Like millions of Americans, you owe back taxes. You can’t afford to pay your taxes, but you don’t want to get mired in debt. What should you do? While you may be looking for tax forgiveness, one reliable way is to set up an installment agreement or payment plan with the IRS.
Although not as desired as other tax relief programs, such as the Offer in Compromise program, which allows you to settle your tax debt for less than the full amount you owe, an installment agreement is the only realistic tax relief option for most people who file tax returns. In 2019, the Internal Revenue Service approved 2.8 million of these agreements and only 17,890 offers in compromise. Only 33.1% of offers in compromise get approved, while installment agreements often get approved automatically (Source).
In 2019, the IRS approved 2.8 million installment agreements but only 17,890 offers in compromise.
Why does the IRS prefer installment agreements to offers in compromise? Because they result in more money in the IRS’s coffers (penalties and interest plus the tax debt you owe). Offers in compromise let you pay less than the balance due amount. Installment agreements enable you to pay off your debt in full through a series of monthly payments over time.
If you enter into an agreement after filing your tax returns, you’ll also have to pay interest and penalties on your debt balance — typically the equivalent of an 8% to 10% APR plus penalties. As a result, if you think you might qualify for an offer in compromise, you should at least apply. But if that strategy fails, a payment plan can help.
What is an IRS tax payment installment agreement?
An installment agreement is a payment plan that allows you to pay your tax debt over a set time period. Just like a car loan or mortgage, an installment agreement gives you the option to pay large debts over time.
There are five main types of installment agreements.
Let’s discuss each type so you can decide which is right for you.
How are installment agreements different from short-term payment plans?
Streamlined installment agreement
How many types of installment agreements are there?
There are five types of installment agreements.
The IRS offers a short-term payment plan to taxpayers who intend to pay the amount owed in 6 months (180 days) or less. Unlike installment agreements (long-term payments), short-term payment plans do not require a setup fee. Like installment agreements, though, they require the taxpayer to repay the tax debt plus any tax penalties and interest owed.
Which installment agreement is right for you?
Which installment agreement or long-term payment plan you qualify for depends on how much you owe, your current financial circumstances, and whether you’re applying as an individual or as a business. There are five main types of installment agreements. Let’s discuss each type so you can decide which is right for you.
Guaranteed Installment Agreement
Do you owe $10,000 or less in back taxes (excluding interest and penalties)? Then you have the right to a 3-year Internal Revenue Service installment agreement or long-term payment plan. You won’t even have to file a financial statement to qualify.
This option enables you to make payment of your taxes in increments over a period of up to 3 years. And as long as you remain current on your payments, the IRS will stop its collection efforts. That means you won’t have to worry about the IRS filing a federal tax lien against your property.
However, there are downsides to this option. Interest rates are high, at approximately 8% to 10% APR (Source). And installment agreements generally hurt your credit score. If your credit is good enough to qualify you for competitive rates, you might be better off paying your tax debt with a personal loan.
To qualify for a guaranteed Internal Revenue Service installment agreement, you must:
- Have filed and paid your taxes by the due date over the previous five years.
- Be up-to-date on filing your current taxes.
- Pay off your taxes within 36 months.
- Have had no installment agreement within the previous five years.
- Agree to file and pay the minimum monthly payment amount on time in the future.
Streamlined Installment Agreement
If you don’t qualify for a guaranteed installment plan and you owe $50,000 or less to the IRS, you may be eligible to apply for a payment plan called a streamlined installment agreement.
A streamlined installment agreement is much like a guaranteed installment agreement, but you must pay off your debt within 72 months (rather than 36). As with the guaranteed plan, as long as you are current with your payments, the IRS won’t file a tax lien against your property.
To qualify for a streamlined installment agreement, fewer payment options are available. You must pay by direct debit or through payroll deductions rather than by credit card.
Partial Pay Installment Agreement (PPIA)
Not eligible for the first two agreements? Perhaps a partial payment installment agreement is right for you. This option is for taxpayers who cannot pay their tax debt in full but have the resources to pay a portion of them.
To qualify, you must:
- Owe over $10,000 combined IRS tax debt, penalties, and interest.
- Have filed and paid all taxes for previous years.
- Have no marketable assets.
- Not be in bankruptcy or have an active offer in compromise.
If you secure a PPIA, the IRS will assess your living expenses and set your monthly payment based on what you may be able to afford. It may also offer you a longer repayment term.
To apply, fill out a financial statement and provide supporting documentation. Once your payments are set, the IRS will re-evaluate your terms every two years to see if you can afford to pay more.
With a PPIA, the IRS can still file a tax lien to protect its interests. If you’re considering a partial pay agreement, check to see if you might qualify for an offer in compromise instead.
In-Business Trust Fund Express Agreement
In-business Trust Fund Express agreements are available for businesses that owe $25,000 or less. This type of payment plan generally does not require a financial statement or financial verification as part of the application process. To qualify, you must pay your entire tax balance within 2 years or before the statute of limitations expires (whichever is sooner).
To apply, you can do so online if your business owes $25,000 or less in payroll taxes (if you owe more than $25,000, consider paying your tax payment liability down to $25,000 before applying). You can also call the IRS Business and Specialty Tax assistance line 800-829-4933 or call the number on your bill or notice to apply for an online payment agreement.
Routine Installment Agreement
If you owe more than $25,000, need a repayment term longer than five years, or don’t qualify for the above options, you may be eligible for a routine payment plan.
