The IRS Installment Agreement
The IRS allows taxpayers to pay off tax debt through an installment agreement. Because interest and penalties will apply, however, the IRS encourages taxpayers to pay taxes immediately. Interest and penalties can equal 8% to 10% per year.
If paying the entire tax debt all at once is not possible, an installment agreement is an alternative allowed by the IRS. The IRS has four different types of installment agreements: guaranteed, streamlined, partial payment, and non-streamlined.
Guaranteed Installment Agreement
To qualify for a guaranteed installment agreement with the IRS, the taxpayer must meet the following conditions:
- Owe less than $10,000, (not including interest and penalties);
- In the previous five years the taxpayer has filed tax returns, paid taxes owed, and has not entered into an installment agreement;
- The taxpayer is unable to pay the tax liability when due;
- The tax liability will be paid off within three years; and
- The taxpayer must pay at least the minimum monthly payment (tax liability, interest, and penalties divided by 30)
Under this payment plan, the IRS will not file a federal tax lien against the taxpayer.
Streamlined Installment Agreement
In most cases, a taxpayer that qualifies for a guaranteed agreement will also qualify for the streamlined installment agreement. A streamlined installment agreement has the following requirements:
- The tax liability, interest, and penalties do not exceed $25,000;
- The balance can be paid off within 60 months; and
- The proposed payment is equal to or greater than the "minimum acceptable payment" (the minimum acceptable payment is the greater of $25 or the minimum payment amount reached by dividing the tax liability, interest, and penalties by 50)
The taxpayer must pay a fee of $105 to set up the installment agreement or $52 for a direct debit installment agreement. To restructure or reinstate a previous installment agreement, the IRS charges a $45 fee. Like a guaranteed installment agreement, the IRS does not file a federal tax lien.
Partial Payment Installment Agreement
A partial payment agreement allows the IRS to enter into agreements with taxpayers for the partial payment of a tax liability. To qualify for this arrangement, the taxpayer must complete a financial statement using Form 433-F to report income and living expenses. The IRS will review and verify the information. If the taxpayer has assets that can be sold to pay some of the tax debt, the IRS will require the taxpayer to provide additional information.
If approved, the taxpayer will be required to participate in a financial review every two years. This review may result in the increase in installment payments or the termination of the agreement.
Non-Streamlined Installment Agreement
If a taxpayer owes $25,000 or more and can make monthly payments to the IRS, a non-streamlined agreement is an option. The IRS will not automatically approve this agreement; instead, the taxpayer must negotiate with the IRS. The taxpayer must file Form 433-F, Collection Information Statement. This form collects information about income, debts, living expenses, assets, accounts, and allows the taxpayer to propose an installment payment amount.
It will usually take a few months for the IRS to review a proposed payment plan. The IRS may refuse a proposed agreement if it considers some of the taxpayer's living expenses unnecessary, if untruthful information was provided, or if the taxpayer failed to complete a prior installment arrangement.
If a taxpayer is unable to pay a tax liability through a non-streamlined agreement, consider filing an Offer in Compromise.
Ways to Make Payments
Taxpayers can make installment payments using the following methods:
- Payroll deduction
- Direct debit
- Check or money order
- Electronic Federal Tax Payment System (EFTPS)
- Credit card
- Online Payment Agreement (OPA)
When Will the IRS Revoke an Installment Agreement
The IRS can revoke an installment arrangement under the following circumstances:
- The taxpayer misses a payment;
- The taxpayer does not file a tax return or pay taxes after the agreement is entered into ;
- The taxpayer provided inaccurate information on Form 433-F; or
- The taxpayer is paying under a partial payment installment agreement and a review indicates a change in their financial position.