Owing money to the IRS can be a stressful experience, especially if you’re unable to pay your entire tax bill immediately. Fortunately, the IRS offers several types of payment plans that allow taxpayers to pay their debt over time. Setting up a payment plan—also known as an installment agreement—can help you avoid more severe collection actions such as wage garnishments, tax liens, or levies. This detailed guide will walk you through the different types of IRS payment plans, eligibility criteria, application procedures, and tips for managing your plan successfully.
What Is an IRS Payment Plan?
An IRS payment plan is an agreement between you and the IRS to pay your outstanding tax debt over time. These plans are available for individuals and businesses and vary depending on how much you owe and your ability to pay. By entering into a payment plan, you show the IRS your willingness to resolve your debt, which can help you avoid enforced collection actions and additional penalties.
Types of IRS Payment Plans
1. Short-Term Payment Plan (up to 180 days)
This option is for taxpayers who can pay their full tax balance within 180 days. There’s no setup fee for a short-term plan, but interest and penalties will continue to accrue until the debt is paid in full. You can pay via direct debit, check, money order, or debit/credit card.
2. Long-Term Payment Plan (Installment Agreement)
If you need more than 180 days to pay off your balance, you can request a long-term payment plan. There are multiple options available depending on how you plan to pay:
- Direct Debit Installment Agreement (DDIA): Payments are automatically withdrawn from your bank account monthly. This is the most affordable option and required if you owe over $25,000.
- Non-Direct Debit Plan: Payments made via check, money order, or card each month. Higher fees may apply.
3. Partial Payment Installment Agreement (PPIA)
This plan is for taxpayers who cannot pay the full amount over time. The IRS will require financial documentation and may settle for less than the total balance, depending on your income and assets. These agreements are subject to periodic review.
4. In-Business Trust Fund Express Installment Agreement
This option is designed for small businesses that owe trust fund taxes (such as payroll taxes). Businesses that owe less than $25,000 may qualify for streamlined approval without needing extensive documentation.
Eligibility Criteria for Setting Up a Payment Plan
Eligibility depends on your filing status, the amount owed, and your compliance history with the IRS:
- To qualify for an online short-term plan, you must owe less than $100,000 (including penalties and interest).
- For a long-term payment plan, the total amount owed must be less than $50,000.
- You must have filed all required tax returns.
- Businesses must owe $25,000 or less to use the online payment system.
How to Apply for a Payment Plan
1. Apply Online via the IRS Website
The easiest way to set up a payment plan is through the IRS Online Payment Agreement Tool. You’ll need:
- Your name and address
- Date of birth and filing status
- Valid email address
- Your balance owed (including any recent IRS notices)
- Bank account details for direct debit (if applicable)
2. Apply by Phone or Mail
If you prefer not to apply online, you can request a payment plan by:
- Calling the IRS at 800-829-1040 (for individuals)
- Submitting Form 9465, Installment Agreement Request
- Including Form 433-F (Collection Information Statement) if you owe more than $50,000
Fees Associated with Payment Plans
There are different setup fees based on your selected plan and payment method:
- Direct debit (online): $31 setup fee
- Non-direct debit (online): $130 setup fee
- Low-income taxpayers: May qualify for reduced or waived fees
- Applying by mail or phone: Fees can be as high as $225
How the Plan Works Once Approved
Once the IRS approves your plan, you’ll receive a confirmation letter detailing the terms. Monthly payments must be made on time and in full. If you miss a payment or fail to file future returns, the IRS may terminate the agreement.
Interest continues to accrue on unpaid balances, even while you’re on the plan. However, staying in good standing with your plan helps you avoid additional penalties or enforced collection actions.
What If You Can’t Afford the Minimum Monthly Payment?
If you cannot meet the standard payment terms, you may still request a reduced monthly amount. The IRS will typically require you to submit a full financial disclosure using:
- Form 433-A: For individuals
- Form 433-B: For businesses
Based on your ability to pay, the IRS may approve a partial payment installment agreement, place you in “Currently Not Collectible” status, or encourage an Offer in Compromise.
Maintaining Your Payment Plan
To avoid defaulting on your plan:
- Make all monthly payments on time
- File all future tax returns promptly
- Pay all future taxes in full and on time
- Contact the IRS immediately if you foresee a missed payment
What Happens If You Default on Your Plan?
If you miss a payment or fall out of compliance, the IRS can terminate your plan and take collection actions, including:
- Wage garnishment
- Bank account levies
- Tax liens
- Seizure of assets
You may be able to reinstate a defaulted agreement, but you’ll likely need to pay a reinstatement fee and submit updated financial information.
Offer in Compromise as an Alternative
If you are unable to pay your tax debt in full or via an installment plan, you may consider an Offer in Compromise (OIC). This is an agreement with the IRS to settle your tax debt for less than the full amount owed. It’s difficult to qualify and requires significant documentation, but it can be a last resort for those in financial hardship.
Benefits of Setting Up a Payment Plan
- Prevents enforced collection actions
- Allows you to resolve tax debt in manageable payments
- May reduce or halt additional penalties
- Protects your credit from severe IRS actions like liens and levies
Final Thoughts
Setting up a payment plan with the IRS is a practical and often necessary step for taxpayers who cannot pay their tax balance in full. By understanding the available options, knowing how to apply, and staying in compliance with your plan, you can successfully resolve your debt over time without further IRS complications. Whether you opt for a short-term plan, a long-term installment agreement, or a more complex arrangement like a partial payment plan, taking action early and staying proactive is the key to protecting your finances and peace of mind.
