IRS Installment Agreements: What You Need to Know
Today I’m talking about installment agreements. I’m going to go over what you need to know about installment agreements in general and then closer to the end of the article I will tell you how a special kind of installment agreement can be an incredibly useful tool to get your IRS debt forgiven. Yes — not just paid off, but forgiven.
And this sometimes comes as a surprise to some clients. In fact, I’ve noticed when I start talking to clients about installment agreements, sometimes they don’t want to hear it because they tell me, “Logan, installment agreements? Why? I want to talk about getting an offer in compromise — a settlement with the government to pay them less than what I owe.”
And don’t get me wrong; sometimes an offer in compromise is the clear path forward — but not always.
And I admit it. Installment agreements are sometimes seen as the Tito of the tax relief trio with the offer in compromise being the superstar, the Michael Jackson, and currently not collectible being maybe Janet or someone like that.
But I want to change that impression. Installment agreements can be a powerful tool when it comes to dealing with the IRS as long as you set the terms, not the IRS, based on a properly-done analysis of your financial situation reported on Form 433-F — but I’m getting ahead of myself.
What you need to understand is that there are installment agreement arrangements other than the ones the IRS wants to push you into, and I’m going to cover what those are in this article.
But before we get into all that strategy and the difference between full-payment installment agreements and partial-payment installment agreements, we need to discuss some basics that you need to know about all installment agreements.
Table of Contents
IRS Installment Agreement Basics
So before we get into the fun stuff, here are eleven basic things that every taxpayer considering an installment agreement with the IRS should know.
1. Installment agreements pause collection activities.
While the IRS is considering a bona fide installment agreement request — i.e., when an installment agreement request is pending — as well as during the duration of the installment agreement assuming it is accepted and the taxpayer does not default on it, the IRS pauses collection activity.
So you won’t have your wages garnished or your bank account levied during this time period.
Now, I must mention that the IRS has an entire section of the Internal Revenue Manual devoted to “installment agreement requests made to delay collection action” because they don’t want people to just make requests for installment agreements not in good faith, meaning that the taxpayer has no intention to make payments under an installment agreement and the only reason they are requesting an installment agreement is to pause collection activity while the IRS is considering the installment agreement.
And if an installment agreement request is flagged as being made to delay collection action, that request will not delay collection action.
Basically how you find yourself in this unfortunate situation is by doing things like submitting an installment agreement request with no economic reality such as proposing a ridiculously small monthly payment, submitting an installment agreement request that ignores direction provided previously to the taxpayer by the IRS, or submitting an installment agreement after defaulting on one recently.
But if you’re doing your best to play by the rules and are truly requesting a reasonable installment agreement that you would intend to pay if the agreement is accepted, the IRS will probably put your installment agreement request in “pending” status, meaning that collection activity is paused while the IRS is considering your installment agreement as well as throughout the duration of the installment agreement assuming it is accepted and you do not default.
2. A notice of federal tax lien may still be filed on a taxpayer while they are in an installment agreement.
I’ve gone more in depth on this in other videos, but basically a notice of federal tax lien is a public filing by the IRS in state or county records that inform the public that the taxpayer owes the United States money and if they were to, say, sell their house, the United States would get its share first.
The IRS does not consider the filing of a notice of federal tax lien to be a collection activity, so it may still do so even if you have an installment agreement with them.
Also, any notice of federal tax lien currently on file when the installment agreement was originated will remain on file.
Now, you can get the lien withdrawn using Form 12277 if you owe $25,000 or less to the government or you can get your balance to $25,000 or less and if you have an installment agreement with the IRS on which you make payments via direct debit, which is one of the payment methods for IRS installment agreements that I will discuss later in this article.
If you have such an arrangement and owe such a balance, you can typically file Form 12277 to get the IRS to withdraw your notice of federal tax lien after you’ve made three consecutive direct debit payments.
And by the way, if you owe less than $10,000, the IRS won’t file a notice of federal tax lien on you.
3. You generally need to have filed all required tax returns with the IRS to be considered for an installment agreement.
According to the IRS’s 2006 Policy Statement 5-133, filing the last six years’ worth of tax returns is generally sufficient to be considered in compliance for most tax resolution purposes.
That said, you may not actually need to file all six years, particularly if the IRS has prepared a substitute.
Check out our article on back taxes for more information on strategies to employ when determining which historical tax returns you should prepare and which ones you shouldn’t.
