An IRS installment agreement is a payment plan that allows you to pay your taxes over time. You can use an installment agreement either for your current year taxes or for tax debts from previous years.
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Installment Agreement Basics
How do installment agreements work?
Installment agreements work similarly to any other type of installment loan. If you are approved, you receive a fixed monthly payment that you need to make by your monthly due date. You also have the option to make additional payments to reduce your interest and penalties and pay the debt off faster.
What are the pros of using an installment agreement?
Using a payment plan to pay your tax bill has the following benefits.
- The IRS will generally not take further collection actions if you maintain current.
- For smaller balances, you may avoid a tax lien or have one removed.
- Eligibility for reduced failing-to-pay penalties with automatic payments.
Interest and penalties added become less over. They are only applied to your outstanding balance not the original balance owed.
- Avoid a loan that impacts your credit score.
- IRS interest and penalties may be less than credit card or bank loan interest rates.
What are the cons of using an installment agreement?
Installment agreements aren’t right in all circumstances. Here are some things to keep in mind.
- You can only have one installment agreement at a time.
- You generally can’t use an installment agreement for another five years.
- There is a fixed processing fee that may be higher than credit card interest for smaller debts.
- Tax penalties and interest continue to accrue.
- If you don’t meet the terms of the agreement, the IRS may take further collections action.
What does it take to be approved for an IRS payment plan?
Unlike loans, you do not need to pass a credit check, and your installment agreement generally won’t impact your credit score. Instead, the IRS considers your filing history, payment history, and the amount of taxes that you owe.
Tax Debts up to $10,000: Guaranteed Installment Agreement
If your tax debt is no more than $10,000, your installment agreement request will generally be automatically approved if you meet the following criteria. This can also be known as an online payment agreement since you can quickly sign up online.
- Able to pay the balance within 3 years (36 months).
- Have filed all required tax returns either on-time or before applying for the installment agreement.
- No late tax payments within the last 5 years.
- No installment agreements within the last 5 years.
Be financially unable to pay in full when due.(This requirement is technically in the law, but the IRS generally doesn’t enforce it as a matter of policy.)
Tax Debts up to $50,000: Streamlined Installment Agreement
If your tax debt is up to $50,000, you can apply for a streamlined installment agreement. This includes if you have a debt less than $10,000 but don’t qualify for a guaranteed installment agreement.
A streamlined installment agreement does not require a financial statement. As such, you will likely be approved if you meet the following requirements.
- Able to pay the balance within 6 years (72 months).
- Have filed all required tax returns either on-time or before applying for the installment agreement.
- If you’re an individual, not be delinquent on employment taxes for your business.
If you owe between $25,001 to $50,000, additional requirements apply.
- No defaults on an installment agreement in the last 12 months.
- Must pay by automatic direct debit or payroll deduction.
- Corporations are not eligible.
Tax Debts Over $50,000: Non-Streamlined Installment Agreement
If your tax debt is over $50,000, you must also complete a Form 433-F Collection Information Statement. This form asks for detailed financial information including your assets, liabilities, income, and expenses.
The IRS manually reviews all non-streamlined installment agreements. In many cases, they will require you to sell assets including your home. They may also require that you attempt to obtain a private loan to pay down your tax balance before they will approve you for an installment agreement.
Partial Pay Installment Agreement
A partial pay installment agreement is an installment agreement that does not pay off your tax debt in full. To be eligible, you must be financially unable to pay off your tax debt in full by the time the collections statute of limitations expires.
As with non-streamlined installment agreements, you must fill out a Collection Information Statement. The IRS will also require you to explore other options such as selling assets or taking out a private loan.
If you’re approved, the IRS will review your financial situation every two years to see if you have the ability to pay more.
Applying for an Installment Agreement
How do you apply for an installment agreement?
You can apply on the IRS website if you owe up to $50,000. The limit increases to $100,000 if you’re able to complete a short-term payment plan within 120 days.
For larger debts, you will need to file a paper Form 9465. You may also need to provide a Collection Information Statement, which details your financial resources, as well as other documentation of your income and assets.
What Does an Installment Agreement Cost?
There are three costs that you may need to pay if you use an installment agreement.
- User fee: This is a one-time fee to the IRS that covers its processing costs. It ranges from $0 to $225 depending on your income, whether you apply online or paper (online is usually cheaper), and whether you’re requesting a short-term (within 120 days) or long-term installment agreement (short-term is usually cheaper).
- Failing-to-pay penalty: This penalty is generally 0.5% of your unpaid taxes per month. It is reduced to 0.25% if you sign up for automatic direct debit.
