IRS Installment Agreement: Setting Up a Tax Payment Plan

Can’t pay your back taxes off in a single lump sum like the IRS expects? If you receive a notice that you owe money on your income taxes, an IRS installment agreement (IA) or short-term payment plan could be the solution you need. It breaks your balance down into a monthly repayment plan, so you can pay off tax debt in a way that works for your budget. Installment agreements give taxpayers a practical way to pay off tax bills that often feel completely overwhelming at first.

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9 Things to Know About Setting Up an IRS Tax Payment Plan

If you can’t pay federal taxes by April 15, you may qualify for a payment plan with the IRS.

1. Apply for a payment plan online

If you’re a qualified taxpayer or authorized Power of Attorney (POA), you may qualify to apply online on the IRS site for a payment plan and installment agreement to pay off tax owed over months or years.

The IRS offers three payment plan options: Pay the full amount upfront; pay in 120 days or less; pay in more than 120 days. Payment plan options are determined by the amount you owe in taxes to the IRS.

2. Apply by mail or phone

If you don’t qualify to apply online for a payment plan, you might still be able to set up a monthly installment plan by mailing an installment agreement request. You can also apply by phone by calling 800-829-1040 (individual) or 800-829-4933 for a business.

3. Set up a short-term payment plan

You may qualify to apply online for a short-term payment plan – paying the amount owed in 120 days or less – if you owe $50,000 or less in combined tax, penalties, and interest and filed required returns, according to the IRS.

Only individual taxpayers (not businesses) can apply for a short-term payment plan. If you’re a sole proprietor or an independent contractor, you can apply for a short-term payment plan as an individual.

4. Set up a long-term payment plan

You may qualify to apply online for a long-term payment plan – paying in more than 120 days – if you owe less than $100,000 in combined tax, penalties and interest, and filed all required returns, according to the IRS.

Business owners may qualify to apply for a long-term payment plan online if they owe $25,000 or less in tax, penalties, and interest (combined) and filed all required returns. Sole proprietors and independent contractors should apply as an individual for a long-term payment plan.

5. You may have to pay a setup fee

Short-term payment plans don’t charge a setup fee. But if you set up a long-term payment plan (installment agreement) with the IRS and pay monthly through automatic withdrawals, you must pay a $31 “setup fee” plus accrued penalties and interest until you pay the full balance if you apply online. The setup fee may be waived for qualified low-income taxpayers.

Applying for a long-term payment plan by phone, mail or in-person raises the setup fee to $107. The  setup fee for a long-term payment plan if you pay (non-automated payments) electronically online, by phone or using the Electronic Federal Tax Payment System (EFTPS) jumps even higher: $149.

6. You’ll pay a penalty

You’ll receive some breathing room to pay taxes with a payment plan, but you’ll still pay interest and some penalties, including a “failure to pay” penalty – 0.5% of tax not paid by April 15 and 0.25% during the installment agreement – until you pay the full balance.

The IRS may also impose other penalties, including a penalty for failure to file of 5% of unpaid tax required to be reported, which is reduced by the failure-to-pay amount if both penalties apply.

7. You’ll also pay interest

If you owe federal tax, the interest on tax, penalties and interest starts on April 15 and accumulates daily. The IRS determines the interest rate once every quarter.

“The IRS doesn’t remove or reduce interest for reasonable cause or as first-time relief. Interest is charged by law and will continue until your tax account is fully paid,” according to the IRS.

8. You may be able to revise your payment plan

If you want to change your payment plan once it’s set up, you can revise the plan using the IRS Online Payment Agreement Tool. You can change your monthly payment amount or monthly due date, convert the existing agreement to pay with direct debit or reinstate a payment plan after default.

If the revised plan doesn’t meet requirements, you’ll be prompted to change the payment amount.

9. Make sure you pay on time

If you don’t stick to the agreed payment plan, your plan could go into default and be subject to forced collection actions such as a levy on your salary and other income, bank accounts or property.

Types of IRS payment plans

Avoiding a Notice of Federal Tax Lien

In the past, using an installment agreement meant that the IRS would apply a Notice of Federal Tax Lien on any property the taxpayer held.^[1] However, the Fresh Start program revised these rules. Now, if you owe less than $25,000, the IRS won’t file a Notice of Federal Tax Lien. If you owe more than $25,000, you can avoid the Notice of Federal Tax Lien by agreeing to pay your IA via direct debit or payroll deduction.

Things to know before you apply

Before applying for an installment agreement or payment plan, make sure that you can fulfill the requirements of the plan. Review your budget carefully to ensure you can meet the payment requirement by the due date every month. The IRS may fine you for defaulting and you may be required to sign a new agreement. When you apply for reinstatement, the IRS will expect an explanation of why you didn’t meet your obligation. You may also be required to submit to a full review of your finances before they agree to set another agreement up for you.

If you don’t feel like you can pay off your balance to the IRS, then you may want to consider another solution. For example, an Offer in Compromise is basically a debt settlement program for back taxes. You can get out of tax debt for a percentage of what you owe.

Interest and penalties

Using an Installment Agreement for the payment of tax debt means that you will need to pay the penalties interest imposed by the IRS on your unpaid balance. Usually, the IRS charges a penalty of 0.5% of the total debt amount each month. However, the IRS charges an additional penalty on taxes due that have not yet been filed. Typically, this penalty is 5% of the total amount of unpaid taxes each month, but the IRS can charge a maximum of 25% penalty on unpaid and/or unfiled taxes.

Even after you have begun making monthly payments to the IRS for the fulfillment of tax debt, penalties and interest will still be charged on the amount of tax debt that remains to be paid. So, it is important to pay as much as possible upfront to avoid higher IRS penalties and interest.

Applying for an installment agreement

If you owe less than $10,000, regardless of whether you can pay it back within 120 days or after, you can apply for an IA online through the IRS website. The fees vary based on the plan you want to use, your payment method and how you set the plan up

1. There’s no setup fee if you choose a short-term payment plan
2. If you can’t pay off your balance within 120 days and need to set up an IA, the fee varies based on how you choose to pay:
   1. If you sign up for direct debit from your bank account, the fee is $31
   2. If you want to use DirectPay, EFTPS, check, money order, debit or credit to pay and apply online, then the fee is $149
3. You can also choose to set up an IA by phone, mail or in-person, but the fees will be higher:
   1. If you plan to use direct debit for a checking or savings account, it costs $107
   2. If you apply for these payment options, the fee is $225

Setting up an installment agreement is more difficult if your debt is higher or you are looking to pay less than what you owe. The financial disclosure the IRS requires is complicated and can be tricky for the average person to complete. A tax debt resolution service can help you complete the disclosures forms correctly to avoid potential issues as you set up your IA.

You can’t use the online application system if you:

• Owe more than $50,000
• Want to set up a PPIA
• Wish to apply for penalty abatement

Making extra payments to the IRS

If you’re currently enrolled in an IRS installment agreement and you come into some extra cash, it’s a good idea to make any extra payment. The IRS allows you to pay off all or just an extra portion of your Installment Plan. Doing so will get you out of tax debt faster and, as a result, minimize interest and penalties.

Make an extra payment on your Installment Agreement online

1. Go to https://www.irs.gov/payments
2. Select whether you wish to make the extra payment by “Bank Account (Direct Pay)” or “Debit Card or Card Card”
   1. Be aware you choose to make a payment by credit card, they will add a processing fee for the payment; if possible, you want to avoid this!
3. From there, click “Make a Payment”
4. Select “Tax Return or Notice” as the “Reason for Payment”
5. When selecting “Apply Payment To” choose “1040, 1040A, 1040EZ”
6. Choose the oldest tax year that you owe for on the “Tax Period for Payment”
7. Then click “Continue”

From there, simply follow the prompts to receive confirmation that your extra payment has processed. Make sure to print the confirmation for your records in case there’s any issue in the future.

Make an extra payment by mail with a check

1. Fill out your check with the amount you wish to pay for the extra payment
2. Make the check payable to “Department of Treasury”
3. In the memo field, write your social security number and “1040”
4. Sign the check and mail it to:
   IRS
   Ogden, UT 84201-0010

Paying off the full remaining balance on your Installment Agreement

Dayan says that if you plan to pay off the full amount left on your payment plan in one shot, you should call the IRS first. The reason for this is that the amount you owe today may not be the amount you owe on the date you wish to pay it off. You could leave a remaining balance of penalties and fees that got assessed after you checked the balance.

“If you want to pay the remaining balance in full, call the IRS to get the payoff amount,” Dayan advises. “You’ll need to know the date you plan to pay, so the IRS agent can calculate the proper amount of interest and penalties. Then you can make that payment using the same instructions we provide above.”

What happens if you can’t pay as agreed?

A Debt.com reader worries what the IRS will do…

My wife and I have been repaying our taxes through an IRS installment agreement, but she just lost her job. She’s looking for a new one but she isn’t finding anything with a comparable salary, so even if she does get a new job, we might not be able to afford the IA payments plus all our other bills. We barely managed to make the payment this month and I have no idea how we’ll make it next month. What will happen if we miss a payment and what can we do? We’re three years into paying this off and I’m worried the IRS will take my business if we don’t keep up with our agreement.

John in Ohio

Our tax expert Jacob Dayan responds…

How to modify an IRS installment agreement

You have a few options if you want to modify an existing agreement with the IRS:

• Modify your payment amount (as well as due date) through their website: IRS.gov/OPA
• Call the IRS at 800-829-1040 to renegotiate directly
• Work with a certified tax professional to renegotiate for you

If you’ve had a significant change in your financial circumstances, then you may require professional help. This will ensure you get a new payment that will work for your budget.

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Jacob DayanAuthor

Expert contributor, Community Tax CEO & Co-Founder