Can I Make a Partial Payment to the IRS? How It Works

Paying taxes in full isn’t always possible, and the IRS allows partial payments under certain conditions. If you’re unable to cover your entire tax bill at once, there are options to help you stay compliant while minimizing financial strain.

The process involves setting up an agreement with the IRS and selecting a payment method that fits your situation. Understanding how these arrangements work can help you avoid penalties or defaulting on your plan.

Eligibility for Partial Payment

The IRS permits partial payments if taxpayers can demonstrate financial hardship. This is assessed through a review of income, expenses, assets, and liabilities. Individuals complete Form 433-A, while businesses use Form 433-B, both requiring details on income, necessary living expenses, and assets that could be sold to cover the debt.

If the IRS finds that full payment would cause hardship, they may approve a Partial Payment Installment Agreement (PPIA), which allows smaller payments over time. If the statute of limitations on tax collection expires before the full amount is repaid, the remaining balance may be forgiven. The IRS has ten years from the date of assessment to collect unpaid taxes.

In some cases, the IRS may require taxpayers to sell certain assets before approving a PPIA. For example, if a taxpayer owns a second vehicle or has significant savings, they may need to use those resources first. Periodic financial reviews may be required, allowing the IRS to reassess the taxpayer’s ability to pay and adjust the agreement if their financial situation improves.

Setting Up an Installment Agreement

Once the IRS determines a taxpayer qualifies for a payment plan, the next step is establishing the terms. The amount owed, financial situation, and time remaining before the tax debt expires influence the structure of the plan. Taxpayers can apply online if they owe $50,000 or less in combined tax, penalties, and interest. If the balance exceeds this threshold, they must submit Form 9465. The IRS typically responds within 30 days, though processing times may be longer during peak tax season.

For balances under $10,000, the IRS generally approves a 36-month plan without requiring additional financial disclosures. If the debt is higher, the IRS may extend the repayment period up to 72 months, provided the taxpayer agrees to automatic payments. For larger balances or those qualifying for a PPIA, the IRS may require a more detailed review of income and expenses before finalizing the terms.

Interest and penalties continue to accrue until the full amount is paid. As of 2024, the interest rate on underpayments is the federal short-term rate plus 3%, adjusted quarterly. Late payment penalties add 0.5% per month, up to a maximum of 25% of the unpaid balance. These additional costs can significantly increase the total amount owed.

Different Payment Methods

Once an installment agreement is in place, taxpayers must choose a payment method. The IRS offers several options, each with advantages and drawbacks.

Direct Bank Transfer

A direct debit from a checking or savings account ensures payments are made on time each month, reducing the risk of default. The IRS requires direct debit for installment plans exceeding $25,000.

Setting up direct debit involves providing bank account details when applying for the installment agreement. Payments are automatically withdrawn on the agreed-upon date, eliminating the need for manual transactions. This method also reduces processing fees, as the IRS does not charge for electronic transfers. However, taxpayers must ensure sufficient funds are available each month to avoid overdraft fees.

IRS Payment Portal

The IRS offers an online payment system called Direct Pay, allowing taxpayers to make one-time or recurring payments directly from their bank account. Unlike direct debit, this method requires manual authorization for each transaction, making it a good option for those who prefer more control over their payments.

To use Direct Pay, taxpayers must verify their identity by providing information from a prior tax return. Payments can be scheduled up to 30 days in advance, and users receive immediate confirmation. There are no processing fees for bank transfers, but debit and credit card payments incur a service charge. Credit card payments also accrue interest if not paid off in full.

Money Order

For those who prefer traditional payment methods, the IRS accepts money orders, which can be purchased from banks, post offices, or retail stores. Payments should be made payable to the “United States Treasury” and must include the taxpayer’s name, address, Social Security number (or Employer Identification Number for businesses), tax year, and form number.

Money orders must be mailed to the appropriate IRS address, which varies based on location and the type of tax owed. Since mail processing times can be unpredictable, taxpayers should send payments well in advance of the due date to avoid late fees. Using certified mail with a return receipt provides proof of payment in case of disputes. While money orders offer a secure way to pay, they may not be ideal for long-term installment agreements due to the inconvenience of purchasing and mailing them each month.

Potential Penalties for Missed Payments

Failing to make a scheduled payment under an IRS installment agreement can lead to default. If an agreement is in default, the IRS can terminate the plan, making the full remaining balance due immediately. This can trigger collection actions, including tax liens or levies on wages, bank accounts, or other assets. A federal tax lien, which is a legal claim against a taxpayer’s property, can impact creditworthiness and complicate the ability to secure loans or sell assets.

Missed payments also result in additional financial burdens. The IRS imposes a failure-to-pay penalty of 0.5% of the unpaid balance per month, increasing to 1% if a taxpayer receives a final notice of intent to levy and does not pay within ten days. This penalty continues until the balance is fully paid or reaches a maximum of 25% of the total amount due. Interest charges also compound daily, increasing the overall debt.

How to Modify an Existing Agreement

If a taxpayer is unable to meet their current payment terms, they can request a modification to avoid default and enforcement actions. The IRS allows adjustments under certain conditions, but approval depends on the taxpayer’s financial situation and payment history.

To request a modification, taxpayers must contact the IRS directly or submit Form 9465, indicating the need for a revised payment amount. If requesting a lower monthly payment, the IRS may require an updated financial disclosure using Form 433-F. The agency will review whether the taxpayer’s financial hardship justifies a reduced payment or an extension of the repayment period. If approved, the new terms replace the previous agreement.

If a taxpayer temporarily cannot make payments due to job loss, medical expenses, or other financial hardships, they may qualify for a temporary delay in collections. The IRS can classify the account as “Currently Not Collectible” (CNC), pausing enforcement actions. However, interest and penalties continue to accrue. The IRS periodically reviews CNC status, and if the taxpayer’s financial condition improves, collection efforts may resume, requiring a new payment arrangement.