Requesting an Installment Agreement: When, How, Why, and Which Type to Request

Should you request an IRS installment agreement? When requesting an installment agreement, which one is best? How do you request one? If you have questions like that, here’s what you need to know.

Table of Contents

• When to consider an installment agreement
• How to request an IRS installment agreement
• Types of installment agreements - finding the right option for you
• Benefits of paying monthly with direct debit
• What happens if the IRS approves your payment plan request
• What if the IRS denies your application for an installment agreement
• How to modify your installment agreement

When to Consider an Installment Agreement on Your Taxes

There are three common situations where an installment agreement can be appropriate:

1. You can’t pay your taxes all at once, but you can afford to make monthly payments
2. Your Offer in Compromise was rejected, or you know that you won't qualify for a settlement.
3. You can’t get a loan with a lower interest rate to cover your taxes.

If you request an installment agreement, you need to propose a monthly payment. However, your payment also has to cover your interest and penalties as well as part of the principal balance. If it doesn’t, the taxes owed will just get larger.

Iif you are on an installment agreement, the IRS will not seize your assets. However, there are a few rare considerations. For example, if you sell a significant asset, the IRS may require you to use the proceeds to cover your taxes. However, this usually only comes into play if the agency has filed a notice of federal tax lien against you.

How to Request an Installment Agreement (IA):

Depending on your financial situation, and your total tax balance, there are five ways to request an installment agreement from the IRS.

1. Use the online IRS payment agreement application if you are an individual who owes $50,000 or less or a business that owes $25,000 or less.
2. Mail form 9465, Installment Agreement Request to the IRS.
3. Call the IRS at 1-800-829-1040. Be prepared to note all of the details on Form 9465.
4. Have a licensed tax professional (EA, Tax Attorney, CPA) negotiate with the IRS on your behalf
5. Go to an IRS office and apply in person.

You can take these steps to set up a new installment agreement on your tax debt. Note that if you already have an installment agreement and you incur new tax debt, you can also use these steps to request to have the IRS add the new tax debt to your existing agreement. However, there is no guarantee that the IRS will let you add new debt to an existing agreement, and the IRS will not let you have multiple installment agreements at the same time. 

Types of Installment Agreements: How to Select the Right Option

Which type of Installment Agreement should you select? The right option typically depends on how much you owe and how much you can afford to pay. Here is a breakdown based on the situation. Follow the links for more details about how to apply for each of these different types of payment plans.

Owe less than $10,000

If you owe less than $10,000 and can pay off the balance within three years, you should be able to get a Guaranteed Installment Agreement. These plans are usually the easiest to obtain as acceptance is guaranteed if you meet the requirements.

Owe $50,000 or less

If you owe $50,000 or less and can pay off the balance within six years, you can set up a Streamlined Installment Agreement (SIA). You can set up this agreement online, through the mail, over the phone, or in person. As long as you owe less than $25,000 or set up automatic direct debit payments from your bank account, you will not have to provide a financial disclosure, and the IRS will generally accept your proposal. 

Owe Over $50,000

If you owe over $50,000, your only option is usually to set up a Non-Streamline Installment Agreement. Traditionally, the IRS required collection information statements on all of these plans, but in recent years, the agency may only require a financial disclosure if you owe over $250,000, you need more than six years to pay, or a revenue officer requests one. The IRS may issue a tax lien while you are on this type of payment plan.

Owe More than $250,000 or Can't Afford the Minimum Payment to Pay Off the Tax Debt in Six Years

Generally, the IRS requires you to pay off your tax debt in installments over six years or fewer. To estimate your minimum monthly payment, divide the amount you owe by 72 and then round up a bit to account for interest. If you cannot afford that payment, you may be able to get smaller payments or longer to pay, but you will have to provide financial verification. In other words, the IRS is not going to let you make a very low monthly payment unless you prove that it's the most you can afford. This is called a Financially Verified Installment Agreement.

You also need to provide financial verification if you owe over $250,000. This is simply to prove to the IRS that they should give you more time to pay such as a large balance. To understand why, consider the types of information you have to provide a bank if you want to borrow hundreds of thousands of dollars. The IRS may also require financial verification if you have defaulted on multiple payment plans in the past or if you're making significant modifications to your existing payment plan.