This type of agreement falls outside normal IRS guidelines. As such, approval is not automatic. You may need to provide financial information to help the IRS determine your monthly payment. They may also encourage you to consider other ways to pay off your debt, such as selling off assets or apply for a loan. Additionally, they may file a federal tax lien.
Making payments on your installment agreement
Once you secure your chosen payment plan option, you’ll start making monthly payments. For individuals, balances over $25,000 must be paid by Direct Debit through an IRS Direct Debit Installment Agreement (DDIA). This describes when you make payments to the IRS directly from your bank account. For businesses, balances over $10,000 must be paid by Direct Debit- they don’t have other payment options. For others, there are several payment options: payroll deduction, checks, money orders, or credit card. In addition to other personal information, you must disclose your social security number to apply.
Unless you are considered low income, you must pay a user fee or filing fee. If you plan to pay using direct debit and apply online, the user fee is only $31, whereas if you file by phone, mail, or in person, the fee is $107. If you’re able to pay off your debt in full within 120 days, you can avoid the fee. If you meet the IRS’s standards for low-income taxpayer status, the setup fee is waived if you apply online, by phone, or in-person. (Generally, this low-income taxpayer status applies to individual taxpayers with adjusted gross income at or below 250% of the applicable federal poverty level).
Through your payment plan, you will be responsible for repaying the tax debt plus debit/credit card processing fees, accrued penalties, and interest until the balance is paid in full. Again, tax penalties and interest continue to accrue while you’re paying your installment agreement online.
The IRS can revoke your payment plan at any time if you:
- Miss a payment.
- Don’t file tax returns.
- Don’t pay current taxes.
- Provide erroneous information in your financial statement.
- Your financial position changes under a PPIA.
Frequently asked questions
Can I have two payment plans with the IRS at the same time?
When you cannot pay the taxes you owe, you can establish a payment plan with the IRS. They offer a short-term payment plan for those with small balances and long-term plans or agreements for those with larger balances. The limit is $100,000 for a short-term payment plan.
These plans allow you to pay down the balance over time or pay in full your debt in smaller chunks. If you cannot pay your taxes in a future tax year, you can add that new balance to your existing agreement. This does not constitute a second agreement.
How do I contact the IRS to make a change to my payment plan?
You have several options available if your ability to pay has changed and you cannot make a payment. The first option is to call the IRS immediately at 1-800-829-1040 for additional information. You can also use the online payment agreement tool on the IRS website to make the following changes:
- Change your monthly payment amount.
- Change your monthly payment due date.
- Convert an existing agreement to a Direct Debit payment agreement.
- Change the bank routing and checking account number on a Direct Debit agreement.
- Reinstate after default.
What happens if I default on my payment plan?
If you fall behind on payments or stop paying entirely, the IRS can cancel the payment plan and put you, the taxpayer, into default. When this happens, you receive a notice called a CP523, which informs you of the IRS’s intent to terminate your agreement and seize your assets.
There may be a reinstatement fee if your plan goes into default. Penalties and interest continue to accrue until your balance is paid in full. If you received a notice of intent to terminate your agreement, contact the IRS immediately. They will generally not take enforced collection actions:
- When a payment plan is being considered;
- While a plan is in effect;
- For 30 days after a request is rejected or terminated, or
- During the period the IRS evaluates an appeal of a rejected or terminated agreement.
But, defaulting on your agreement can still lead to serious consequences. The CP523 notice also explains the denial or revocation of a United States Passport. The Fixing America’s Surface Transportation (FAST) Act legislation generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt, and this could apply to you.
Can I pay off my IRS payment plans early?
There’s no penalty for paying off your IRS payment plan early. In fact, if you pay tax debt quickly, it’s likely the plan setup fee will be waived. If you owe $50,000 or less, you can avoid the fee by paying the full amount due within 120 days or 4 months. If you owe more than $50,000, call the IRS at 800-829-1040 to discuss your tax debt and an option for payment plans.
What if I miss a payment?
If you are temporarily unable to pay, contact the IRS and alert them of your financial situation. In general, they will not default your agreement after just one missed or late payment, and so you usually have a 30-60 day grace period. The more you can communicate with them to help them understand your situation and why you’ve missed a payment, the better.
How has COVID-19 impacted these agreements?
Taxpayers who were unable to comply with the terms of their payment plan had the option to suspend payments until July 15, 2020. However, payments must now continue for agreements to remain in effect.
According to the IRS, taxpayers who asked their banks to suspend direct debit installment agreements until July 15, 2020, should, if they haven’t already, inform their banks to allow those debits to resume. This will ensure that agreements remain in effect and payment continues to be made.
Can I still receive a refund if I have an installment agreement with the IRS?
No, one of the conditions of your installment agreement is that the IRS will automatically apply any refund (or overpayment) due to you against taxes you owe. Because your refund isn’t applied toward your regular monthly payment, continue making your installment agreement payments as scheduled.
If your refund exceeds your total balance due on all outstanding tax liabilities, including accruals, you’ll receive a refund of the excess unless you owe certain other past-due amounts. These can include state income tax, child support, a student loan, or other federal non-tax obligations which are offset against any refund.
It is your responsibility to meet your tax obligation and file tax returns. If you’re not sure how to proceed, you may want to seek the assistance of an enrolled agent, certified public accountant, or tax attorney. They can look at your financial situation and negotiate with the IRS on your behalf or use their expertise to plan your next steps. You can also review the online payment agreement options on the IRS website.
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Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.