IRS installment agreement guide: How IRS payment plans work

• An IRS installment agreement allows taxpayers to pay off their tax debt over time through monthly payments.
• While these plans prevent aggressive collection actions, interest and penalties continue to accrue on the balance.
• Several types of agreements exist, with eligibility depending on the amount owed and the taxpayer's financial situation.

Getting a large tax bill from the IRS can feel overwhelming, especially if you can’t afford to pay it in full right away. If that’s your situation, an IRS installment agreement is a form of tax relief that may let you break your balance into monthly payments over time.

An IRS installment agreement is a pay-over-time plan that can help you stay in good standing with the IRS while avoiding more aggressive collection actions, such as levies and wage garnishment. However, interest charges and penalties will accrue until your balance is paid in full. 

This guide explains how IRS installment agreements work, the types of payment plans available, who may qualify and what costs to expect so you can decide whether this option makes sense for your tax situation.

What is an IRS installment agreement?

An IRS installment agreement is a payment plan that lets you pay off your tax bill over time, either by a certain deadline or with monthly payments. While it won't reduce your principal balance, it will help you avoid more serious collections actions. 

"Installment agreements are ideal for taxpayers who cannot pay the full balance owed prior to the tax payment deadline [and who] want to avoid more aggressive IRS collection actions such as liens, levies or garnishment of wages," says Josh Streimer, a enrolled agent (EA) and managing partner of Venti Accounting.

The main drawback is cost. Interest and penalties continue to accrue on your balance, and you may also pay a setup fee. As a result, you’ll likely pay more overall than if you were able to pay your tax bill in full upfront.

Basic compliance requirements

The specific IRS installment agreement requirements vary by plan, but some general criteria include: 

• You've filed all your required tax returns. 
• You're current on your estimated tax payments (if you're self-employed).
• Your tax balance doesn't exceed the maximum limit. 
• You're able to make the proposed payments . 

Financial disclosure requirements

Some IRS installment agreements require financial disclosures with details on income, expenses, assets and liabilities. These include: 

• Form 433-A: This is the Collection Information Statement for Wage Earners and Self-Employed Individuals. It asks for detailed information about your finances and is often required for larger balances or hardship claims. 
• Form 433-F: This Collection Information Statement is a simplified financial form the IRS may require for certain installment agreements. It's typically for smaller debts that can be resolved more quickly. 

Types of IRS installment agreements

There are several IRS payment plan options, depending on how much you owe and your financial situation. 

Short-term payment plan

A short-term payment plan gives you up to 180 days to pay off your balance. It's available if you owe less than $100,000 in taxes, penalties and interest combined. 

There are no setup fees, but penalties and interest will accrue until you've paid off your balance. You can pay from a checking or savings account online or by phone, or via check, money order, debit card, or credit card. Using a card to make payments may incur additional fees. 

A short-term payment plan doesn't require fixed monthly payments; you're simply required to pay off your bill before the 180 days are up. 

Long-term installment agreement

A long-term installment agreement allows you to make monthly payments over time, typically up to 72 months. It’s generally available to taxpayers who owe less than $50,000 in combined taxes, penalties and interest.

This plan involves setup fees, interest and penalties. Fees start at $22 if you apply online and pay through automatic direct debits, but it can increase to $107 if you apply over the phone, by mail or in-person. Fees may be higher if you choose a non-direct-debit payment method. 

Low-income individuals may qualify for reduced or waived fees. 

Simple installment agreement

Formerly called a streamlined installment agreement, the simple installment agreement gives you up to 120 months or until the IRS collection statute expiration date (CSED) to pay your debt, whichever is sooner. 

To qualify, you must owe $50,000 or less in assessed taxes, penalties and interest. This option is similar to a long-term payment plan but typically requires less extensive financial documentation.

Partial payment installment agreement

If you're facing financial hardship, you might qualify for a partial payment installment agreement. This installment plan lets you pay off what you can within the remaining time the IRS has to collect your taxes. 

The IRS CSED usually spans 10 years, except in special circumstances. On a partial payment plan, you'll make a monthly payment you can afford until you've paid off your balance or the statute expires. 

You'll need to provide financial disclosures when you apply so the IRS can determine if you qualify. 

Guaranteed installment agreement (if applicable)

A guaranteed installment agreement may be available if you owe $10,000 or less, not including penalties or interest. It requires you to pay your tax balance within three years and doesn't ask for a financial statement. To qualify, you must have paid all your taxes and not entered into an installment agreement within the past five years. 

Costs of an installment agreement

Installment agreements will increase your tax liability due to interest, penalties and potential setup fees. Common costs include: 

• Setup fees: Short-term installment agreements don't charge setup fees, but long-term plans do. They range from $22 to $178, depending on how you set up the plan and your payment method. Low-income taxpayers may qualify for reduced fees or waivers. 
• Direct debit vs. non-direct debit: The IRS reduces your fee if you pay via automatic direct debits. On a long-term plan, for instance, the setup fee is just $22 if you apply online and use direct debit, but it increases to $69 if you apply online but use a different payment method. 
• Interest and penalty accrual: The IRS charges interest and failure-to-pay penalties throughout an installment agreement. 
• Potential lien filings: The IRS may file a lien if you owe a large amount, which means it can seize your property if you don't pay. This could incur an additional fee. 

Pros and cons of an installment agreement

There are both pros and cons of an installment agreement that are worth considering before you apply. 

Pros

• Gives you the flexibility to pay off your tax liability over time 
• Helps you avoid immediate enforced collections, such as wage garnishment and levies
• Offers a structured payment schedule with payments that may be adjusted to fit your financial circumstances
• Can apply online and get an immediate approval decision, in some cases

Cons

• Interest and failure-to-pay penalties will accrue, increasing your total costs.  
• Missing payments can lead to termination of your plan and resumed collections. 
• Some plans have strict requirements and require detailed financial disclosures. 
• The IRS may file a Notice of Federal Tax Lien in some cases. 

Installment agreement vs. other tax relief options

Installment agreements aren't the only form of tax relief the IRS offers. Some alternatives include: 

• Offer in Compromise: This lets you settle your tax debt for less than what you owe if you're experiencing financial hardship. 
• Currently Not Collectible status: The IRS may put your account in Currently Not Collectible status if your financial situation prevents you from making any payments on your tax debt. This status will pause collections efforts, but interest and penalties will keep adding up. 
• Penalty abatement: You may request a removal or reduction of penalties in certain situations, such as an illness or natural disaster. The IRS also offers first-time penalty abatement if you've had no tax issues for the past three years. 

An installment agreement is usually your best bet if you can afford to pay off your tax debt over time, just not all at once. Some other forms of tax relief have more stringent financial requirements. 

How to know if an installment agreement is right for you

If you owe a large amount in taxes, you may be wondering if an installment agreement is right for you. Here are some key considerations to help you decide:

• Review your monthly disposable income: Look over your income after taxes and essential living expenses, such as your rent or mortgage, utilities, food, and insurance. An installment agreement could be a good fit if you have enough left over to cover payments while still covering your basic needs. If not, a partial payment plan, Offer in Compromise or Currently Not Collectible status may be a better fit. 
• Consider the long-term costs: Consider how much your debt will grow over time due to interest and penalties. Estimating your long-term costs upfront can help you decide whether an installment plan would be affordable for you. 
• Factor in future tax obligations: When you're on an installment agreement, you're required to stay current on future tax filings and payments. Think about whether you can keep up with taxes in the future, as falling behind could mean defaulting on your plan.  
• Consult a licensed tax professional: Getting professional guidance from a tax expert could be helpful if you owe a lot in taxes or have a complex situation. A licensed tax professional can help you navigate your options and help you decide if an installment agreement is right for you. 

How to apply for an IRS installment agreement

Depending on the type of payment plan, you may be able to apply online, by mail or over the phone. Here's how to set up an IRS payment plan. 

Applying online

You can apply for a short-term or long-term installment agreement on the IRS website. You'll need to create an IRS online account, which requires a photo ID. You'll also provide your bank routing and account numbers if you're applying for a direct debit payment plan. When you apply online, you can find out immediately if your plan is approved. 

Applying by mail or phone

Applying by mail or phone is also an option. You'll need to complete Form 9465, Installment Agreement Request, along with any additional financial disclosure forms, such as Form 433-A or Form 433-F. Mailing addresses vary depending on the state you live in. 

You can also call the IRS at 800-829-1040 if applying as an individual or 800-829-4933 if applying as a business. The IRS will usually let you know its approval decision within 30 days, though it could take longer in some cases. 

What happens after approval?

Once the IRS has approved your installment agreement, you'll need to keep up with your payment obligations. Consider opting into automatic direct debit so you don't miss payments.

Ongoing tax filing compliance is also a top priority. You'll need to file all your future tax returns on time and pay any new taxes you owe by the deadline. Falling behind could cause your installment agreement to default. 

Your agreement could also be terminated if you miss payments or your financial situation changes. If your agreement ends, the IRS can resume collections if you don't pay back the tax you owe. 

When to consider professional help

If you're dealing with a large balance, collection actions or a complex financial situation, you may benefit from professional assistance. 

"Seek professional help as soon as you feel out of your depth," recommends Shawn Alexander, a CPA and former IRS agent. "When facing the IRS in any capacity, it's important to have someone by your side who can explain the process and the options available to you."

Tax relief companies like Optima Tax Relief, Anthem Tax Services, Alleviate Tax, BC Tax and Priority Tax Relief can help you evaluate your options and find a resolution. These companies can often fill out paperwork, apply for relief and negotiate with the IRS on your behalf. 

Keep in mind that fees can vary widely, and no tax relief company can guarantee a specific outcome. Before working with a tax relief company, it's important to compare your options, read reviews and verify a company's credentials.

Bottom line

IRS installment agreements are a common solution to unpaid tax balances. They let you spread payments out over time while avoiding collections efforts.

These agreements don't eliminate your debt and can increase your overall costs due to interest charges and penalties. If you're using an installment agreement, make sure you understand the long-term costs. 

Review your budget carefully to make sure you can stay current on your payment obligations and any future tax bills. By evaluating your finances upfront, you can choose the right plan and minimize your risk of default. 

FAQs about IRS installment agreements

How much does the IRS require for a payment plan?

The IRS may determine a reasonable monthly payment based on your balance, payment plan and financial circumstances. Depending on the plan, you may have up to 180 days, 72 months or longer to pay off your balance. 

Does the IRS charge interest on installment agreements?

The IRS charges interest and penalties on installment agreements until you've paid off your balance in full. 

Can the IRS reject a payment plan?

The IRS can reject your application for a payment plan if you don't qualify. Eligibility depends on factors like your financial circumstances, tax balance and whether you've filed all your required returns. 

How long can you stay on an IRS installment agreement?

Different IRS installment agreements have different terms. Short-term plans span up to 180 days, while long-term plans give you up to 72 months to pay off your balance. The partial payment plan lets some taxpayers pay off what they can within the IRS's statute of limitations to collect, which goes up to 10 years. 

What happens if you miss a payment?

Missing a payment on your IRS installment agreement could put the arrangement into default. The IRS could terminate the plan and reinstate collections efforts, like levies or wage garnishment.