IRS Payment Plans: Installment Agreements for Tax Debt You Cannot Pay in Full

When you owe taxes but cannot pay the full amount immediately, an IRS installment agreement allows you to pay over time in manageable monthly amounts. These payment plans provide a structured way to address your tax debt while avoiding more aggressive collection actions like levies and seizures. Understanding the different types of installment agreements and how to apply helps you find the payment option that works best for your financial situation.

Types of Installment Agreements

The IRS offers several types of installment agreements depending on the amount you owe and your ability to pay. Guaranteed installment agreements are available to individuals who owe $10,000 or less and can pay the balance within three years. If you meet these criteria and have filed all required returns, the IRS must accept your request without analyzing your finances.

Streamlined installment agreements provide an expedited process for taxpayers owing up to $50,000 who can pay within 72 months. These agreements do not require detailed financial disclosure if you agree to make payments by direct debit. For debts exceeding $50,000 or payment terms longer than 72 months, the IRS requires a full financial analysis and may require you to demonstrate that you are paying your maximum affordable amount.

How to Apply

For balances of $50,000 or less, you can apply for an installment agreement online using the IRS Online Payment Agreement tool. This method provides immediate approval or rejection in many cases. You can also apply by phone, mail, or in person at an IRS office. Form 9465, Installment Agreement Request, is used for mail applications and for agreements involving amounts over $50,000.

When applying, you will need to provide information about your tax debt, proposed monthly payment amount, and preferred payment method. The IRS prefers direct debit agreements because they ensure consistent payments and reduce administrative costs. Agreeing to direct debit may qualify you for reduced user fees and allows streamlined processing for larger debts.

Costs and Fees

Setting up an installment agreement involves fees that vary based on the type of agreement and payment method. User fees range from approximately $31 for low-income taxpayers with direct debit agreements to over $200 for agreements established by phone or in person without direct debit. These fees are added to your balance or can be paid upfront.

Beyond setup fees, interest and the failure-to-pay penalty continue to accrue on your unpaid balance during the installment agreement. The interest rate is the federal short-term rate plus three percent, adjusted quarterly. The failure-to-pay penalty is reduced to 0.25 percent per month while an installment agreement is in effect, which is half the standard rate. These ongoing costs mean you will pay more overall than if you could pay immediately.

Determining Your Payment Amount

For streamlined agreements, your monthly payment must be enough to pay your entire balance before the collection statute expires, typically within about six years. Divide your total balance by the months remaining in the collection period to determine the minimum payment. For larger debts requiring financial analysis, the IRS will evaluate your income, expenses, and assets to determine your reasonable collection potential.

If the calculated payment amount is more than you can afford, you may need to provide detailed financial information on Form 433-A or 433-F. The IRS has national and local standards for allowable living expenses that limit what you can claim. If your expenses exceed these standards, you will need to justify the higher amounts or reduce your expenses to make room for larger payments.

Direct Debit vs. Other Payment Methods

Direct debit installment agreements automatically withdraw your monthly payment from your bank account on a date you choose. This method offers several advantages including lower setup fees, streamlined application processing for larger debts, and no risk of missing payments due to oversight. The IRS strongly encourages direct debit agreements.

Alternative payment methods include sending checks or money orders, paying through IRS Direct Pay, electronic funds withdrawal, or payroll deduction for federal employees. While these methods offer more control, they also create more opportunities for missed payments. A missed payment can result in default of your agreement and resumption of collection activity.

Maintaining Your Agreement

Once your installment agreement is approved, staying current on payments is essential. Missing a payment can result in default, which reinstates the IRS's ability to take collection action and may require establishing a new agreement with additional fees. Set up reminders or automatic payments to ensure you never miss a deadline.

Beyond making payments, you must remain compliant with all tax obligations during the agreement. File all required returns on time and pay any new taxes when due. If you cannot pay current taxes, contact the IRS immediately to modify your agreement. Failure to stay current on new obligations while making installment payments typically results in default.

Modifying or Revising Your Agreement

Life circumstances change, and the IRS allows modification of installment agreements when needed. If your financial situation improves, you can increase payments to pay off your debt faster and reduce total interest costs. If your circumstances worsen, you can request a reduction in payments, though this may require providing updated financial information.

To modify an agreement, contact the IRS by phone or submit a written request. Temporary payment suspensions may be possible during financial hardship, though interest and penalties continue to accrue. If you owe additional taxes from a subsequent year, you will need to modify your agreement to include the new balance.

When Installment Agreements Are Not Enough

If even the minimum payment required for an installment agreement is more than you can afford, other options may be more appropriate. Currently not collectible status suspends collection activity when you have no ability to pay. An offer in compromise may allow you to settle your debt for less than the full amount if you meet specific eligibility requirements. Consulting with a tax professional helps you determine which option best fits your situation.