IRS Installment Agreements:
How to Make Monthly Payments on Tax Debt

Ending up in tax debt isn’t a reason to panic or feel ashamed—it’s a situation that millions of taxpayers find themselves in every year. Although paying in full is the option that saves you the most money, it simply isn’t an option for some people. That’s where installment agreements can be helpful. 

IRS payment plans help taxpayers like you stretch payments out over an extended period of time, limiting the damage to your budget. Learn more about the different types of payment plans available, how to apply for an IRS payment plan, and how to remain compliant throughout the duration of your payment plan. When you’re ready to discuss whether or not a payment plan is the right option for you, turn to our team of IRS installment agreement attorneys to discuss your options. Call us at 601-873-6510 to get started.

Key Takeaways

• Payment plans let you pay off your tax bill in monthly installments for up to 72 months.
• In some cases, you can qualify for a payment plan without providing additional financial information. 
• In others, you may have to provide more detailed financial information to the IRS.
• There are setup fees associated with installment agreements, but you can minimize your costs by opting for a direct debit installment agreement.
• You must be able to pay future tax debt in full and make all required monthly payments until your installment agreement is complete to avoid default.
• In some circumstances, other payment arrangements may be a better option for taxpayers.

What is an IRS Payment Plan?

IRS payment plans take the taxes you owe, plus interest and penalties, and break it up into monthly payments. There are several types of payment plans, allowing you to choose the one that best fits your needs.

Short-Term Payment Plan

Short-term payment plans are intended for those who owe $100,000 or less and can pay their balance within 180 days. You can apply for this option online, although the IRS also allows you to apply in person, over the phone, or via paper application.

Long-Term Installment Agreement

Long-term installment agreements let you pay your balance due over a period as long as 72 months (and even longer in rare cases). If you owe less than $50,000, you can set up a long-term payment plan online, but if you owe more than $25,000, you have to set up automatic payments from your bank account (direct debits) if you apply online. 

One type of long-term plan, guaranteed installment agreements are a convenient option for taxpayers who owe $10,000 or less. To qualify, you must have filed all tax returns for the previous five years and paid your taxes on time. You must also not have asked for a previous installment agreement and be able to pay in full within three years.

Streamlined installment agreements are popular for taxpayers who cannot qualify for a guaranteed installment agreement. If you owe less than $50,000, the IRS does not require a collection information statement, but you do have to make payments via direct debit if you owe more than $25,000.

What to Do If You Don’t Qualify to Apply for Payments Online

While there are tax debt caps listed for both short-term and long-term installment agreements, it is possible to get a payment plan if you exceed the amounts listed—it’s just a bit more work. 

Rather than applying online, you will need to fill out additional forms, including Form 9465, Installment Agreement Request and a collection information statement such as Form 433-F that asks questions about your financial status and ability to pay. 

Other common forms required in this situation are Form 433-H, Installment Agreement Request and Collection Information Statement and Form 433-D. You can generally apply for installment agreements exceeding the caps listed above by calling the IRS or submitting the necessary paper forms via mail. 

In some cases, there are also exceptions to the 72-month limit on installment agreements. This is reserved for those with extremely high tax bills and must be worked out with the IRS directly or with the help of a tax attorney. Depending on the specifics of the situation, you may be able to make payments until the collection statute expiration date which is 10 years after the tax was initially assessed.

Partial Payment Installment Agreement

Taxpayers who can make some payments toward their tax debt but cannot pay the minimum monthly payment required for a traditional installment agreement may qualify for a partial payment installment agreement. The IRS will consider this option for taxpayers whose financial situations are limited enough that full payment is truly not possible. 

You make smaller monthly payments until you reach the Collection Statute Expiration Date. Upon reaching the CSED, the IRS stops collection efforts on the rest of the amount owed. The drawback of these plans is that they are not set in stone. The IRS will review your finances every two years or so, and if you earn more money or get new assets, the agency may require you to pay more.

Benefits of IRS Payment Plans

Perhaps the biggest benefit of an IRS payment plan is that you can make budget-friendly payments that allow you to avoid collection activities. Once you set up a payment plan, the IRS will not seize your assets or garnish your wages. In some cases, the terms of the payment plan may even prohibit the IRS from issuing a tax lien against you. 

