Establishing an IRS Installment Agreement

Andrea Miller
Expert Contributor
Last Updated:
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  • Taxpayers who owe less than $50,000 can automatically qualify for an IRS installment agreement in most cases.
  • Those with debt exceeding $50,000 can negotiate a payment plan by providing financial information to the IRS for consideration.
  • You have the right to appeal if your request for an installment agreement is rejected.

 

Many taxpayers are eligible for an IRS installment agreement if they cannot afford to pay their tax debt. This arrangement allows you to repay the debt over time, usually up to six years.

Short-Term Payment Plans

This option is designed for individuals who owe less than $10,000 and can pay the debt in full within four months. Short-term payment plans don’t carry the fees associated with long-term payment plans (those over 120 days). This program is called a guaranteed installment agreement and does not require a minimum monthly payment as long as you completely pay the balance within the agreed time frame. To apply, complete IRS Form 4868, Application for Automatic Extension of Time to File.

The IRS Fresh Start Program

With the IRS Fresh Start Program, taxpayers who owe less than $50,000 and meet several requirements automatically qualify for a 72-month payment plan without providing additional financial information. To be eligible, you must:

  • Have filed all outstanding tax returns.
  • Be paid up-to-date on estimated tax payments for the year if you are a freelancer or small business owner.
  • Be current on Form 941 filings and payroll tax deposits if you are an employer.

Keep in mind that penalties and interest will continue to accrue until the tax debt is paid in full. Depending on the amount of taxes you owe, the annual interest rate could be as high as 10% (the interest rate varies in response to the prime lending rate). Remember that the higher your monthly payment, the lower amount you’ll pay over the length of the agreement.

Establishing an IRS Installment Agreement

For example, if you have $10,000 in back taxes and interest and can afford to pay $150 a month, your tax debt will be repaid in about 67 months. Boosting your payment to $250 a month shortens the agreement to 40 months, a substantial interest savings. The lowest possible monthly payment would be about $139 if you take advantage of the full 72 months.

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The cost to request a payment plan is $52 for a direct debit agreement or $120 for a standard agreement or payroll deduction agreement. Those with income below 250 percent of the federal poverty threshold can complete Form 13844 to request a reduced fee of $42, which will be credited back to your tax account after several successful payments.

Negotiate a Payment Plan

Taxpayers who owe more than $50,000 or who need longer than six years to repay their tax debt are not eligible for the Fresh Start program, but they can still request an installment plan with the IRS. You will need to submit Form 433-A, Collection Information Statement, which lists your income and expenses. The evaluator will use this information to determine how much you can afford to pay toward your tax debt each month.

However, you are able to propose a monthly payment amount as part of your Form 433-A. To increase the likelihood that your proposed amount will be accepted by the IRS, it should equal your income minus living expenses. Never propose a payment higher than you can afford since it will be difficult to negotiate for a lower payment once you sign the agreement.

You should also make your first proposed monthly payment when you submit Form 433-A. Continue to pay each month until the IRS responds to your offer. Making regular payments shows good faith and increases the chances that your request will be approved. You may not receive an official IRS decision on your proposed payment plan for several months.

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Fees for this type of installment agreement are the same as with the Fresh Start program.

Make Monthly Payments

Use barcoded envelopes and payment slips provided by the IRS with your bill to send payments to your local IRS service center. Once you have an approved installment agreement in place, you can opt to use either a direct debit or direct payroll deduction to make your monthly payments.

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For payroll deduction, complete Form 2159 Payroll Deduction Agreement. Your employer will withhold the monthly payment amount and send it to the IRS. For a direct debit agreement, you can have the payment directly sent by your bank each month. Paying by payroll deduction or direct debit ensures you won’t miss a payment, which can invalidate your agreement and leave you open to other collection actions.

Avoid Revocation

Although an IRS installment is legally binding for both you and the agency, it can be revoked if you do not abide by its terms. Reasons that the IRS can cancel your payment plan include:

  • Discovery of inaccurate or incomplete information provided during the negotiation period.
  • Significant change in your financial situation, either positive or negative.
  • Missing a payment, usually after a warning or if more than 60 days pass without a payment.
  • Failing to file or pay subsequent tax returns.

Appeal a Refused Proposal

The IRS may reject your proposed monthly installment payment amount or refuse to let you enter a payment agreement for three reasons:

  • You defaulted on an installment agreement in the past.
  • You provided false or incomplete information on Form 433-A. If your proposal is refused for this reason, the IRS may believe that you are withholding information about income, bank accounts, or property.
  • Your living expenses are considered above the reasonable standards that the IRS has established, and you can afford a higher monthly tax payment. Examples can include evidence of private school funding for children or high consumer spending.

Ask to speak to the supervisor of the agent who rejected your offer and to this individual’s supervisor if necessary. Talking to other representatives at the IRS increases the likelihood that one of them can offer you a fair payment agreement.

If you need help establishing a payment plan with the IRS or cannot afford to pay any monthly amount toward your tax debt, you can seek tax debt relief from Solvable. We have the resources and partnerships with tax debt relief and settlement companies to connect you with a debt relief program that fits your needs.

 

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Andrea Miller
Expert Contributor
Last Updated: