How to Submit an Installment Agreement Request and What to Expect
Learn how to navigate the process of submitting an installment agreement request, including eligibility, steps, and managing terms effectively.
Managing tax liabilities can be challenging, especially when financial constraints make it difficult to pay in full. An installment agreement with the IRS offers taxpayers a practical solution, allowing payments to be spread over time and easing financial strain. Understanding how to submit a request effectively is essential for those seeking this relief.
Eligibility Criteria
To qualify for an IRS installment agreement, taxpayers must meet specific requirements. All tax returns must be up to date, ensuring that any outstanding returns from previous years are submitted. This enables the IRS to accurately assess the taxpayer’s full liability.
The total amount owed is a key factor. As of 2024, individuals with tax debts of $50,000 or less and businesses with debts of $25,000 or less are generally eligible for streamlined installment agreements, which involve a simplified application process without requiring detailed financial information. For higher liabilities, a more comprehensive review of financial circumstances, including income, expenses, and assets, is required.
Taxpayers must show they are unable to pay the full amount immediately, as paying in full would cause financial hardship. The IRS evaluates this through a review of the taxpayer’s financial situation, including income, expenses, and any assets that could be liquidated. Additionally, taxpayers must be current with estimated tax payments and federal tax deposits if they are self-employed or own a business.
Steps to Submit the Request
Submitting an installment agreement request involves gathering financial records such as income statements, expense reports, and asset documentation. This information forms the basis of the financial profile the IRS evaluates.
Taxpayers can apply online using the IRS Online Payment Agreement tool, which is user-friendly for most individuals eligible for streamlined agreements. Alternatively, Form 9465, Installment Agreement Request, can be submitted by mail, which is often used when more extensive financial details are necessary.
After submitting the request, taxpayers should expect a response from the IRS, which may take several weeks. During this time, making any possible payments toward the outstanding balance demonstrates good faith and may positively influence the decision. Maintaining communication with the IRS is also important, especially if additional information is required or financial circumstances change.
Payment Arrangements
The IRS offers various payment schedules based on a taxpayer’s financial situation. Options range from short-term plans up to 120 days to long-term agreements spanning several years. Each plan has specific criteria and potential fees, so taxpayers should carefully evaluate their financial capacity before committing.
Interest and penalties continue to accrue on the unpaid balance until fully resolved. As of 2024, the IRS interest rate for underpayments is the federal short-term rate plus 3%, and a late payment penalty of 0.5% per month generally applies. This penalty can be reduced to 0.25% for taxpayers on an installment plan. Larger initial payments or higher monthly installments can reduce these costs.
Payment arrangements can be adjusted as financial circumstances change. Taxpayers may request modifications, such as altering monthly payment amounts or extending the repayment period. Any changes must be communicated to the IRS promptly and may require updated financial information for reassessment.
Terms of the Agreement
Once approved, an installment agreement outlines specific obligations during the repayment period. Taxpayers must submit all future tax returns on time and pay any new tax liabilities to remain compliant and avoid jeopardizing the agreement.
Monthly payments must be made without fail. Missed payments can lead to default, triggering potential enforcement actions like wage garnishments or levies on bank accounts. To minimize the risk of missed payments, taxpayers can opt for automatic withdrawals from their bank accounts.
Consequences of Default
Defaulting on an installment agreement carries serious consequences. The IRS typically issues a CP523 notice, warning that the agreement may be terminated. This notice gives taxpayers a limited window—usually 30 days—to address missed payments or discuss alternative arrangements. Ignoring this notice can escalate the situation.
If the agreement is terminated, the IRS can take aggressive collection actions, such as filing federal tax liens or levying wages and bank accounts. A tax lien can damage a taxpayer’s creditworthiness, while wage garnishments reduce take-home pay until the debt is resolved. Additionally, any penalty reductions associated with the agreement may be lost, increasing the overall cost of the debt. Communicating proactively with the IRS can help taxpayers avoid default by exploring options like revising the agreement or requesting a temporary delay in payments.
Revising or Canceling the Agreement
Taxpayers may need to revise or cancel an installment agreement if circumstances change. Revising typically involves requesting modifications to payment terms, such as lowering monthly payments or extending the repayment period. Updated financial information, often submitted using Form 433-F or Form 433-B, is required for such requests, and approval depends on the taxpayer’s current financial capacity.
Canceling an agreement usually happens when the remaining balance can be paid in full or is resolved through other means, such as an Offer in Compromise. Canceling eliminates the obligation to make further payments but reinstates the full liability for any penalties and interest previously reduced under the agreement. Taxpayers should carefully consider the financial implications before pursuing this option.