4. You also need to pay in your current tax liabilities.
This generally means making sure that employees’ tax withholdings are adequate and that independent contractors are making their required estimated tax payments timely for at least the duration of the installment agreement.
5. Your federal tax refunds will be offset.
Don’t expect to receive any federal tax refund on a tax return you file while in an installment agreement with the IRS to actually hit your bank account since the IRS will more than likely apply it to your balance with them.
6. Penalties and interest continue to accrue on debt being paid off through an installment agreement.
While an installment agreement staves off IRS collection activity, it does not prevent penalties and interest from accruing on a taxpayer’s account.
The typical penalties and interest taxpayers face are shown in the table below.
|Penalty / Interest||How It's Calculated||Maximum|
|Failure-to-Pay||0.5% of the taxpayer's unpaid taxes for each month or part of a month the tax remains unpaid|
0.25% if return filed timely and on an approved payment plan
1% after receiving notice of intent to levy
|Failure-to-File||5% of the taxpayer's unpaid taxes for each month or part of a month the return remains unfiled|
4.5% if failure-to-pay penalty is running concurrently
|Interest||Compounded daily based on federal short-term rate plus 3%; rate is currently 4%||No maximum|
7. There is a user fee for setting up installment agreements with the IRS.
In some cases — such as qualifying as a low-income taxpayer — the IRS will waive or reimburse the user fee associated with setting up an installment agreement, but most taxpayers will be on the hook for these.
Low-income qualification is generally achieved by having an adjusted gross income for the most recent tax year at or below 250% of the federal poverty guidelines.
The table below shows the current installment agreement user fee rates.
|Manual Installment Agreement||No||Regular||$225|
|Manual Installment Agreement||No||Direct Debit||$107|
|Manual Installment Agreement||Yes||Regular||$43, subject to reimbursement|
|Manual Installment Agreement||Yes||Direct Debit||$0|
|Online Installment Agreement||No||Regular||$149|
|Online Installment Agreement||No||Direct Debit||$31|
|Online Installment Agreement||Yes||Regular||$43, subject to reimbursement|
|Online Installment Agreement||Yes||Direct Debit||$0|
|Reinstatement / Restructuring||No||Any||$89|
|Reinstatement / Restructuring||Yes||Regular||$43, subject to reimbursement|
|Reinstatement / Restructuring||Yes||Direct Debit||$0|
8. An installment agreement is not guaranteed for everybody.
While most taxpayers qualify for at least some kind of installment agreement with the IRS, not all taxpayers are guaranteed one.
The IRS does, from time to time, reject installment agreements.
That said, if you owe $10,000 or less in taxes alone to the IRS — not including penalties and interest — you may be guaranteed an installment agreement if you request one.
If you owe $50,000 or less in taxes and assessed penalties and interest to the IRS, you may qualify for a streamlined installment agreement.
I will talk about both guaranteed and streamlined installment agreements in more detail later in this article.
9. If your installment agreement is rejected, you can appeal.
If the IRS for whatever reason does not accept your installment agreement, you do have the right to appeal their decision.
I plan on eventually writing a separate article on appealing installment agreement rejections, but suffice it to say that as long as you file your appeal within 30 days of the rejection, the IRS still cannot take your stuff.
Generally, you would use Form 9423, Collection Appeal Request, to appeal an IRS installment agreement request rejection.
10. The IRS will have more time to collect your debt.
The IRS has a 10-year statute of limitations on collecting tax debt.
This means from the date the IRS assesses a tax liability it only has 10 years to collect it from the taxpayer — else, it’s essentially written off.
This last date the IRS has to collect a tax liability is called the collection statute expiration date (CSED).
However, there are certain events called tolling events that can extend this statute of limitations beyond 10 years, and an installment agreement is the basis for some of these events.
Here is how requesting an installment agreement tolls the statute of limitations:
- The statute is tolled while the installment agreement is pending, which requires the taxpayer making a satisfactory request with the IRS to enter into an installment agreement.
- The statute is tolled for 30 days after the rejection or termination of an installment agreement.
- The statute is tolled for the period that Appeals is considering the rejection or termination of an installment agreement.
Note that sometimes, as a condition of entering into a partial-payment installment — discussed later — the IRS requires taxpayers to agree to extending the CSED for the taxpayer’s liability or liabilities.
