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What Is an IRS Installment Agreement?
By Ashley Donohoe MONEY RESEARCH COLLECTIVE
If you end up owing more taxes than you can pay on time, you can experience larger problems than costly tax penalties and interest. To avoid potentially having income and assets seized as part of the IRS collections process, consider requesting an IRS installment agreement to pay your debt over time.
Read on to learn what an IRS installment is, including the different types of installment agreements, their requirements and application processes, associated fees and alternative ways to pay off your taxes.
Understanding IRS installment agreements
An IRS installment agreement is a payment plan for your tax debt. Once you set up the payment plan , you will make monthly payments to the IRS. The payment plan can save you money as the interest rates are lower than most bank loans or credit cards. The IRS halts collection actions such as levies as long as you stay current with your plan.
What are installment agreements and how do they work?
With an IRS installment agreement, you can pay your tax debt over six months to 10 years. You can choose from several installment options depending on how long you need to pay the balance and how much tax debt you owe. The IRS supports several payment options, such as automatic bank drafts and manual payments, and you can update your preferences over time.
While the plan is active, the IRS requires that you pay on time and make minimum agreed-upon payments. This lets you avoid defaulting on the plan and either paying additional fees for reinstatement or facing a collection action. The IRS requires that you do not have other outstanding tax debt outside of the agreement. You must also file future tax returns on time. To stay current, you’ll need to know where you fall within the 2023 tax brackets. You might also look into some of the best tax software programs on the market to help with your future tax filing.
The IRS doesn’t waive existing interest charges or penalties incurred for failing to file your tax return or pay taxes in full on time. In addition, it charges you ongoing interest on the balance until you pay off your installment agreement. While the rate may be double for those who aren’t participants in an IRS plan, on the plan, you’d pay a lower IRS installment agreement interest rate of 0.25% per month, or 3% per year.
Types of IRS monthly payment plans and their eligibility requirements
Depending on your financial situation, you might need a few extra months to cover a small income tax balance or several years to pay many thousands. The IRS offers short- and long-term payment plans with different benefits and requirements for taxpayers to accommodate both situations.
Short-term payment plan
The IRS makes the short-term payment plan available to individuals but not businesses. The short-term payment plan allows you a maximum of 180 days to pay off a total balance (including interest and penalties) of up to $100,000. It doesn’t require extensive documentation like long-term plan options do.
This flexible plan doesn’t require you to make any specific monthly payment amount as long as you pay everything off on time. In addition, the IRS doesn’t require an automatic payment arrangement, and you can use any accepted payment method, such as automatic bank drafts or checks.
Long-term payment plan
Available to both individuals and businesses, the IRS’s long-term installment plans suit those with higher tax balances. These plans come in a few forms that give you anywhere from three to 10 years to make monthly payments. The most commonly used plans include guaranteed, streamlined and non-streamlined agreements.
With a guaranteed installment arrangement, the IRS automatically gives you three years to repay your tax debt. You must owe no more than $10,000 in taxes to qualify, and you can’t have any unfiled tax returns, past installment agreements or tax delinquencies within the last five years. You won’t be required to set up automatic payments, and you tell the IRS how much you can pay monthly.
The streamlined installment agreement allows you up to six years to pay. A tax balance (including penalties and interest) of up to $50,000 can qualify, and you’ll divide the amount by 72 to arrive at your monthly payment. To qualify, you must be current with your tax returns and have met other prior tax obligations. The IRS also requires you to set up a direct debit arrangement if your balance exceeds $25,000.
If you’re an individual taxpayer whose tax debt exceeds $50,000 but not more than $250,000, you can opt for the non-streamlined agreement. This less common option requires you to be able to pay off the amount within the 10-year statute of limitations the law has imposed on the IRS on tax collection. It requires extensive documentation about your finances and assets, and the IRS usually puts a federal tax lien on your property. You’ll also likely set up a direct debit agreement.
How to apply and what you need to do so
In most cases, you can apply for a short- or long-term IRS installment agreement online. The exception is if you seek a non-streamlined agreement with a tax debt exceeding $50,000. In that case, you’ll have to submit forms by mail, visit an IRS office or call the IRS for help. If you’d like another plan but prefer doing things offline, you can also use these alternative options.
Before starting, locate any tax balance notice the IRS has sent you. You may also need income, asset and expense information for a long-term installment plan application. Have your bank account information ready if you plan to set up a direct debit arrangement.
You’ll find online application links for individual and business taxpayers on the IRS’s online payment agreement application page. You can either sign in or create an ID.me or IRS account and complete the identity verification process. The online application tool will walk you through selecting a payment plan and providing your personal and financial information.
You can download Form 946 (Installment Agreement Request) if you’d rather complete a paper application. The IRS also requires Form 433-F (Collection Information Statement) if you need a non-streamlined plan for a significant tax debt. This detailed form documents your assets, employment information, monthly expenses and income.
