What an IRS payment plan is and when you need one
An IRS payment plan (officially called an installment agreement) lets you pay your tax bill in monthly chunks instead of all at once. You set up the plan directly with the IRS, and they charge you a fee to do it. The IRS offers several types of plans depending on how much you owe and how quickly you can pay.
You need a payment plan if you owe taxes but cannot pay the full amount by the tax important date. The IRS will not waive the debt, but a plan stops them from taking collection action like wage garnishment or bank levies while you are making regular payments. If you ignore the bill and do not set up a plan, the IRS will eventually file a lien against your property or seize your paycheck.
The sooner you contact the IRS after you know you owe, the more payment options you have. If you wait until after the IRS sends a notice, your choices narrow and fees increase.
Key Takeaways
- The IRS offers short-term plans (120 days or less) with no setup fee and long-term plans (more than 120 days) with setup fees ranging from $31 to $225 depending on how you set it up.
- You can request a plan online through IRS.gov, by phone at 1-800-829-1040, or by mail using Form 9465, and the method you choose affects both the fee and how quickly the plan starts.
- Monthly payments are calculated by dividing your total debt by the number of months in your plan, and you must continue paying income taxes on time while the plan is active.
- Interest and penalties continue to accrue on your unpaid balance throughout the plan, so paying faster saves you money even if you can only afford small monthly amounts.
- If your financial situation improves, you can pay off the plan early without penalty, and if it worsens, you can request a modification to lower your monthly payment.
Types of payment plans and their costs
The IRS offers two main categories: short-term plans and long-term installment agreements. A short-term plan covers debts you can pay off within 120 days. There is no setup fee, but you must pay the full amount within that window. This option makes sense if you are waiting for a bonus, a tax refund, or money from selling something.
Long-term installment agreements are for debts you need more than 120 days to pay. The setup fee depends on how you set up the plan. If you set it up online or through the IRS phone line with automatic payments from your bank account, the fee is $31. If you set it up by phone without automatic payments, the fee is $225. If you mail in Form 9465, the fee is also $225. Once the plan is active, you make the same payment every month until the debt is gone.
The IRS also offers a streamlined installment agreement for people who owe $50,000 or less in combined income, estate, and employment taxes. This plan has a lower setup fee ($31 with automatic payments, $225 without) and faster approval, but you must pay within 84 months (seven years).
How to request a payment plan online
The fastest and cheapest way to set up a plan is through the IRS website at IRS.gov. Go to the "Online Payment Agreement" tool under the Payments section. You will need your Social Security number or Individual Taxpayer Identification Number, your filing status, and the tax year for which you owe.
The tool will ask you how much you owe and how many months you want to pay it back over. It will then calculate your monthly payment and show you the total interest and penalties you will pay. You can review the terms, and if you agree, you can set up automatic payments from your bank account. The setup fee is $31 if you choose automatic payments.
Once you submit the request online, the IRS usually approves it within 24 hours. You will receive a confirmation number and details about when your first payment is due. Automatic payments begin on the date you choose, and the IRS sends you a bill each month showing your balance.
Setting up a plan by phone or mail
If you prefer to speak with someone, call the IRS at 1-800-829-1040. A representative will ask the same questions as the online tool and help you choose a payment amount. They will explain the total cost of the plan and answer questions about what happens if you miss a payment. The call usually takes 15 to 20 minutes.
If you set up a plan by phone without automatic payments, the setup fee is $225. You will receive a bill in the mail each month, and you send a check or money order to the address on the bill. This method is slower because the IRS has to process your payment by mail, which can take two weeks.
You can also mail Form 9465 (Installment Agreement Request) to the IRS address listed in your tax notice. Include a copy of the notice and a check or money order for the setup fee. Mail this to the address shown on your notice, not the general IRS address. Processing by mail takes four to six weeks, so this method is the slowest option.
What happens to interest and penalties while you pay
Interest and failure-to-pay penalties continue to grow on your unpaid balance every month you have a payment plan. The interest rate is set by the IRS each quarter and is currently around 8 percent per year, though this changes. The failure-to-pay penalty is 0.5 percent of your unpaid tax per month, up to 25 percent total.
This means if you owe $5,000 and set up a 24-month plan, your total cost will be higher than $5,000 because interest and penalties are added to each month's balance. If you can pay faster, you will save money. For example, paying off the same $5,000 in 12 months instead of 24 months will cost you less in interest and penalties, even though your monthly payment is higher.
You can see the exact total cost before you agree to the plan, both online and when you speak with an IRS representative. This total includes the setup fee, all interest, and all penalties through the end of the plan.
What you must do while the plan is active
While you are making payments on a plan, you must file your tax return on time every year and pay any new taxes you owe by the important date. If you do not file or you miss a payment on your plan, the IRS can cancel the agreement and take collection action when ready.
If you miss a payment, contact the IRS right away. You have a grace period of a few days before the IRS considers the plan broken, but do not rely on it. Call 1-800-829-1040 and explain what happened. The IRS may allow you to make up the missed payment or adjust your plan.
If your financial situation changes and you cannot afford your monthly payment, you can request a modification. Call the IRS or log into your online account to request a lower payment amount or a longer payment period. The IRS will recalculate your plan based on your new circumstances.
Paying off the plan early or modifying it
You can pay off your plan at any time without penalty. If you receive a bonus, inheritance, or tax refund, you can send extra money to the IRS and reduce your remaining balance. There is no fee for paying early, and you will save money on interest and penalties by doing so.
If you want to lower your monthly payment because your income has dropped, you can request a modification. The IRS will extend your plan to a longer period so your monthly payment is smaller. You will pay more interest overall, but your monthly cash flow improves. To request a modification, log into your IRS online account or call 1-800-829-1040.
If your financial situation improves and you can afford a higher payment, you can also request to shorten your plan. This saves you money on interest and gets you out of debt faster.
Frequently Asked Questions
What if I cannot afford any monthly payment right now?
Contact the IRS and explain your situation. You may be placed in "currently not collectible" status, which pauses collection action temporarily while you get back on your feet. Interest and penalties still accrue, but the IRS will not garnish your wages or levy your bank account. You will need to reapply periodically to stay in this status.
Can I set up a payment plan if I owe state taxes too?
No, this plan only covers federal taxes owed to the IRS. You must contact your state tax agency separately to set up a plan for state taxes. Each state has its own rules and processes.
What happens if I miss a payment on my plan?
The IRS will send you a notice. You have a short grace period to catch up, but if you do not respond, the IRS can cancel the plan and begin collection action like wage garnishment. Contact the IRS when ready if you miss a payment to explain and arrange to make it up.
Will a payment plan hurt my credit score?
A payment plan itself does not appear on your credit report. However, if the IRS files a tax lien (which happens if you do not set up a plan or break an existing one), that lien will damage your credit. Setting up a plan before a lien is filed protects your credit.
Can I change my payment amount after the plan starts?
Yes. If your income changes, you can request a modification to raise or lower your monthly payment. Call the IRS or use your online account to request the change. The IRS will recalculate your plan based on your new circumstances.