How to Set Up a Payment Plan for Federal Taxes

When a taxpayer owes federal taxes but cannot pay the full amount immediately, the Internal Revenue Service (IRS) offers various payment options. These plans provide a structured approach to resolving tax debt, helping prevent further penalties and aggressive collection actions.

Types of Federal Tax Payment Plans

The IRS provides several pathways for taxpayers to address outstanding tax liabilities, each suited to different financial circumstances.

A Short-Term Payment Plan grants up to 180 additional days to pay a tax balance in full. This plan is available to individuals who owe less than $100,000 in combined tax, penalties, and interest. It can be set up without a user fee, though interest and penalties continue to accrue until the debt is paid.

An Installment Agreement allows monthly payments for up to 72 months. Individuals may qualify for a streamlined agreement if they owe $50,000 or less in combined tax, penalties, and interest, and have filed all required tax returns. Interest and penalties still apply, but this agreement can prevent the IRS from taking enforcement actions like liens or levies. A setup fee applies, varying by application method and payment type, with lower fees for low-income taxpayers.

An Offer in Compromise (OIC) allows certain taxpayers to settle their tax debt for a lower amount than what is owed. The IRS generally approves an OIC when there is doubt as to collectibility (taxpayer cannot pay the full amount) or doubt as to liability (uncertainty about the amount owed). This option is for taxpayers experiencing significant financial hardship and requires a thorough financial analysis by the IRS. An OIC application requires a non-refundable fee and an initial payment, unless low-income certification guidelines are met.

In situations of severe financial hardship, a taxpayer may be deemed Currently Not Collectible (CNC). This status temporarily pauses IRS collection efforts, such as wage garnishments or bank levies, when the taxpayer demonstrates they cannot afford basic living expenses if forced to pay their tax debt. While collection actions are suspended, interest and penalties continue to accrue, and the IRS will periodically review the taxpayer’s financial situation.

Gathering Information for Your Application

Before requesting a federal tax payment plan, taxpayers should compile specific personal and financial information. Necessary personal details include your full name, current address, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), and the specific tax periods and amounts owed.

A detailed overview of your financial situation is also required, encompassing both income and expenses. Gather documentation of all income sources, such as recent pay stubs, bank statements, or business income records, to reflect your gross monthly income. Itemize monthly living expenses, including housing, utilities, food, transportation, and medical expenses. The IRS uses national and local standards to evaluate these expenses, so provide realistic figures.

Information about assets and liabilities is also a necessary component. This includes details on all bank accounts, investment portfolios, real estate holdings, and vehicles, along with their current values. Prepare documentation of all outstanding debts, such as credit card balances, loan obligations, and other financial commitments.

Specific forms must be completed depending on the payment plan requested. For an Installment Agreement, Form 9465, Installment Agreement Request, is the primary document. This form requires basic identifying information, the amount owed, and a proposed monthly payment. If the tax debt is between $25,000 and $50,000, or if you have defaulted on a previous plan, you might need to provide additional details on Form 9465 regarding your financial situation, such as marital status, dependents, and income.

For an Offer in Compromise, Form 656, Offer in Compromise, is submitted with detailed financial statements. Individuals typically use Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, while businesses use Form 433-B. These forms require extensive information on income, expenses, assets, and liabilities, supporting the proposed OIC amount.

Submitting Your Payment Plan Request

After gathering information and preparing forms, submit your payment plan request to the IRS. Several methods are available, depending on the plan type and your situation. The IRS Online Payment Agreement (OPA) tool is a convenient method for individuals to apply for short-term payment plans or streamlined installment agreements. This online portal allows for immediate approval notification if eligibility criteria are met, such as owing less than $100,000 for a short-term plan or $50,000 for a streamlined installment agreement. Taxpayers need to create an IRS Online Account and verify their identity.

For those who prefer traditional methods or do not qualify for online submission, mailing completed forms is an alternative. Form 9465, Installment Agreement Request, can be mailed alone if the tax return is filed, or attached to the front of the tax return if filing simultaneously. Form 656, Offer in Compromise, with required financial statements (Form 433-A or 433-B), is typically sent via mail. Send copies of documents, not originals, and use certified mail with a return receipt for proof of delivery. Mailing addresses are in the form instructions.

Certain Installment Agreements can also be set up over the phone. Call the IRS directly using the number on your bill or notice, or the general IRS individual taxpayer line. Have all prepared information ready, including tax identification numbers, the amount owed, and proposed monthly payment amounts. An IRS representative will guide you through the application process and determine eligibility.

After submission, anticipate a processing period. The IRS generally responds to Installment Agreement requests within 30 days. OIC reviews are more extensive due to detailed financial analysis. The IRS communicates approval or denial by mail. If additional information is required or the request is denied, the IRS sends a notice explaining next steps or reasons. Respond promptly to IRS correspondence to avoid delays or potential collection actions.

Managing Your Approved Payment Plan

Once a payment plan is approved, adhering to its terms is paramount to avoid default and potential collection actions. Make all scheduled payments on time. Payment options include direct debit from a bank account (often encouraged by the IRS for a lower setup fee), IRS Direct Pay, electronic payments through EFTPS, or by check, money order, or debit/credit card.

Beyond timely payments, maintaining future tax compliance is a requirement for most payment plans. This means filing all subsequent tax returns on time and paying any new taxes due in full by the due date. Failure to meet these obligations can lead to default of an existing payment plan. The IRS may also apply future tax refunds to the outstanding debt.

If a taxpayer fails to meet the terms of their agreement, the payment plan may default. Consequences include cancellation of the plan, immediate demand for the entire outstanding balance, and renewed IRS enforcement actions like a Notice of Federal Tax Lien or a levy on wages or bank accounts. Penalties and interest will also continue to accrue, increasing the total amount owed.

Should financial circumstances change after a plan is approved, it may be possible to modify the existing agreement. Taxpayers can often change their monthly payment amount, due date, or convert to a direct debit agreement through the IRS online payment tool or by contacting the IRS by phone. If a significant change in financial situation makes it impossible to continue current payments, contact the IRS immediately to discuss options and potentially provide updated financial information. Addressing these changes proactively can help prevent default and maintain the payment plan in good standing.