How the IRS Calculates Installment Agreement Payment Amounts

Overview

The IRS sets monthly installment agreement payments to collect owed federal taxes while trying to leave taxpayers able to meet basic living expenses. That balance is based on three core elements: the total tax liability (taxes, penalties, interest), the taxpayer’s collectible assets, and monthly disposable income (what remains after allowable living expenses). The agency combines those figures to determine how much it can realistically collect now and over time. See the IRS’s guidance on installment agreements for the official rules (IRS — Payments: Installment Agreements: https://www.irs.gov/payments/installment-agreements) and an overview of collection options (IRS — Understanding Your Collection Options: https://www.irs.gov/individuals/understanding-your-collection-options#installment-agreements).

In my work helping clients set up payment plans, I find that taxpayers who document income, use direct debit, and choose an appropriate term get faster approvals and lower overall costs from fees and enforced collection actions.

How the IRS actually calculates the payment (step by step)

1. Total the tax liability

• The starting point is the full balance due on your account: unpaid tax plus assessed penalties and accrued interest at the time of review.

1. Identify collectible assets

• The IRS will look at bank and brokerage accounts, equity in real estate and vehicles, and other assets that could be used to satisfy the debt. If there are assets the IRS can seize and sell, that reduces the monthly payment the agency will expect.

1. Compute monthly disposable income (NDI)

• The IRS uses a Collection Information Statement (Form 433-F for individuals or Form 433-A for more detailed cases) or information supplied during collections to calculate monthly net disposable income.
• Net disposable income = monthly income (take-home plus non-taxable receipts) minus allowable expenses. Allowable expenses are determined by IRS Collection Financial Standards (national and local standards) and any necessary documented out-of-pocket expenses such as medical costs or certain business expenses.
• Important: Line-item rules and national/local standards mean the IRS does not accept every expense you name. The standards are published by the IRS; agents will reference them when calculating what you can reasonably keep for living costs.

1. Calculate the Reasonable Collection Potential (RCP)

• The IRS commonly uses a concept called Reasonable Collection Potential, which is the sum of collectible asset value plus the amount the IRS can collect from future disposable income over the collection period.
• RCP = collectible assets + (monthly NDI × collection months).
• The default collection period is often six years (72 months), but the IRS may use a different period depending on the statute of limitations on collection and case specifics.

1. Compare RCP to total liability

• If RCP equals or exceeds the tax liability, the IRS expects full collection — either a short-term payment plan or a longer installment agreement where monthly payments reflect the NDI.
• If RCP is less than the tax liability, the IRS may permit a partial-payment installment agreement (PPIA) or place the account in Currently Not Collectible (CNC) status if continued collection would cause economic hardship.

1. Finalize the payment amount and term

• For standard installment agreements, the IRS will set a monthly payment that covers the tax within the allowed collection period. For PPIs, payments may be reviewed and adjusted periodically as the agency reassesses the taxpayer’s financial situation.

Practical example (numbers you can follow)

• Tax liability (including penalties & interest): $24,000
• Collectible assets: $2,000 in savings
• Monthly gross income: $3,500; allowable monthly expenses per IRS standards and documentation: $3,000
• Monthly NDI = $3,500 – $3,000 = $500
• If the IRS uses a 72-month collection period, potential collection from income = $500 × 72 = $36,000
• RCP = $2,000 + $36,000 = $38,000, which exceeds the $24,000 liability.
• Result: The IRS will expect a payment plan that covers the balance within the 72 months. A simple monthly payment would be about $24,000 / 72 = $333 — but actual payments may be higher to account for ongoing penalties/interest until paid in full.

If RCP were lower than the liability (for example, if NDI were $50 or if significant assets were exempt), the IRS could consider a partial-payment plan or CNC status.

Differences by type of installment agreement

• Streamlined (online) agreements: For taxpayers who can pay the full balance within the IRS’s allowed term (commonly up to 72 months) and meet other eligibility rules, a streamlined agreement can be approved without submitting a full financial statement. Streamlined plans are faster but still require payments that meet the IRS’s collection expectations. See our guide on how to apply online for a step-by-step walkthrough: How to Apply for an Installment Agreement Online: Step-by-Step (internal link: https://finhelp.io/glossary/how-to-apply-for-an-installment-agreement-online-step-by-step/).