Can't Afford the Minimum Payment to Pay Off the Debt by the Collection Expiration Date

The IRS only has 10 years to collect most tax debts, and after that time, the debt expires and doesn't need to be repaid. In all of the payment plans discussed above, the IRS requires full payment before the collection period expires. For example, if you set up a streamlined agreement, you generally get six years, but if your tax debt expires in three years, that's all the time you get. 

So, what if the amount you can afford monthly isn't enough to pay off the tax debt by the time it expires? Then, you may qualify for a Partial Payment Installment Agreement. With a PPIA, you make small monthly payments based on your budget. Then, at the end of the collection period, the remaining debt is wiped out. To qualify, you must provide the IRS with very detailed information about all of your assets and disposable income. If the IRS approves your request, they will review your situation every two years (generally, by monitoring the income you report on your tax return), and they may require you to switch to a more conventional payment plan if your finances improve. 

Owe Business Taxes

If you owe business taxes, the options are different than they are for individuals as explained above, and you may want to consult with a tax professional. Generally, if a business is still operating, it can set up a streamlined or "in operation express" payment plan on up to $25,000 in payroll tax for up to 24 months. Businesses that owe more or need longer payment terms can only qualify if they submit a financial disclosure. If the business is no longer operating, it can set up payments for payroll and other trust fund taxes, but the business owner may need to submit a collection statement. 

Benefits of Paying with Direct Debit

A Direct Debit IRS Installment Agreement (DDIA) refers to any payment agreement where monthly payments are taken out of your bank account. A streamlined, non-streamlined, or financially verified agreement may all fall into this category. Here are the benefits of paying with direct debit payments:

• Set it and forget it - As long as you select a day you know you're going to have the funds, you don't have to worry about making a payment manually. 
• Save time - With a DDIA, you don't have to worry about signing in to make manual payments or writing out a check and mailing a payment. 
• Choose your date - You can select any date from the 1st to the 28th for your direct debit payments.
• Avoid a collection information statement - If you owe between $25,000 and $50,000, you don't have to complete a collection information statement if you set up direct debits.

You can set up direct debit payments online, or you can file Form 433-D once the IRS approves your request for a payment plan. If you owe over $50,000, a DDIA usually doesn't help you avoid a tax lien, but it makes it easier to stay on top of your monthly payments. 

What to Expect If the IRS Accepts Your Request for an Installment Agreement

If the IRS accepts your request, you must start making payments immediately as outlined in your agreement. You may even want to make monthly payments while the IRS reviews your application to be on the safe side. In addition to making your monthly payments on time, you must do the following to stay compliant with the terms of your agreement:

• File all tax returns on time and in full. 
• Do not incur any new tax liability - however, if you incur one new tax bill, the IRS will generally let you roll that into the payment plan. 
• Pay estimated quarterly taxes on time and in full if applicable.
• Provide the IRS with updated financial details if requested.

While you are on the payment plan, you will see interest added to your account. You will also incur a monthly penalty of .25% of your balance, but once this penalty reaches 25% of your balance, it will no longer apply.

What If the IRS Rejects Your Application

If the IRS rejects your application, you have the right to appeal. You can also appeal if the IRS terminates your installment agreement. In both cases, you must start the appeal within 30 days of the deadline on the letter. The IRS does not pursue collection actions while your payment plan application is pending. They also don't do any collections for 30 days after sending the rejection letter, and if you appeal, that will also pause the collection process. 

For best results, figure out why the IRS denied your application or request to change your agreement. Then, address that issue in your appeal or before you try again. For example, if the IRS rejected your application because you have unfiled returns, you should file them before you apply again. Talk with a tax pro for help.

How to Make Changes to Your Installment Agreement

Once your installment agreement is set up, you can request basic changes such as the payment date or your direct debit account details through the IRS's online payment agreement tool. However, with some changes, the IRS may request additional paperwork, and sometimes, you may need to speak directly with an IRS employee. For example, if you need to roll a new tax liability into your existing payment plan, you may need to talk to the IRS to get approval.

If you can no longer afford your payments or need longer to pay off the balance, be proactive about contacting the IRS. Generally, as long as you reach out first, you will be able to come to a satisfactory arrangement. If not, the agency may put your payment plan into default and go after you to collect the balance. If you miss a payment, the IRS will generally give you a month to catch up and get back on track, but if not, they can terminate your agreement and demand payment in full.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.