11. You have options when it come to making your installment agreement payments.
The table below shows the six payment options taxpayers have when it comes to IRS installment agreements.
|Payment Option||How It Works|
|Electronic Federal Tax Payment System (EFTPS)||Payments scheduled up to 12 months in advance (for individuals) and up to 4 months in advance (for businesses) based on instructions provided by taxpayer|
|Direct Debit||Payment is drafted on a particular date every month from taxpayer's checking account|
|Payroll Deduction||Payment is sent directly from taxpayer's employer to the IRS|
|Credit Card, Debit Card, or Digital Wallet||Taxpayer makes payment using electronic method of their choice, though additional fees may apply|
|Check or Money Order||Taxpayer signs an instrument every month to the government, payment to "US Treasury". Note that checks made out to "Internal Revenue Service" or "IRS" will still be processed.|
|Direct Pay||Taxpayer makes payments directly to the government from their checking or savings account; similar to direct debit option|
How to Request an Installment Agreement
All taxpayers have the right to request installment agreements.
Though taxpayers may propose to the IRS to enter into an installment agreement by a variety of means including letters, phone calls, voicemails, emails, and other methods, not every request to enter into an installment agreement will be considered processable, that is, a legitimate request, by the IRS.
In order for an installment agreement request to be considered processable, the taxpayer must’s request must:
- Identify the taxpayer, such as by including the taxpayer’s name and taxpayer identification number (TIN) — for most individuals, this is their Social Security number
- Identify the tax liability to be covered by the installment agreement
- Propose a monthly or other periodic payment of a specific amount
In addition, the taxpayer must be in compliance with all filing requirements. For these purposes, the IRS generally considers a taxpayer in compliance if they have filed the last six years of tax returns.
If a taxpayer does not meet these requirements and/or does not include all the required information in their installment agreement request, then the IRS will contact the taxpayer to tell them what they can do to perfect their installment agreement request.
Now, there are standardized ways of requesting installment agreements from the IRS: You can either do it online if your situation qualifies for that or you can request an installment agreement by completing and submitting Form 9465 to the IRS; sometimes you are just able to give them the information over the phone as well by calling the number on your notice or 1-800-829-1040 if you’re able to get through. You can also technically do it in person at a local IRS office, but most people prefer not to do it in person.
How to Set Up an Installment Agreement Online
But who qualifies to submit their installment agreement request online? The IRS spells it out on their website. And keep in mind these are for full-payment installment agreements whereby you will end up paying the entire balance that you owe the IRS.
The IRS wants you to sign up for these; I covered this in my recent article on tax relief basics; but basically a full-pay installment agreement is one in which you pay off your entire tax debt to the IRS in monthly installments over a timespan of typically up to six years.
And this is a good deal for the IRS; under a full-pay installment agreement the taxpayer eventually pays off their entire balance while penalties and interest continue to accrue.
In fact, if you Google, “What if I can’t pay my taxes?” the first organic search result, meaning the first search result that is not an ad, that comes up is an article from irs.gov that says:
“What if I can’t pay my taxes? Don’t panic — you may qualify for a self-service, online payment plan (including an installment agreement) that allows you to pay off an outstanding balance over time. Once your online application is complete, you’ll receive immediate notification of whether your payment plan has been approved without having to call or write to the IRS.”
And then it spells out for you the two kinds of payment plans you can easily set up online:
- Short-term payment plan: This is for taxpayers who owe the IRS less than $100,000 and can pay the IRS off within 120 days. These are not technically speaking “installment agreements” because paying off your balance within 120 days under one of these short-term payment plans is not required to be done in installments.
- Long-term payment plan: If you owe less than $50,000 to the IRS — and these balances combine taxes, penalties, and interest, by the way (the whole kit and caboodle) — you can set up a longer-term payment plan with the IRS online. This is a streamlined installment agreement.
So obviously the IRS wants folks to be able to set up these installment agreements easily online.
And if you qualify and if you are willing to pay the full amount of taxes, penalties, and interest you owe to the IRS, you can set up one of these payment plans online by going to irs.gov/OPA and then clicking “Apply/Revise as Individual”.
You will need an IRS account; if you do not have a current IRS account, you will need an ID.me account that basically matches a picture of you taken within ID.me to a government-issued identity document such as your driver’s license or passport.
