IRS Installment Agreements: A Flexible Tax Payment Option

Paying off a tax debt can be daunting, especially when you owe more than you can afford. Fortunately, the IRS offers Installment Agreements, a flexible payment plan that allows taxpayers to pay off their taxes over time instead of in one lump sum. This option is ideal for individuals and businesses who need extra time to fulfill their tax obligations without facing aggressive collection actions.

In this article, we’ll explain what an IRS Installment Agreement is, how it works, the different types available, and how to apply.

What Is an Installment Agreement?

An Installment Agreement is a payment plan arranged with the IRS that allows taxpayers to pay their tax debt in monthly installments. If you cannot pay your taxes in full by the due date, entering into an Installment Agreement can help you avoid severe penalties and collection measures like wage garnishments or bank levies.

These agreements are generally available for both individuals and businesses, making them one of the most common solutions for taxpayers with outstanding debt.

How Do IRS Installment Agreements Work?

When you enter into an Installment Agreement with the IRS, you agree to pay off your tax debt over a specific period, usually in manageable monthly payments. The IRS will calculate a payment amount based on the total debt, your financial situation, and the payment terms you qualify for. During the repayment period, penalties and interest will continue to accrue, but the IRS will not take further collection actions as long as you make your payments on time.

Key Features of Installment Agreements:

• Monthly Payments: You make regular monthly payments until your tax debt is fully paid.

• Interest and Penalties: While penalties are reduced under an Installment Agreement, they still apply, and interest continues to accrue until the balance is paid in full.

• No Collection Actions: Once the agreement is in place and as long as you stay current with your payments, the IRS will typically halt aggressive collection actions like liens or levies.

Types of Installment Agreements

The IRS offers several types of Installment Agreements, depending on the size of your tax debt and your financial circumstances.

1. Guaranteed Installment Agreement

A Guaranteed Installment Agreement is the most straightforward and accessible type. It’s available to taxpayers who owe $10,000 or less in tax debt (excluding penalties and interest). Under this agreement, the IRS is required by law to approve your request if:

• You owe $10,000 or less.

• You have filed all your returns on time for the past five years.

• You agree to pay off the debt in full within three years.

• You have not entered into an Installment Agreement within the last five years.

2. Streamlined Installment Agreement

If your total tax debt is $50,000 or less, you can qualify for a Streamlined Installment Agreement. This type of agreement does not require detailed financial disclosures or a drawn-out approval process. Key features include:

• Available to individuals and businesses owing $50,000 or less.

• The debt can be paid over a period of up to six years (72 months).

• No liens are filed as long as you stay compliant with the payment plan.

3. Partial Payment Installment Agreement (PPIA)

For taxpayers who cannot pay the full amount of their tax debt but can still make partial payments, a Partial Payment Installment Agreement (PPIA) might be an option. With a PPIA, you make monthly payments based on what you can afford, but the total debt might not be paid off within the statute of limitations. After the payment period ends, the remaining debt may be forgiven. However, this option requires full financial disclosure and regular re-evaluations of your ability to pay.

4. Non-Streamlined Installment Agreement

If your tax debt exceeds $50,000, you can still apply for an Installment Agreement, but the process is more complex. You will need to provide detailed financial information (income, expenses, assets, and liabilities), and the IRS will evaluate your ability to pay before approving the plan. These are referred to as Non-Streamlined Installment Agreements, and they may require negotiation and a longer approval process.

How to Apply for an Installment Agreement

Applying for an IRS Installment Agreement can be done either online, by mail, or over the phone. The process depends on the amount of tax debt you owe.

For Debts of $50,000 or Less

• Apply Online: The IRS offers an Online Payment Agreement application for individual taxpayers with tax debt up to $50,000 and businesses with tax debt up to $25,000. The process is simple, and if approved, you’ll receive confirmation immediately.

For Debts Exceeding $50,000

• File Form 9465 (Installment Agreement Request): If you owe more than $50,000, you must submit IRS Form 9465 along with detailed financial information (Form 433-F or Form 433-B for businesses). The IRS will review your application and may request additional information before approving the agreement.

Additional Fees

There are some costs associated with setting up an Installment Agreement:

• Application Fee: As of 2024, the fee for setting up an installment agreement is $130 for online applications and $225 for paper applications. Lower fees apply if you opt for direct debit payments.

• Reduced Fees: The IRS offers reduced fees or waivers for low-income taxpayers.

Pros and Cons of IRS Installment Agreements

Like any financial decision, opting for an Installment Agreement has both advantages and disadvantages.

Pros:

• Avoid Collection Actions: Once your Installment Agreement is approved, the IRS will typically suspend actions like wage garnishments or property liens.

• Manageable Payments: You can spread the payment of your tax debt over time, reducing immediate financial pressure.

• Accessible: There are options for taxpayers with varying levels of debt, including straightforward plans for those with smaller liabilities.

Cons:

• Interest and Penalties: While penalties are reduced, they are not eliminated, and interest will continue to accrue on the unpaid balance.

• Lengthy Repayment: Extending payments over several years means you’ll continue to owe the IRS until the debt is paid off.

• Financial Disclosure: If you owe more than $50,000, the IRS will require full disclosure of your financial situation, which can be invasive and time-consuming.

Alternatives to Installment Agreements

If an Installment Agreement isn’t the best fit for your financial situation, you may want to explore other options for tax relief, such as:

• Offer in Compromise (OIC): Settle your tax debt for less than the full amount owed.

• Currently Not Collectible (CNC) Status: Temporarily delay payments due to financial hardship.

• Penalty Abatement: Request a reduction or removal of penalties under certain circumstances.

Is an Installment Agreement Right for You?

An IRS Installment Agreement can be a valuable tool for managing your tax debt without facing aggressive collection actions. If you owe back taxes and can’t pay in full, this option gives you breathing room to meet your obligations over time. Before committing, consider your financial situation, the available agreement types, and whether you qualify for a streamlined or more complex process. Consulting a tax professional can help you evaluate your options and ensure that you choose the best path forward for your unique circumstances.

Tax debt can be stressful, but with the right payment plan, you can tackle it gradually. If you think an Installment Agreement might be the right solution for you, it’s time to take action, review your financial situation, and apply for the plan that best fits your needs.