What is an IRS installment agreement?
An installment agreement (IA) is a tax repayment plan that’s setup and approved by the IRS. It consolidates one or more years of unpaid IRS tax debt with fixed payments that work for your budget. This is known formally as a Partial Payment Installment Agreement (PPIA)
Installment agreement benefits
Tax debt can be some of the most financially debilitating. Setting up an installment agreement through the IRS can help you stop wage garnishment, end liens and levies. It also helps you minimize interest charges and penalties as much as possible.
How an installment agreement works
Before entering into an IA, make sure you can fulfill the requirements of the plan. If you default, the IRS may fine you for defaulting even if you enter into a new agreement.
- If you owe less than $10,000 then a simple installment agreement can be set up through the IRS website; for higher amounts, hardship repayment cases and more complicated agreements, it’s recommended to use a tax debt resolution service.
- First the IRS will thoroughly review your financial situation to see what you can afford to pay.
- The monthly payment is based solely on what you can afford to pay – paying more helps minimize penalties and interest.
- You will be required to make fixed payments every month until the debt is paid off OR until the statute of limitations runs out.
- There is a $52 setup fee for direct debit from your checking account and $102 setup fee for payroll deduction setup.
- If the statute of limitations expires on your debt, you will no longer be required to make payments even if there was a remaining balance.
If you have defaulted on a previous IA, the IRS requires you to explain the reason for default in order for your plan to be reinstated.
IRS Installment Agreement Penalties and Interest
It’s important to understand that entering into an IA will not stop future penalties and interest from being applied to your tax debt. Penalties and interest will continue to accrue on any unpaid debt.
In general, the IRS applies a 0.5% penalty on the total amount owed at the end of each month. This continues even while you make payments on an IA. That’s why it’s in your best interest to pay as much as possible as quickly as possible.
Also note that there may be an additional 5% penalty on any taxes due that have not yet been filed. Penalties are capped at 25% maximum of the total amount owed.