Negotiating an installment plan with the IRS, obtaining legal assistance, or investigating alternative options such as an offer in compromise (OIC) or presently not collectible (CNC) status may all be used to resolve unpaid tax difficulties.

What You Need to Set up an Installment Agreement With the IRS

To create an installment agreement, you'll need the following information:

• Your most recent tax returns;

• Your bank routing and account number;

• Your contact details;

• The amount you owe in overdue taxes.

What Is the Length of an IRS Payment Plan?

The IRS payment plan might be short or long term. If you owe less than $100,000, you may be eligible for a short-term payment plan, which allows you an extra 180 days to pay. Individual taxpayers who owe $50,000 or less, including penalties and interest, are often eligible for a long-term payment plan that can last up to six years. 

Businesses that owe $25,000 or less may be eligible for long-term payment plans after submitting all required returns. Independent contractors and sole owners may apply for payment arrangements as individuals.

Four Common Types of Installment Agreements

You can seek several IRS installment arrangements based on the amount of taxes outstanding and your qualifications.

1. Guaranteed Installment Agreement

A guaranteed installment agreement is a short-term payment arrangement intended for taxpayers with modest tax obligations. To qualify, you must fulfill the following qualifying requirements:

• You owe a maximum of $10,000 excluding interest and penalties;

• I have submitted all income tax forms and paid taxes for the last five years;

• Have not signed into an installment payment plan to pay income taxes in the last five years;

• Unable to pay taxes in full by the due date;

• Be able to pay the entire debt owing within 120 days.

2. Streamlined Installment Agreement

The simplified payment agreement qualifies you for an automated plan without requiring any additional financial information. This option is accessible to taxpayers who owe $50,000 or less in taxes, including penalties and interest. The taxpayer must be able to pay the outstanding sum, plus penalties and interest, within 72 months by direct debit or payroll withdrawal.

3. Non-Streamlined Installment Agreement

You may need a longer-term payment plan, such as a non-streamlined installment arrangement. Unlike other payment agreements, you must fill out Form 433 and supply the following information to the IRS:

• Identify your present financial holdings and property, as well as any due amounts;

• Employment information and salaries;

• Other income;

• Monthly expenditures.

4. Partial Payment Installment Agreement

If you are unable to settle the installment debt within 72 months, you may contact the IRS to discuss payment options. A partial payment installment arrangement (PPIA) allows you to repay your amount in monthly installments based on what you can afford after meeting your basic living needs. To qualify, you must demonstrate financial hardship, which may include compiling supporting documentation and invoices. In addition, you must have submitted all necessary tax forms and paid estimated taxes. The following may disqualify you for a PPIA:

• Have an OIC;

• Being qualified to apply for CNC status;

• Filing for bankruptcy;

• Having equity in assets such as a home, as the IRS may require you to borrow against such assets to pay your taxes. 

When determining your eligibility and monthly payment, the IRS will consider the following:

• Current income;

• Current costs;

• Ability to pay;

• Equity in assets.

Examples of income, spending, and assets that the IRS may examine are:

• Monthly income;

• Savings accounts;

• Utility expenses;

• Childcare expenses;

• Mortgage or rent;

• Car's worth;

• Home value.

After the IRS evaluates the paperwork, you may need to sell some of your assets to cover a portion of the debt. Additionally, the IRS may examine your PPIA on a regular basis, such as every two years, and seek new financial information to assess whether conditions have improved. If your circumstances change, you may be required to make larger monthly payments. However, with the assistance of a tax specialist, you may fight and demonstrate that you cannot afford the increase.

How to Apply For an Installment Plan

Examine your tax balance and ensure you owe the correct amount. If you feel you do not owe these taxes, consult a tax attorney and talk with the IRS. If you receive a notice from the IRS, call the number indicated to discuss the amount they believe you owe.

If you owe these taxes, you may be needed to complete a collection information statement, depending on the kind of payment request. This form lets the IRS gather all of your financial information to calculate how much you can afford. If you are applying as an individual, you must complete Form 433-A or 433-F. If you are applying as a business, you must submit Form 433-B. 

Following that, you must complete Form 9465, the installment agreement request. The IRS requires you to furnish certain information, including:

• Your name and Social Security Number (SSN);

• If you're requesting a combined return, include your spouse's name and SSN;

• The entire amount owed according to the notification or tax return;

• Any further sums you owe;

• An estimate of how much you can afford to pay monthly.

Make sure you can afford the payment; if you fail to meet the payment terms, you may have to restart the entire procedure.

What Is the Interest Rate for IRS Payment Plans?

The interest rate is determined by the availability of an installment agreement and whether you file on time. If you do not have an installment agreement and do not file on time, the IRS will inform you of the interest levied on the sum owed. This is compounded daily at an interest rate equal to the federal short-term rate + 3% points, which is now about 5%. Additionally, the IRS will levy fines for late files.

If you do not have an installment agreement but file on time, you will face a failure-to-pay penalty. The failure-to-pay penalty is 0.5% of the tax owed every month until paid in full. You may be assessed a penalty of up to 25% of the tax payable. If you have an installment arrangement, the failure-to-pay penalty is reduced by half. Interest and failure-to-pay penalties will continue until the whole overdue tax bill is paid in full.

What Are the Fees For Installment Agreements?

The IRS charges user fees based on the payment plan, application method, and eligibility for fee reductions. If you pay the tax debt within 180 days or fewer, you will not be charged a fee under short-term installment arrangements. You must pay using one of the following methods:

• Make direct debit payments from your bank accounts;

• Check or money order;

• Credit or debit card — payment processing costs apply;

• Online or phone payments using the Electronic Federal Tax Payment System (EFTPS).

If you pay with recurring debit withdrawals online, there is a minor cost for long-term payment plans that last more than 180 days. The fee increases for phone, mail, and in-person applications. Other payment options, such as direct pay, money order, or EFTPS, incur a greater cost whether the application is submitted online, over the phone, by mail, or in person.