How to set up a payment plan with IRS

Here’s what to do if you owe on taxes

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When life surprises you with a big tax bill, don’t ignore it. Even if you cannot afford to pay the IRS back what you owe in one lump sum, not addressing the problem now can make your tax debt even higher. Setting up a payment plan with the IRS can help you get back on track with what you owe.

An IRS payment plan — also known as an installment agreement — is an agreement to pay a federal tax debt within a specific time frame. Depending on how much you owe, you can opt in to a short-term or long-term payment plan for owed taxes. Unlike IRS tax relief programs, payment plans do not reduce your total tax debt. Here’s everything you need to know to set up an IRS payment plan and where to turn if you need additional help.


Key insights

  • The IRS will automatically agree to a payment plan if you owe less than $10,000 and have filed all required tax returns.
  • The IRS offers several payment plan options based on your financial situation and ability to pay.
  • The easiest way to set up a payment plan with the IRS is to apply online using the Online Payment Agreement tool on the IRS website.

What is an IRS payment plan?

An IRS payment plan is an agreement between the IRS and a taxpayer to allow them to pay off their taxes owed in installments rather than in a lump sum. It's important to note that tax penalties and interest will still apply, even if the debtor is on a payment plan with the IRS.

When deciding if an IRS payment plan is the right step for you, Kevin Matthews, a certified public account and accounting professor at George Mason University’s School of Business, said individuals need to figure out which is more important to their financial situation: income or cash flow.

“If cash flow is what is more important, then we usually recommend that the client take a payment plan because if the client cannot afford to pay the large amount that they owe, this will allow clients to pay over time and reduce the stress of having to pay a large bill,” Matthews said. “The only major problem with this method is that penalties and interest will accumulate as the debt is paid off.”

» MORE: Interest rates and how they work

Types of IRS payment plans

The IRS offers multiple types of payment arrangements. If you’re not sure which IRS tax repayment plan is best for you, consider hiring a tax professional to help navigate your repayment options.

Guaranteed installment agreement
The IRS automatically agrees to installment payment plans if you owe less than $10,000 and have filed your tax returns on time for the past five years. For guaranteed installment agreements, your minimum monthly payment is equal to your total tax debt (plus interest and penalties) divided by 36.
Partial payment installation agreement
Partial payment installment agreements (PPIA) are determined by what you can afford to pay instead of the total amount you owe. The IRS calculates monthly installment payments based on your income after essential living expenses. Only those with less than $10,000 in tax debt, limited assets and no previous bankruptcies qualify for a PPIA.
Individual payment plan
Individual payment plans are for people who owe taxes but don’t qualify for a guaranteed installment agreement. Short- and long-term individual payment plans are available for taxpayers who owe less than $100,000 in taxes, including penalties and interest. Individual payment plans are available with or without automatic withdrawal.
  • Short-term payment plan: Short-term payment plans last for 180 days or less. You can apply online for a short-term repayment plan if you owe less than $100,000.
  • Long-term payment plan: Long-term payment plans, also called installment agreements, last for more than 180 days. You can apply online for an installment agreement if you owe $50,000 or less.

How to set up payments with the IRS

If you need to set up a payment plan to eliminate your tax debt, follow these steps:

  1. Determine your total unpaid tax debt: You must file all back tax returns to determine your total tax balance before you can apply for an IRS payment plan. You can also request tax return information through Form 4506-T or access your IRS account information online.
  2. Choose your plan and gather the correct documents: Discover which payment plan you qualify for and gather any accompanying documentation that might be required, such as an Installment Agreement Request (IRS Form 9465) if you owe taxes on your individual income tax return (Form 1040).
  3. Complete IRS payment plan application: Individuals and businesses can apply for payment plans online, over the phone, by mail or in person. You will also need to verify your identity before you can submit your application.
  4. Pay setup fees and start repaying your back taxes: Once you have been approved, you will need to pay the setup fee, which varies based on your payment plan. You must manage your IRS installment plan payments responsibly. If you don’t, the IRS can cancel your installment agreement and put you in default for missing payments. Always try to mail your check at least a week before it’s due and consider enrolling in IRS Direct Pay.

» MORE: How to fill out a W-4 form

IRS payment plan costs and fees

IRS payment plan costs vary based on which plan you select. The total cost of IRS payment installment agreements includes accrued penalties and interest until the balance is paid in full.

IRS installment agreement fees are reduced if you opt into automatic withdrawal payments from a checking or savings account through direct debit. IRS payment plan fees are waived or reimbursed for low-income taxpayers who are below the federal poverty level.

*Including penalties and interest

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    FAQ

    Can the IRS refuse a payment plan?

    Yes, the IRS can refuse a payment plan. Most commonly, the IRS denies a payment plan application if:

    • You have defaulted on a previous installment agreement
    • You’re still in the process of paying a tax debt from a prior year
    • The plan doesn’t require you to pay the full debt during the agreed term
    • Your living expenses appear too excessive
    Can you have two installment agreements with the IRS?

    No, you can’t have more than one installment agreement. But if you already have a payment plan and owe taxes in the next year, you can revise your existing agreement to include the additional tax debt.

    What interest does the IRS charge for payment plans?

    In many cases, loan costs may be lower than the combination of interest and penalties the IRS must charge under federal law. The interest rate, adjusted quarterly, is currently 4% per year, compounded daily. The late-payment penalty is 0.5% per month, not to exceed 25% of unpaid taxes.

    Bottom line

    The IRS wants to recoup as much tax debt as possible and works with you if you can’t pay all at once. Whether you owe less than $10,000 or more than $100,000, there’s a payment plan for you to settle your tax debt. It’s always in your best interest to set up a payment plan with the IRS to avoid garnishments, levies and liens.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
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