When You Can't Pay Your Taxes in Full: Installment Agreements With the IRS

Closeup photo of a letter from the IRS
•••

LPETTET / Getty Images

A monthly payment plan is often the easiest way to pay off any large debt, including any major tax liability. The Internal Revenue Service (IRS) offers various payment arrangements and installment agreements to help taxpayers eliminate their tax debts.

You can request a new installment agreement online at the IRS website or by submitting Form 9465, but you must contact the IRS directly to add tax liabilities to an existing installment agreement. All agreements are subject to certain rules.

The IRS will usually charge interest and penalties for late tax payments—even if you enter into an agreement.

Guaranteed Installment Agreements

The IRS will automatically agree to an installment plan if you owe no more than $10,000 and meet all of the following criteria:

  • You (and your spouse if you're married) haven't filed a late return or paid late in the previous five years. This does not include extensions of time to file. It means missing a tax deadline without taking any action. 
  • You agree to file on time and to pay on time in future tax years.
  • You agree to pay the amount you owe within three years.
  • You don't have an open bankruptcy proceeding.

You might have to provide some information regarding your finances if you owe the IRS more than $10,000.

The main benefit of a guaranteed installment agreement is that the IRS will not file a federal tax lien or levy against you for outstanding taxes due. Tax liens, like mortgage liens, give the IRS the right to certain assets if you don't pay. A tax levy gives the IRS the right to seize certain assets. Both liens and levies can be reported to the credit bureaus and negatively impact your credit score.

Individual Payment Plans

If you owe more than $10,000, you may be able to set up an individual payment plan instead. These plans are available in both long-term (more than 120 days) and short-term varieties.

The plan options available to you depend on your tax debt. If the total of all your tax liabilities, penalties, and interest is $50,000 or less, and you've filed all required returns, then you may qualify for a long-term payment plan. If you owe less than $100,000, then you may qualify for a short-term plan.

What If You Can't Pay?

It's important to contact the IRS immediately if you're approved for an installment agreement and your financial situation turns out to be worse than you thought or if you encounter an unexpected financial setback. Options are available to help you out. You might be able to reduce your monthly payment, but your options will depend on your financial situation—expect to be asked to provide proof of your hardship to the IRS.

Partial Payment Installment Agreements (PPIAs)

A partial payment installment agreement (PPIA) allows you to make a monthly payment to the IRS that is based on what you can afford after accounting for your essential living expenses. You must have limited assets to qualify, and you can't have any outstanding returns. To request a PPIA, you must file Form 433 with Form 9465.

Form 433 is used to calculate your disposable income—which, in turn, determines your payments under the plan with the IRS. A partial payment plan can be set up for a longer repayment term, and the IRS might file a federal tax lien to protect its interests. You might have to provide pay stubs and bank statements to support your application and substantiate any equity you have in owned assets. The terms of the agreement will be reviewed every two years in case you can make additional payments.

The IRS might require that you sell assets to pay your tax debt rather than enter into a PPIA.

An Offer in Compromise

An offer in compromise will only be discussed after all other options have been exhausted, and you're unable to make any type of installment plan agreement. An offer in compromise involves negotiating with the IRS to pay less than what you owe. You'll typically need a tax professional to help represent you.

It is best to seek the advice of a federally-authorized tax professional, such as an enrolled agent, if you're unable to pay your tax debt. A professional can talk to the IRS on your behalf and can help you manage the process so it's not so overwhelming. A professional can also help you analyze your financial situation and tax issues to help you decide which program will best suit your needs.