How to Set Up a Payment Plan With the IRS

Dealing with tax debt can be daunting for individuals and businesses. Fortunately, the IRS offers structured payment plans to help taxpayers manage liabilities over time, reducing the risk of severe penalties or interest.

Understanding how to establish an IRS installment agreement is crucial for those seeking relief from tax pressures. This guide explains eligibility criteria, agreement types, application procedures, and more.

Eligibility Requirements

To qualify for an IRS payment plan, taxpayers must meet specific requirements. All required tax returns must be filed—typically the past three years for individuals and all payroll tax returns for businesses. This ensures the IRS has an accurate assessment of obligations.

Tax liability limits also apply. As of 2024, individuals with debts of $50,000 or less and businesses owing $25,000 or less in payroll taxes generally qualify for streamlined installment agreements, which simplify the process by reducing the need for detailed financial documentation. Taxpayers with higher debts can still qualify but must provide additional financial information.

Compliance with current tax obligations is essential. Taxpayers must be up-to-date with estimated tax payments and withholding requirements. Those in bankruptcy proceedings are not eligible to enter into an installment agreement.

Types of Installment Agreements

The IRS offers several installment agreements to suit different financial needs, each with specific features and requirements.

Short-Term

Short-term installment agreements are for taxpayers who can pay off their debt within 120 days. These agreements suit those facing temporary cash flow issues. Though they don’t incur setup fees, interest and penalties continue to accrue until the balance is paid. Taxpayers can apply online or by contacting the IRS directly.

Long-Term

Long-term installment agreements, or monthly payment plans, are for those needing more time to settle their tax debt. These agreements can span several years. Individuals must owe $50,000 or less in combined tax, penalties, and interest, while businesses must owe $25,000 or less in payroll taxes. The IRS charges a setup fee, which varies based on the payment method. Taxpayers must submit Form 9465 and, for higher debts, may need to provide additional financial information.

Partial-Payment

Partial-payment installment agreements (PPIAs) are for taxpayers unable to pay their full liability, even over an extended period. Payments are based on what the taxpayer can afford, requiring detailed financial disclosure, typically via Form 433-F. The IRS reviews PPIAs every two years to reassess the taxpayer’s financial condition. Interest and penalties continue to accrue, and future refunds may be applied to the outstanding balance.

The Application Process

Setting up an installment agreement involves a straightforward application process. The IRS provides an Online Payment Agreement tool for individuals with simple financial situations, offering real-time processing and immediate confirmation.

For more complex cases, taxpayers may need to submit Form 9465 along with supporting documents, such as financial statements or proof of income. Those applying for partial-payment agreements may need additional forms, such as Form 433-A or 433-B.

Taxpayers should be aware of associated fees. As of 2024, the IRS charges a setup fee for long-term agreements, with lower fees available for direct debit options. Interest and late payment penalties continue to accrue until the debt is fully paid.

Payment Methods

Selecting a suitable payment method is important. Direct debit is often preferred for its automation and reliability, with lower setup fees compared to other methods. Taxpayers authorize the IRS to withdraw the agreed amount from their bank account monthly.

Other options include payments by check, money order, or credit card. These methods provide flexibility but require active management to ensure timely payments. Credit card payments may involve additional processing fees.

Adjusting or Cancelling the Plan

Changes in financial circumstances may require adjusting or cancelling an installment agreement. Taxpayers experiencing income reductions can request lower monthly payments by submitting updated financial information.

If the remaining balance can be paid in full, taxpayers may cancel their agreement by contacting the IRS and arranging payment. However, cancelling an agreement could affect eligibility for future IRS payment plans.

Repercussions of Missed Payments

Missing a payment can lead to serious consequences. The IRS typically sends a notice for missed payments, and taxpayers should address the issue promptly to avoid additional penalties or interest. A late payment penalty of 0.5% of the unpaid balance per month may apply.

Repeated missed payments can result in defaulting on the agreement, prompting the IRS to take more aggressive actions, such as issuing a tax lien or levy. A lien is a legal claim against the taxpayer’s property, affecting credit ratings, while a levy allows the IRS to seize assets or garnish wages. Taxpayers should communicate with the IRS if they anticipate difficulties meeting payments, as renegotiation may be possible.