- Interest: The IRS charges interest in addition to the failing-to-pay penalty at a rate of the current federal short-term rate plus 3%. For comparison, credit cards often charge the federal prime rate plus 10 to 20% unless you’re in a promotional period.
Failing-to-pay and interest penalties apply until you have paid in full. The good news is that they reduce over time, because they’re based on your current balance.
What are the requirements for an installment agreement?
In addition to the information you need to apply, the main requirements are that you:
- Have filed all of your required tax returns.
- Continue to file all of your tax returns on time.
- Pay all future taxes on time for the duration of the installment agreement. This means paying throughout the year via wage withholding or estimated tax payments not waiting until your tax filing deadline.
- Make all installment payments on time.
- Complete a power of attorney form if you’re having someone else fill out your paperwork.
If you can’t meet these requirements, the IRS may consider your installment agreement in default, take further collections action, and/or not allow you to enter into a new installment agreement. Often, this may include a CP523 Notice: Intent to Terminate Installment Agreement.
What happens to the collections process when you’re in an installment agreement?
Assuming that you make all of your payments on time, the IRS collections process generally stops when you’re in an installment agreement — at least the nastier parts. Penalties and interest continue to accrue, but the only collection notices you should receive are your account statements detailing how much you’ve paid and how much you still owe.
The IRS will generally not move to take your property or garnish your wages. For smaller balances, the IRS will also typically not file a tax lien and may remove an existing lien if you’re using automatic payments.
However, this is only a temporary pause. If you miss a payment or default in some other way, the IRS may still use all available collections methods to collect the debt.
Can I apply for an installment agreement on my own?
The IRS allows you to apply for a payment plan on your own without professional assistance. You may wish to do so, especially when you’re eligible to apply online, unless you need assistance in the following areas:
- Filing unfiled tax returns.
- Amending a previous tax return where you missed deductions or credits.
- Challenging an IRS assessment for additional tax.
- Seeking a waiver or reduction in penalties.
- Filling out a collection information statement and other financial information for larger debts.
- Planning to make future tax payments on time including adjusting your withholding and/or estimated tax payments.
- Having another recent installment agreement.
- Being in default on another installment agreement.
Installment Agreement Forms
- Form 9465 Installment Agreement Request
- Instructions for Form 9465
- Online Installment Agreement Application
Is an installment agreement right for you?
Who can use an installment agreement?
Both individuals and businesses can use an installment agreement. Sole proprietors and independent contractors should apply as individuals even if they use an EIN.
Other business forms should apply as a business. You will need your EIN and the date your business was established.
Who should use a payment plan?
You should use an installment agreement if you:
- Have no cheaper options such as a 0% credit card offer or low-interest personal loan.
- Are certain you can make the monthly payments on time.
- Are certain you can file and pay all future taxes on time.
- Understand that using an installment agreement now may make it more difficult or impossible to use an installment agreement for the next five years.
The key thing to understand is that even though there’s no credit check and the installment agreement terms might be more favorable than a private loan, this is not a free lunch. The reason the IRS can charge less is because it has much more power to collect debts than a private lender.
What if I have unfiled tax returns?
You will need to go back and file returns for any years where you failed to file before you apply for an installment agreement.
What if I owe taxes for multiple years?
If you owe taxes for multiple years, you can include your total tax debt on a single long term payment plan. However, you must make any and all future tax payments on time.
Paying Off an Installment Agreement
What is the minimum monthly payment for an installment agreement?
The minimum monthly payment for an installment agreement is typically the amount you owed divided by 72. For older tax debts, the IRS may require an accelerated payment schedule that pays the balance before the collection statute expiration date (statute of limitations).
You can choose a higher monthly payment amount when you apply. If you propose a monthly payment amount that does not repay your debt within 72 months, the IRS will adjust your monthly payment to a 72-month payment.
Unlike credit card debt, your monthly minimum payment does not reduce as you pay off your tax debt. It is a fixed amount based on your original balance. Making additional payments will pay your debt off sooner but won’t change your monthly minimum payment.
How to Check Your IRS Payment Plan Account Balance
There are four ways to check what you owe on your installment agreement.
- View your account on the IRS website. You will need to verify your identity which may include providing a phone number in your name, answering security questions, or waiting to receive a code in the mail.
- Call the IRS. Be prepared to wait on hold for a long time. This could be well over an hour during peak times.
- Request a tax transcript by mail. Tax transcripts show your account balance, payment history, and other information. This requires slightly less identity verification than viewing your account online. It’s useful when the IRS is rejecting your online account for things like using a prepaid phone number. It may take 4-6 weeks to receive your transcript.
