IRS encourages taxpayers to pay what they owe as quickly as possible. For those individuals or businesses not able to resolve a tax debt immediately, an installment agreement can be a reasonable payment option. Installment agreements allow for the full payment of the tax debt in smaller, more manageable amounts.
To be eligible for an installment agreement, all returns that are due must first be filed.
Installment agreements generally require equal monthly payments. The amount of an installment payment will be based upon the amount owed and on the taxpayer’s ability to pay that amount within the time legally available for the IRS to collect. By law, the IRS has the authority to collect outstanding federal taxes for ten years from the date of assessment. For taxpayers that enter into an installment agreement, the IRS may require a signed waiver to extend the time IRS can collect.
Taxpayers who already have an installment agreement from a previous amount owed may still find help. All of the amounts owed could be included in one installment agreement. Additionally, a Collection Information Statement may have to be completed to further illustrate the financial situation.
As a condition of an installment agreement, any refund due in a future year will be applied against the amount owed. Therefore, taxpayers may not get all of their refund if they owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. The IRS will automatically apply the refund to the taxes owed. If the refund does not take care of the tax debt; then the installment agreement continues until all of the terms are met.
Interest does not stop with an installment agreement
An installment agreement is more costly than paying all the taxes owed now. Penalties and interest continue to be charged on the unpaid portion of the debt throughout the duration of an installment agreement.
NOTE:The interest rate on a loan or on a credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. It is best to pay as much as possible before entering into an agreement.
How best to make timely installment payments
The IRS strongly recommends one of the following options for payment under an installment agreement:
- Direct Debit – electronic transfers from a checking account; or
- Payroll Deduction – deductions that an employer takes from wages or salary. Call toll free 1-800-829-1040 to set up this option.
These forms of payment help to reduce the burden of mailing the payments, save postage, help ensure timely payments, and decrease the likelihood that the agreement will default. If the agreement defaults, enforced collection action could be taken.
Installment agreement payments can also be made by electronic funds transfer (www.eftps.gov), credit card (www.officialpayments.com or www.pay1040.com), personal or business check, money order, cashier’s check, certified funds or cash. (Cash payments can only be made in person at a local IRS Office–do not send cash through the mail).
Fees to set up an installment agreement
The IRS charges a user fee of $43 to set up the installment agreement. It is possible for an installment agreement to be reinstated if the agreement defaults. Also, installment agreements may be restructured to include additional amounts owed in one agreement. Reinstating or restructuring an existing installment agreement will cost an additional $24 user fee.
How to set up an installment agreement
Taxpayers wishing to pay off a tax debt through an installment agreement and owe:
- $25,000 or less in tax can call the number on the bill or notice (have the bill or notice available, along with the social security number). A fill-in Request for Installment Agreement, Form 9465, is available online and can be mailed to the address on the bill.
- More than $25,000 in tax may still qualify for an installment agreement, but a Collection Information Statement, Form 433F, may need to be completed. Call the number on the bill or mail the Request for Installment Agreement, Form 9465 and Form 433F to the address on the bill.
A notification is sent to the taxpayer advising whether the terms of the installment agreement have been accepted or if they need to be modified.
The IRS generally may still file a Notice of Federal Tax Lien to secure the government’s interest in the taxpayer's personal or real property until final payment is made. The notice filing could have a negative impact on the taxpayer’s credit rating.
Enforced collection actions
Generally, IRS enforced collection actions (i.e., levy against personal or real property) are not made while an installment agreement request is being considered, or:
- while an agreement is in effect;
- for 30 days after a request for an agreement has been rejected; and
- for any period while a timely appeal of the rejection or termination is being evaluated by the IRS.
Payments should be made timely
Throughout the term of an installment agreement, payments must be made on time. If payments cannot be made due to a change in financial condition, taxpayers should contact the IRS immediately. Failure to make timely payments could default the agreement. A defaulted installment agreement could subject a taxpayer’s account to enforced collection action and potentially have a negative effect on a taxpayer’s credit standing.
Annual statements of balance due
In accordance with the law, installment agreement taxpayers receive an annual statement from the IRS. The statement provides the amount owed at the beginning of the statement period, the payments (credits) posted to account(s), any fees or assessments, and the ending balance. Currently, the annual statement is sent each year in July.