• Regular/standard agreements: These often require a Collection Information Statement (Form 433-F/433-A) so the IRS can calculate NDI and RCP. Use the regular path if you need a lower monthly payment than the automated tools allow.

• Partial-payment installment agreements (PPIA): PPIAs are evaluated using a full financial picture. If the IRS determines the taxpayer cannot fully repay the liability within the collection period, it may approve a PPIA. PPIAs require documentation and periodic review.

For more on how different plans compare, see: Comparing Installment Agreements: Guaranteed, Streamlined, and Partial-Pay (internal link: https://finhelp.io/glossary/comparing-installment-agreements-guaranteed-streamlined-and-partial-pay/).

What documentation the IRS will ask for

• Recent pay stubs, bank statements, and a list of monthly bills
• Proof of necessary medical or extraordinary expenses (if claiming exceptions)
• Copies of filed tax returns (you must be current on filings to qualify)
• Completed Collection Information Statement (Form 433-F or Form 433-A) when required

Make sure documents are organized and legible. In my practice I’ve seen cases delayed for months because bank statements had gaps or expenses weren’t clearly explained.

Common issues that raise monthly payment amounts

• Unfiled tax returns: The IRS will estimate income and tax if returns aren’t filed, often increasing the assessed liability.
• Overstated expenses without proof: Unsupported claims for unusual expenses will be rejected, increasing NDI and expected monthly payments.
• High-value assets: Equity in homes, investment accounts, and vehicles can reduce the need for low monthly payments by increasing collectible value.

Practical strategies to improve your payment terms

• Be current on filings: The IRS generally won’t approve a plan until all required returns are filed. File missing returns before applying for an IA. See our guide: How to Apply for an IRS Installment Agreement: Types and Eligibility (internal link: https://finhelp.io/glossary/how-to-apply-for-an-irs-installment-agreement-types-and-eligibility/).
• Use direct debit: Agreements with direct debit have lower default rates and are sometimes easier to approve.
• Provide complete documentation: A clear Form 433-F/433-A with supporting documents speeds approvals and supports claims for lower monthly payments.
• Consider an Offer in Compromise only if you can show you cannot reasonably pay the full liability — this is a different, more restrictive process. See IRS guidance and our Offer in Compromise resources (IRS and FinHelp links).

What happens if you miss payments or need to change them

• Missed payments can lead to default on the installment agreement. Default may trigger enforced collection actions such as wage garnishment or bank levies.
• If your financial situation changes, you can request a modification of the agreement; the IRS may require an updated Collection Information Statement.

Fees, interest and penalties

• Interest and penalties continue to accrue on unpaid balances. That means smaller monthly payments or longer terms can increase the total amount paid over time. Fees for setting up installment agreements and the exact fee amounts may change; check the IRS Installment Agreements page for current costs (https://www.irs.gov/payments/installment-agreements).

When a partial-payment plan or CNC status makes sense

• If your NDI and collectible assets leave little or no ability to pay, a PPIA or Currently Not Collectible (CNC) status may be appropriate. CNC suspends active collection while the taxpayer’s financial situation prevents collection, but penalties and interest generally continue to accrue.

Quick checklist before you apply

• File all required tax returns
• Gather pay stubs and bank statements for the last 2–3 months
• Complete Form 433-F (or 433-A if requested)
• Decide whether you can pay by direct debit (recommended)
• Review IRS Collection Financial Standards and be ready to justify any nonstandard expenses

Professional tips from practice

• I’ve found taxpayers get better results when they request a reasonable term and show a willingness to pay via direct debit. In contrast, asking unrealistically low monthly payments without supporting docs prompts denials and delays.
• If you’re borderline eligible for a streamlined plan, apply online — it’s faster and often less expensive than manual processing.

Sources and further reading

• IRS — Payments: Installment Agreements (official): https://www.irs.gov/payments/installment-agreements
• IRS — Understanding Your Collection Options (official): https://www.irs.gov/individuals/understanding-your-collection-options#installment-agreements

Professional disclaimer: This article is educational and reflects general practices and IRS guidance as of 2025. It is not tax advice. For tailored advice, consult a tax professional or enrolled agent who can review your specific financial circumstances and the latest IRS rules.