Discovering that you owe taxes can be truly stressful if you can’t afford to pay them all at once. Don't panic if you find yourself in this situation. The IRS offers a few payment plans that will let you pay the taxes you owe over time.
What Is an IRS Payment Plan?
The IRS failure-to-pay penalty is 0.5% per month for each month you're late, up to 25% of the amount you owe, plus interest. The IRS adjusts its interest charges quarterly. They're always set at the federal short-term rate plus 3%. The interest rate is 3% for individual taxpayers for the fourth quarter of 2021.
An IRS installment plan is typically cheaper than paying your taxes with a credit card if you can’t pay your tax debt in full. The average credit card annual percentage rate (APR) was 20.25% as of August 2021.
Any tax refunds that you're due for other years while you're enrolled in a payment plan will be applied to your balance until you no longer owe.
You can set up a short-term payment plan if you can afford to pay off your balance in 180 days or less. Taxpayers who owe less than $100,000 and can pay in 120 days or less may apply for a short-term plan online at IRS.gov/OPA; those who need more time to pay, up to 180 days, must apply by mail or telephone. Otherwise, you can apply for a long-term streamlined payment plan and make monthly installment payments. The maximum repayment period is 72 months.
Who Is Eligible for an IRS Payment Plan?
You’re guaranteed to qualify for an IRS installment agreement if you owe $10,000 or less, and if you (and your spouse if married and filing jointly):
- Have filed your tax returns on time for the past five years;
- Agree to pay your tax debt in full within three years rather than 72 months;
- Can’t afford to pay the taxes you owe in full; and
- Aren’t in bankruptcy proceedings
You might still qualify by applying online if your tax bill is higher or you need more than three years to pay. Individuals who owe less than $50,000 and businesses that owe less than $25,000 can generally apply for a payment plan online as long as they’ve filed all of their tax returns, but you may be able to apply online even if you owe more.
The IRS relaxed its rules in 2020 to allow some taxpayers who owe up to $250,000 to apply without submitting additional information, but their proposed monthly payment must be sufficient.
An agreement can usually be set up in just a few minutes, according to the IRS website. You can apply by submitting Form 9465 or by calling the IRS if you’re not eligible to set up a plan online.
The IRS will require that you set up automatic monthly payments by direct debit from your bank account if the balance you owe is greater than $25,000. The same rule applies to businesses that owe more than $10,000.
What Are the Fees for an IRS Payment Plan?
Fees also apply if you set up an IRS payment plan. Some fees can be waived, however, if the IRS considers you to be a low-income taxpayer; that is, your if income for the tax year is at or below 250% of the applicable federal poverty level.
|Type of Plan||Fees||Who Qualifies|
|Short-term plan (180 days or less)||• No setup fee • Interest and late charges||Individuals who owe less than $100,000 in total|
|Long-term payment plan (more than 180 days) with Direct Debit monthly payments from your bank account||• $31 setup fee if you apply online • $107 setup fee if you apply by phone or mail or in person • Interest and late charges||Online application: Individuals who owe $50,000 or less and businesses that owe $25,000 or less • Those who owe up to $250,000 can qualify in some cases • Individuals who owe more than $25,000 and businesses that owe more than $10,000 must pay by Direct Debit|
|Long-term payment plan (more than 180 days) with another payment method||• $149 setup fee if you apply online • $225 setup fee if you apply by phone or mail or in person • Interest and late charges||• Individuals who owe $25,000 or less • Businesses that owe $10,000 or less|
Should I Use a Tax Settlement Firm?
Your best option is typically to work directly with the IRS rather than hiring a tax settlement company if you owe taxes. Plenty of firms claim that they can reduce your tax debt or stop wage garnishment, but the Federal Trade Commission (FTC) warns that most taxpayers won’t qualify for the programs they advertise.
The FTC has received numerous complaints from taxpayers who say that certain tax settlement firms not only failed to negotiate a settlement for them but also didn’t submit the necessary paperwork to the IRS. They charged unauthorized fees.
The FTC recommends carefully reviewing a tax relief company’s fee structure and cancellation policies before hiring one to represent you. A better solution is often to contact the Taxpayer Advocate Service, an independent division of the IRS, for unresolved issues. Only a certified public accountant (CPA), an enrolled agent, or an attorney can represent you before the IRS if you want the assistance of a third party.
Alternatives to an IRS Payment Plan
You can ask the IRS to delay collection if you're unable to pay any of your tax debt at all. The debt won't go away if the IRS approves your request, but your account will be reported as "currently not collectible." Interest and late payments will still continue to accrue.
You may also be eligible for an offer in compromise (OIC) in which the IRS agrees to settle your debt for a reduced amount. This isn’t an option if you’re currently in bankruptcy, however. Use the IRS Offer in Compromise Pre-Qualifier screening tool to determine whether this could be an option for you.
- An IRS payment plan lets you spread out your tax bill over a period of time if you can’t afford to pay your tax debt right away and in full.
- You can set up a short-term or long-term plan, depending on whether you can afford to pay the IRS within 180 days.
- Interest will continue to accrue if you set up an IRS payment plan.
- Most taxpayers won’t qualify for the programs that tax relief companies advertise.
Internal Revenue Service. "Collection Procedural Questions."
Internal Revenue Service. "Interest Rates Remain the Same for the Fourth Quarter 2021."
Internal Revenue Service. "Additional Information on Payment Plans."
Internal Revenue Service. "Instructions for Form 9465: Installment Agreement Request." Pages 1-2.
Internal Revenue Service. "188.8.131.52.1 (12-19-2019): IA Requests for Post-Petition Liabilities Submitted During Bankruptcy."
Internal Revenue Service. "Instructions for Form 9465: Installment Agreement Request," Page 1.
Internal Revenue Service. "IRS Makes It Easier to Set Up Payment Agreements; Offers Other Relief to Taxpayers Struggling With Tax Debts."
Internal Revenue Service. "Temporarily Delay the Collections Process."
Internal Revenue Service. "Form 656 Booklet: Offer in Compromise," Page 1.