans work? This guide will cover the basic process of applying for and setting up a payment plan, as well as some key details about IRS business payment plan interest rates. Read through the pros and cons of payment plans to decide whether getting an extension is a good strategy for paying off your business’s back taxes.

How IRS payment plans work for businesses

Payment plans essentially give businesses an extended timeline to pay back overdue taxes. Rather than paying the full amount at once, you can spread payments out over a set period to alleviate the financial burden.

To qualify for a payment plan, you must file all required tax returns, provide financial evidence of your inability to pay the amount owed in full, and proof that you can manage regular payments over time. The more money you owe, the more documentation you’ll have to provide to initiate an installment agreement.

Businesses have two options for IRS payment plans:

• Short-term payment plan (or full payment). These payment plans require businesses to pay their full outstanding tax debt in 180 days or less. Please note that businesses cannot apply for a short-term plan online — it must be done by phone, mail, or in person.
• Long-term payment plan (or installment agreement). These payment plans require businesses to make monthly payments over a longer period of time. These plans are available for those who have filed all required tax returns and owe $25,000 or less to the IRS.

Interest and late fees continue to accrue while on any type of payment plan, though these fees may be reduced. A long-term payment plan also requires a setup fee, ranging from $22 to $178, depending on the details of the plan.

In either case, setting up a payment plan is relatively simple. You can apply online, through the mail, or with the help of a tax professional. Once you’ve been approved and set up a plan, you’re obligated to meet the payment terms in order to avoid further penalties.

If neither a short-term nor a long-term payment plan is right for your business, the IRS also offers an Offer in Compromise, which allows businesses to reduce the amount they owe under certain conditions and allows a temporary delay of fund collection.

Note that certain business practices, like BNPL sales tactics, can complicate payment plans. Learn more about managing sales taxes under these conditions, and speak with a tax professional to understand your full range of options for paying back taxes.

Pros and cons of IRS installment agreements

Though the terms of short-term vs. long-term payment plans may differ slightly, they both offer the opportunity for a business to pay back taxes over time. This is a key benefit of IRS installment agreements, through which businesses are able to maintain cash flow by making smaller payments over time rather than one lump sum. Consider these other pros and cons of IRS installment agreements as you determine what’s best for your company.

Pros of IRS payment plans

Payment plans can be financially and emotionally appealing. They offer instant stress relief as you’re no longer waiting for the consequences of unpaid back taxes to catch up with you, and they present a structured payment plan for resolving the debt.

Here are a few of the other benefits:

• Predictable monthly payments. Once a payment plan is established, you’ll know exactly what you owe and when. The installments provide stability for budgeting the rest of your finances.
• Accessible setup process. The IRS has a straightforward application process for installment agreements, especially for smaller balances. You’re able to get started quickly, without the additional burden of complicated paperwork.
• Prevented penalties. One of the biggest reliefs for many business owners is that payment plans stop severe penalties from moving forward. The IRS typically will not issue a lien or levy if your payments are consistent.
• Credit protection. In some cases, payment plans actually protect your credit. They can prevent the escalation of collections or punishments if your payments stay current.

Cons of IRS payment plans

Payment plans protect your business in some ways, but they aren’t without their own cost. Prepare for these downsides so you can guard against further business strain:

• Continued interest accrual. Interest continues to grow as long as portions of your debt remain unpaid. These costs can be significant, depending on your repayment timeline and total debt.
• Cash flow constraints. Monthly payment obligations can damage the liquidity of any business. If the financial strain compromises other vital business functions, such as payroll or operating expenses, filing for a payment plan may not be the right solution.
• Potential for default risk. On an installment agreement, missed payments can trigger harsher consequences. You may face immediate collection or penalties.
• Limited flexibility. The IRS rarely renegotiates terms, so you’re stuck with the interest rates and timelines they offer. This can limit the rest of your business functions, including your ability to invest in new opportunities.

When to consider alternative payment methods

Payment plans help you manage your debt, but they can still strain your working capital. Most businesses cannot afford to tighten the purse strings so significantly; they need to preserve working capital for operations or payroll.

If this applies to your financial situation, alternative payment methods might be a better solution for managing tax debt, particularly if the cost of alternative financing is less than the cost of accrued interest on IRS payment plans.

Avalara Capital offers a purpose-built line of credit that enables businesses to pay off tax debt without creating additional risk to day-to-day financial operations. Avalara AvaTax users can qualify and see their borrowing limits within a matter of minutes. Use the line of credit to deal with sales tax nexus then keep it open to support your business however you need to.

Stay tax compliant with support from Avalara Capital

IRS payment plans can be an effective way to manage tax debt, but they aren’t the right (or only) tool for every situation. These plans allow you to pay back taxes on a predictable schedule while avoiding severe penalties. However, on a payment plan, your debt continues to accrue interest. Additionally, you might face cash flow constrictions that limit your business’s flexibility.

If you need alternative financing and tax compliance support, Avalara Capital offers lending solutions embedded directly into tax compliance software. Learn more about financing options with Avalara Capital.