When you compare a payment plan to, for example, paying your tax debt off with a high-interest credit card, you can save a significant amount of money over the life of your payment plan. 

However, despite the advantages, a payment plan may not be the best option in your specific situation. It’s best to seek professional guidance from a tax professional if you’re unsure. Payment plans also keep you in good standing with the IRS, which provides significant relief to taxpayers worried about being non-compliant.

Payment Plan Duration and Costs

Knowing what to expect regarding your monthly IRS tax payment plan costs and how long you’ll be making payments can help you make future financial plans.

How Long Will My Payment Plan Be?

If you sign up for an IRS short-term payment plan, your total balance must be paid off in 180 days, or roughly six months. If you apply for a long-term installment agreement, you will make payments for 72 months, or six years and longer in rare cases.

What Does it Cost to Set Up an IRS Payment Plan?

If you sign up for a direct debit installment agreement, the online setup fee is $22. This jumps to $107 if you apply by phone, mail, or in person. Fees are waived for those who earn at or below 250% of the federal poverty level.

If you apply for a long-term installment agreement but do not elect to enroll in direct debit payments, plan on paying a $69 setup fee when you apply online or a $178 setup fee when you apply in person, by phone, or by mail. The setup fee is $43 for low-income taxpayers, but that fee is reimbursed at the end of the installment agreement.

Both short-term payment plans and long-term installment agreements accrue interest and penalties until paid in full. So, keep those costs in mind as well.

Budgeting for Your IRS Payment Plan

Calculating your monthly payment is fairly simple. If you enroll in an IRS long-term payment plan, you can take your total balance due and divide by 72 to estimate your estimated monthly payment. Note that your payment will be slightly higher to account for interest and penalties.

How to Make Payments

When you enroll in a direct debit installment agreement, payments will be automatically withdrawn every month on the due date you select when setting up the plan. If you opt for non-automatic payments, you can pay online with your checking or savings account, make online payments with the Electronic Federal Tax Payment System (EFTPS), pay by check or money order, or pay with debit or credit card. Note that fees do apply when you use a debit or credit card.

Interest Rates on IRS Tax Payment Plans

The IRS sets its interest rate every quarter. The rate is the federal short-term rate plus 6. For the first three quarters of 2024, the interest rate for underpayment was 8%. Interest compounds daily on tax debt. 

Penalties

The IRS charges a failure-to-pay penalty when you don’t pay the full amount you owe by the due date. The penalty is generally 0.5% of the amount due for each month or partial month that the balance remains unpaid, but the penalty drops to 0.25% per month when you are enrolled in a payment plan. This penalty cannot exceed 25% of your unpaid taxes.

Qualifying for an IRS Installment Agreement

Depending on the type of installment agreement you apply for, the IRS may require a collection information statement to determine whether or not you are capable of making the monthly payments required in a tax repayment plan. You must have enough disposable income to make the minimum monthly payment to qualify. Additionally, you must file all required tax returns, make monthly payments by their due dates, and avoid accruing any new tax debt while paying on an installment agreement.

What Happens If I Don’t Qualify?

If you apply for an installment agreement but do not get approved, you still have options. If you applied online but were not approved, you may be able to apply by sending in additional paperwork and proof of your financial ability to pay. But if you cannot afford the minimum monthly payment, you may qualify for other payment options like an offer in compromise, partial payment installment agreement, or currently not collectible status.

Modifying an IRS Payment Plan

The Online Payment Agreement tool lets you review the current terms of your payment plan and make certain modifications. You may be able to change your monthly payment amount if you are currently paying more than the minimum, change the date that your payment is due each month, change a current tax repayment plan into a direct debit installment agreement, change the bank information for a direct debit agreement, and reinstate your payment plan after default.

Defaulting on an IRS Payment Plan

You have to stay compliant with IRS requirements in order to continue on in your installment agreement. If you default, the agreement is terminated and the remaining balance will be due in full immediately. When this happens, the IRS will typically send Notice CP523 to inform you of their intention to terminate your agreement.