So if you owe the IRS less than $50,000 in combined taxes, penalties, and interest, can’t pay off your balance within 120 days but you think you can within the earlier of six years or the collection statute expiration debt on your debt and you are willing to pay the IRS your full balance over this time period, you can just set up one of these streamlined installment agreements yourself online.
Now, the IRS can very well reject these installment agreements, but as a matter of practice as long as you meet the parameters and are willing to pay your debt off within the appropriate time period, they generally accept these.
And as a matter of fact if you owe less than $10,000 in only taxes — not including penalties and interest — the IRS is required to accept your installment agreement proposal if you are in compliance for the past five years with both your payments and your tax returns and agree to pay off your debt by the earlier of three years or the collection statute expiration date on your debt.
This is called a guaranteed installment agreement. Also, to qualify for the guaranteed agreement, you can’t have entered into an installment agreement with the IRS during any of the preceding five tax years.
How to Set Up an Installment Agreement Using Form 9465
And if you can’t set up a payment plan online because you don’t fit these parameters, you can get an installment agreement another way by using Form 9465.
I am not going to do a walkthrough of this form here; I will likely be doing that in the future.
Now, one thing to know if you owe more than $50,000 to the IRS in total taxes, penalties, and interest, you are required to submit Form 433-F or the information thereon along with your installment agreement request.
This is right in the Form 9465 instructions, which say:
“If the amount you owe on line 9 is greater than $50,000, you must complete Form 433-F, Collection Information Statement, and file it with this form.”
If you’ve read my other tax relief articles, you know that Form 433-F, just like Form 433-A and other “433” forms are collection information statements, which are basically forms on which you present to the IRS a picture of your personal and financial situation in terms of income, expenses, assets, and liabilities.
And these collection information statements form the basis for many of the IRS’s decisions regarding how to treat a taxpayer who owes them money.
In my offer in compromise formula article, I have gone over some of the financial analysis principles that the IRS says taxpayers must use when completing these forms.
Now, if you want to pay off your balance to the IRS in full and you can set up one of these payment plans online, that’s great; thank you for paying the IRS every penny you owe them; but that’s not tax relief.
That’s paying your taxes.
What I want to talk about now is partial-payment installment agreements, which are a form of tax relief and not merely tax payment.
Partial-Payment Installment Agreements
Where tax relief comes in is in what are called partial-payment installment agreements. I intend to write a separate article on partial-payment installment agreements in the future, going over them in depth, but for now I’m going to cover these agreements at a high level.
Partial-payment installment agreements are covered in Part 5, Chapter 14, Section 2 of the Internal Revenue Manual as an “installment agreement…when the financial analysis indicates the taxpayer will be unable to satisfy the tax liability within the Collection Statute Expiration Date (CSED).”
What does this mean? Let’s break this definition down into components.
First of all, a partial-payment installment agreement is an installment agreement. You are obligated to pay the IRS every month a certain amount of money or you will default on your agreement with them.
This is the same as any other installment agreement.
Next, under a partial-payment installment agreement, the taxpayer will not satisfy their entire tax liability by the collection statute expiration date, which is the last date of the IRS’s statute of limitations on collections.
This is why these are called “partial-payment installment agreements” because they result in you only paying a partial amount of what you owe the IRS.
That sounds great, right? It is. It is a form of tax relief by which a portion of a taxpayer’s tax debt gets wiped away.
However, in order to qualify for a partial-payment installment agreement, the financial analysis — which in the case of installment agreements is done on Form 433-F — must indicate that the taxpayer is in fact unable to pay their entire tax liability by the collection statute expiration date.
And this is where the art and science of completing IRS collection information statements is so essential, and that, dear ones, is where I am leaving you today.
My next article is going to be going into partial-payment installment agreements in depth. I’m going to go through basically all the IRS guidance in the Internal Revenue Manual on partial-payment installment agreements so you can know if such an agreement is right for you and if so how to obtain one.
So stay tuned for that!
After Your Installment Agreement Is Accepted
After your IRS installment agreement is accepted, the IRS will send you Letter 2273C confirming the acceptance of your installment agreement and laying out the terms of your agreement.
And every year while your installment agreement is in effect, the IRS will send you a CP89, Annual Installment Agreement Statement, indicating:
- The beginning account balance due at the beginning of the period indicated on the statement
- An itemized listing of payments made under the installment agreement
- An itemized listing of penalties, interest, and other charges assessed on the taxpayer’s account during the period
- The ending account balance due at the end of the period indicated on the statement