- Wait for your annual statement. The IRS sends a CP89 notice each year you have an installment agreement. This notice includes a summary of your past payments and what you still owe.
Keep in mind that the IRS may take several weeks to post a payment to your account. When you check your account balance, also check for the date of your last posted payment to see if it reflects your latest payment. Even though it takes weeks to post, your payment will be dated on the date the IRS received it.
How do you make installment agreement payments?
You have several options to pay your installment agreement.
- Automatic bank account debits to take advantage of the reduced failing-to-pay penalty.
- Manual payments by ACH, debit card, or credit card. Cards have additional fees.
- Mailing a check.
If you want to make an additional payment, you can make a manual payment or mail a check. This will reduce your future interest and penalties since they’re based on your current balance owed.
The IRS will also apply any tax refunds you receive towards your installment agreement. You do not have a choice, and they do not count towards your monthly minimum payment.
What happens when you pay off your tax debt?
There are no steps to take at the end of an installment agreement other than checking that your balance owed is $0. The IRS will automatically stop automatic payments.
If you made additional payments or the IRS took your refund and you ended up overpaying on your installment agreement, the extra amount will appear as a credit on your account for the year of the installment agreement. Once the payment posts, you should automatically receive a refund. If you don’t, contact the IRS.
What happens if you miss a payment on an IRS installment agreement?
Missing a payment on an IRS installment agreement is a default on your agreement. The IRS will usually send a CP523 Notice: Intent to Terminate Installment Agreement. If you don’t pay by the deadline in the notice, the IRS will terminate your installment agreement. You will then need to pay your tax debt in full or the IRS may take further collections actions.
Does a missed installment agreement payment impact your credit score?
Installment agreements are not reported on your credit report. Unlike a late credit card payment, a late installment agreement payment will not count against your credit score as a late payment.
Your credit score could go down if you default on your installment agreement and the IRS reports a tax lien on your credit report.
Does the IRS charge a late payment penalty on installment agreements?
There is no specific late fee for missing an installment agreement payment. However, interest and penalties continue to accrue based on your outstanding balance.
If the IRS terminates your installment agreement because of missed payments, you may have to pay a fee to reinstate it.
What should you do if you miss an installment agreement payment?
If you miss an installment agreement payment, you should make the payment as soon as possible. The best way to do this is by using direct pay on the IRS website rather than by mailing a check. This will ensure the IRS receives your payment as soon as possible.
If you make your payment fast enough, the IRS may not take any additional action and leave you on your installment agreement. If they’ve already started the process to terminate it, having already made your payment will make it more likely they won’t terminate it or will reinstate it.
What if you can’t afford your installment agreement payments?
If your financial situation has changed, you may have other options. This could include temporarily stopping collections through currently not collectible status or settling the debt with an offer in compromise.
Once you default on an installment agreement, it can be very difficult to get the IRS to agree to a new installment agreement. One exception might be if you originally requested a larger monthly payment than the minimum and can no longer pay the extra amount.
What is CP523 Notice: Intent to Terminate Your Installment Agreement?
A CP523 notice means that the IRS intends to terminate your installment agreement and levy your assets. You may have missed payments or failed to comply with other terms of the agreement.
Why does the IRS send a CP523 Notice?
You may have failed to make timely payments as required by your installment agreements. Or, you may have failed to file other tax returns or pay other taxes on time. Any one of these actions is a default on your installment agreement.
How should you respond to a CP523 Notice?
You have three options to respond to a CP523 notice to prevent the IRS from levying your assets:
- Pay the full balance by the deadline.
- Call the IRS and request that they leave you in an installment agreement.
- If your financial situation has gotten worse, explore your eligibility for an offer in compromise or currently not collectible status.
What are the chances of staying in an installment agreement?
The IRS is very skeptical of allowing you to remain in an installment agreement after a default. This is especially true if you’ve continued to be late on payments for tax years after your installment agreement.
Your chances are greatest if this is your first default and go down if you have multiple defaults. This is largely a judgment call by the IRS, so be prepared to explain why you will be able to make payments and avoid a default on your new installment agreement when you weren’t able to do so in the past.
What happens if I ignore a notice of intent to terminate installment agreement?
The IRS will terminate your installment agreement. You will still owe any remaining amount, and interest and penalties will continue to accrue. If you were using automatic payments, you will lose the penalty reduction for doing so. The IRS may garnish your wages, take money out of your bank account, or seize other assets to cover the amount that you owe.