What Issues Lead to Default?

There are several ways you may default on an installment agreement. If you miss payments, refuse to provide a collection information statement when the IRS requests one, provide inaccurate or incomplete financial information, or accrue new tax debt that you cannot pay in full, you may default on your agreement.

How to Address a Defaulted Installment Agreement

The IRS can be flexible with those who have defaulted on their installment agreement. It’s important to get in contact with them as soon as possible to discuss your options. In general, being proactive about falling behind is better than waiting for the IRS to terminate your agreement or begin more aggressive collection actions.

If you have fallen behind on your payments due to a hardship, they may work with you on new payment arrangements. For example, they may be willing to extend your payment plan and add your missed payments to the end of your current payment schedule. If you have a new tax debt that you cannot pay, you may be able to roll your new balance into your current installment agreement. You don’t know which options are available to you until you ask.

Is an IRS Payment Plan the Best Option for You?

While payment plans are one of the most popular tax solutions for those with tax debt, they aren’t the right option for everyone. Consider these factors while deciding whether or not to move forward.

Ability to Make Monthly Payments

Are you able to make your monthly payments on time every single month without stretching your budget? If the minimum monthly payment is high enough that you worry about having to cut back on groceries or other necessary expenses, this may be too great of a hardship for you—especially if you have to make payments for six years. On the other hand, if the payment is low enough that it fits comfortably into your budget, this may be a good option for you.

Commitment to Staying on Track in the Future

Remember, accruing new tax debt that you cannot pay in full by the due date can trigger a termination of your installment agreement. If you have not made the necessary changes to avoid tax debt in the future—for example, changing your withholdings or your estimated quarterly payments—you run the risk of ending up in the exact same situation next tax season. It’s important to address the issues that led to this tax debt to ensure you are able to stay compliant in years to come.

Other Payment Options

For some people, other payment options are simply a better choice. For example, consider the issue of someone who cannot comfortably make their minimum monthly payment every month. Taxpayers experiencing financial hardship may be better suited to an offer in compromise, partial payment installment agreement, or currently not collectible status than they are a conventional installment agreement. You may wish to discuss these options with a tax pro before committing to a monthly payment that is unrealistic for your budget.

Frequently Asked Questions

What types of payment plans are available through the IRS?

The IRS provides short-term payment plans, which last up to 180 days, and long-term installment agreements, which last up to 72 months. Options include guaranteed installment agreements, streamlined installment agreements, direct debit installment agreements, and partial payment installment agreements. 

What other costs are associated with payment plans?

You will have to pay penalties and interest until you have paid the debt off in full. There are also setup fees you must pay when signing up for a long-term installment agreement and small fees for making changes to your existing payment plan.

How can I apply for an IRS installment agreement?

Many taxpayers can apply online. Those who have high levels of tax debt may need to apply in person, over the phone, or by mail.

What payment methods are accepted?

Taxpayers can make payments via direct debit, the Electronic Federal Tax Payment System (EFTPS), check or money order, or debit or credit card.

How long does it take to get a decision from the IRS regarding my application?

Most taxpayers can apply online and receive an instant decision. You may also get an instant decision when you apply over the phone or in person. If you apply by mail, it may take several weeks to hear back from the IRS.

What happens if I miss a payment?

The IRS may default on your installment agreement if you miss payments. In this situation, you should contact them to figure out your next steps.

If I have more tax debt next year, can I add it to my current payment plan? Can I have two payment plans?

You cannot have two installment agreements at once. While the IRS may allow you to roll your new tax debt into your installment agreement, you shouldn’t assume that it will be an option—it’s best to plan to pay it in full to remain compliant with the terms of your agreement.

What other payment options are available?

Some taxpayers may want to look into an offer in compromise or currently not collectible status before applying for an installment agreement.

Get Help Setting Up a Payment Plan Now

As you decide how best to address your tax debt, remember that you don’t have to figure it out alone. The team at Damiens Law is committed to helping taxpayers like you get caught up and take control of their tax situation. Set up a free call with our team now by calling us at 601-476-2693 or reaching out online.