Regardless of your chosen application method, you can expect to provide these types of information:
- Your name and contact details
- Your business information
- Your tax balance
- Your initial IRS installment agreement payment
- Your calculated monthly payment
- Desired payment date
- Bank account and routing numbers (for direct debit)
- Low-income taxpayer status (if applicable)
- Additional household financial information (for specific taxpayers only)
After submitting your IRS installment agreement form, expect to hear back within a month. If you receive an acceptance letter, it will instruct you to pay the setup fee, and you’ll see your balance and payment details. The IRS will send statements regularly unless you have a direct debit arrangement. Watch for future letters, and if you can’t pay your IRS installment agreement, immediately contact the IRS.
Associated fees
Getting and using an installment agreement can come with one-time and recurring fees. Depending on the specific plan and payment method chosen, you will create an account with your bank to process your monthly payments to the IRS. In addition, you’ll have to pay for reinstatement if you default on the IRS installment agreement.
Setup fee
You won’t pay a fee if you set up a short-term installment plan. But for a long-term plan, after your installment plan is approved, you’ll pay a setup fee that compensates the IRS for reviewing your application and processing the agreement. The fee amount varies based on how you set up the plan and whether you use direct debit.
If you set up a direct debit arrangement with a linked checking account, you’ll pay $31 to set up the long-term plan online or $107 to set it up using other methods. You can have the fee waived if you meet the requirements for low-income taxpayers.
You’ll pay higher fees if you pay manually each month and use a non-direct debit payment method such as a check, credit card or bank account. The IRS charges $130 to set up a long-term plan online and $225 to apply using other methods. Low-income taxpayers can get the fee reduced to $43.
Processing fee
You’ll pay processing fees if you use a debit or credit card to make IRS installment agreement payments online. The IRS works with a few processors, whose fees vary depending on the service and the type of card used. Do some calculations before you choose one.
Generally, you’ll pay a flat rate for a debit card payment and a percentage rate for a credit card payment. For example, one processor may charge 1.85% for credit cards but just $2.20 total for debit cards. You can also expect a minimum fee between $2.50 and $2.69 for credit card payments.
Reinstatement fee
If you miss a payment, pay below an agreed amount or fail to respond to information requests, you’ll default on your IRS installment agreement. The IRS sends a default notice where you have 30 days to get your payment plan reinstated. If you default, you may face future actions, such as a levy.
The reinstatement fee runs $10 if you submit the request online. Otherwise, you’ll pay $89 to use other methods. The higher fee drops to $43 if you meet the low-income criteria.
Other payment options to rectify tax debt
An IRS installment agreement may not suit all situations. Maybe you can’t qualify or afford the payments, or you want to avoid the interest charge. If so, you can consider other options.
Offer in compromise
An offer in compromise can help if your financial situation makes it unlikely even an installment plan would allow you to pay off your taxes. Although approval is challenging, the IRS may let you pay just a part of your tax debt through either two years of monthly payments or up to five installments over five months. You’ll need to complete extensive paperwork and provide information about your assets, expenses and income for the IRS to decide. You’ll also likely experience a tax lien on your assets.
For help understanding what tax relief is and how it works, consider working with a professional to navigate the offer in the compromise process more efficiently. They can boost your chances of approval and assist with other needs, such as teaching you how to file back taxes.
Personal loan
You could get a personal loan from a financial institution for your tax debt and pay it off in a maximum of five to seven years. This nonsecured loan typically features fixed payments and a lower interest rate than credit cards, but you’ll encounter borrowing limits and fees.
Credit card
Using an existing or new credit card may help you meet your obligation to the IRS. You can put the debt on a credit card and make a monthly payment to your lender until you’ve paid off the card balance. Since the interest rate can be high, this option best suits situations where you need short-term financing. Look for card rewards programs or 0% interest promotions that might allow you to save with higher balances. Be aware of the card processing fee when paying your taxes.
Home equity loan
If you own a property with enough equity, you could take out a home equity loan for your tax bill. These loans tend to have more attractive interest rates than personal loans and credit cards, and your monthly payments can stretch out longer to be more affordable. However, this is a secured loan where you could lose your property if you default. The application process is extensive, with strict lending criteria.
Is an IRS installment agreement the best option for you?
As long as you meet the criteria and can afford to make timely payments, an IRS installment agreement is a good way to satisfy the IRS and prevent collection efforts. Before proceeding, consider the fees involved, and consult an IRS installment agreement interest rate calculator to see how those charges will add up. If you’d like help with tax relief options, including installment agreements, it’s also worth looking into the best tax relief companies.
Ashley Donohoe is a business and finance writer with over a decade of experience in the field. She enjoys helping others manage their money, improve their credit, make important financial decisions, and start and run small businesses. She has earned a Master of Business Administration degree from Western Governors University as well as certifications in taxation and bookkeeping from the National Association of Certified Public Bookkeepers.