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Back Taxes and Tax Debt

How to set up an IRS payment plan or installment agreement

Jo Willetts, EA

Director, Tax Resources

Updated on: July 07, 2022

There are few things more concerning than owing the IRS money. Unexpected debt is a problem millions of Americans face. When it comes to tax debt, you have several options, including an IRS payment plan.

Your best option is to pay the full bill. You’ll avoid late fees and interest when you pay IRS debt on time, and it will keep the IRS from taking future refunds to settle your debt. And ultimately, not paying your tax bill can damage your credit if the IRS files a tax lien against you.

How can I pay the IRS?

You can pay the IRS by writing a check, sending in a money order, paying by credit card, or going to irs.gov and paying the full amount by direct debit from your bank account.

If you can’t pay your full tax bill, you may be able to set up an IRS installment agreement, which is a monthly payment plan. You’ll want to understand the basics of installment agreements, so you can identify the best one for your situation.

What is an IRS payment plan?

A payment plan is an agreement with the IRS to pay the taxes you owe within an extended time frame. If you’re facing a tax bill you can't immediately handle, but believe you can pay over an extended period, you may benefit from a payment plan. Payment plans range from short-term plans that last no longer than 180 days, to long-term plans that can last years, and in specific instances, these plans may not carry any additional fees.

In most cases, your unique tax situation and the total amount you owe will help determine which payment plan is best. You can request a payment plan in person at various IRS locations, by phone, by mail, and online. Applying online has the lowest application fees, especially when you set up automatic payments.

There are 2 categories of IRS payment plans

The IRS has simple payment plans and more complex ability-to-pay agreements. Most taxpayers set up simple IRS payment plans that will give them specific payment terms and conditions. For example, the most common IRS payment plan is the streamlined installment agreement, which is for people who owe less than $50,000 and can pay their debt within 72 months (or by the IRS collection statute of limitations, whichever is shorter).

If you don’t qualify or can’t meet the conditions of one of the simple payment plan options, you can set up an ability-to-pay agreement, which is based on your financial situation. To get these agreements, you must provide financial information to the IRS to show your ability to pay (Form 433 and proof of your assets, income, and expenses). You would work directly with IRS Collection personnel to set up an ability-to-pay plan.

How to apply for an IRS payment plan

The process and fees for requesting a payment plan vary, depending on the amount you owe and how you apply (by phone, online, in person, or by mail). It’s important to remember that to successfully set up any agreement with the IRS, you must have filed all your required tax returns. The rules for which returns need to be filed can be complicated. For individual taxpayers, the general rule is that you need to have filed the past 6 years of returns. 

If you’re not up to date on filing, the IRS won’t accept your application. When you’re certain that you’ve filed all your past returns and paid quarterly payments (if applicable), you can use Form 9465, Installment Agreement Request, to apply for a simple payment plan. If you are requesting an ability-to-pay plan, you will need to provide financial information using IRS Form 433-F or 433-A, Collection Information Statement. You will need to submit this form, plus proof of your financial situation, to the IRS to request payment terms based on your finances.

Low-income applicants (people with an adjusted gross income at or below 250% of the federal poverty level) may qualify to have their application fees reduced or waived, using IRS Form 13844.

What you should know about IRS payment plans

There are a few important things to know about IRS payment plans.

  • You can only have one payment plan with the IRS. If you owe taxes for multiple years, you would need to consolidate the balances and negotiate one payment plan. If you get another unpaid balance in the future (like from a filed return or an audit adjustment), you will default your IRS payment plan and will need to set up another plan, or face IRS collection enforcement (liens, levies, and/or passport restrictions).
  • The IRS charges interest. And the IRS can change the interest rate quarterly. 
  • The IRS will take your refund. No questions asked. As part of your payment plan agreement, the IRS keeps future refunds until you’ve paid your balance.
  • Penalties apply. The IRS will charge a monthly failure-to-pay penalty while you are in the agreement. The normal failure-to-pay penalty is 0.5% of the taxes you owe per month.
  • You can reduce your failure-to-pay penalty by setting up a payment plan. If you set up a payment plan and file your return on time, you can get your failure-to-pay penalty reduced to 0.25% a month.
  • There is a fee to set up a payment plan. The fees range from $0 (for low-income taxpayers) to $225 (for setup by phone, mail, or in person). The IRS offers lower setup fees for online setup.
  • The IRS will want you to pay well before the statute to collect expires. The IRS has 10 years to collect a tax bill. All simple IRS payment plans require you to pay your full tax bill before the statute expires. For ability-to-pay agreements, the IRS will also seek full payment before the collection statute expires. If the ability-to-pay calculation shows that the IRS will not get paid in full before the statute expires (called a partial-pay installment agreement), the IRS will review the plan every 2 years to see if you can pay more.
  • If your financial circumstances change, you can change your agreement. If you lose your job, you may be able to request a new agreement based on your new ability to pay. If you get a big influx of cash, you can also pay off the debt in full.
  • You will need to make regular monthly payments. You can’t pay 2 months in one payment and skip the next month. That would default your agreement. The IRS requires you to make a payment each month to avoid default. Extra payments are considered voluntary. To avoid default, it is best to set up direct payments from your bank account (called direct debit installment agreements).

How to check your status

You can check the status of your IRS installment agreement, pending balance, next payment date, and other information by logging into your account at irs.gov. The IRS updates pending account balances every 24 hours once you activate your account. As part of a standard resolution plan, Jackson Hewitt specialists keep clients updated on the status of their applications and next steps to minimize a client’s engagement with the IRS and make the process less stressful.

How Jackson Hewitt can help

Jackson Hewitt’s team has a wide variety of tools to manage tax issues. Whether simple or complex, our team works directly with the IRS and keeps you updated throughout the process. Contact us to learn more and see how committed Jackson Hewitt is to working hard for the hardest working.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 25 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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