How to Request an Installment Agreement to Reduce Penalty Accrual

Quick take

• An installment agreement allows you to repay an IRS balance in monthly payments instead of all at once. It does not automatically erase interest or all penalties, but it can stop collection actions (for example, levies) and open pathways to penalty reduction or abatement when you follow the right steps. (IRS online payment agreement: https://www.irs.gov/payments/online-payment-agreement-application)

Why timing and documentation matter

The moment you contact the IRS to request a plan, you demonstrate intent to pay. That matters because:

• The IRS generally pauses enforced collection steps (like levies or seizures) while it processes a legitimate installment agreement request and the agreement remains in compliance. (IRS collection guidance)
• Penalties and interest typically continue to accrue until the underlying tax is paid in full, so the faster you put an agreement in place, the less additional interest and penalties you’ll likely owe.
• If you qualify for penalty abatement (for example, first-time penalty abatement) or reasonable‑cause relief, documenting the facts early improves the odds of successful relief. (IRS penalty relief: https://www.irs.gov/newsroom/penalty-relief)

Common penalties that interact with installment agreements

• Failure-to-pay penalty: Generally 0.5% of the unpaid tax per month, assessed until the tax is paid (up to a maximum). The exact rate and limits are set by the IRS and should be confirmed on the IRS penalty guidance page. (See: https://www.irs.gov/payments/penalties)
• Failure-to-file penalty: Usually larger (commonly 5% per month) and often applies before an installment agreement will be approved; filing returns is a prerequisite.
• Interest: Accrues on unpaid tax and on penalties. Interest rates are set quarterly by the IRS.

Types of installment agreements you can request

• Online Payment Agreement (OPA): The easiest route for many taxpayers who owe under specified limits and have filed required returns. Use the IRS Online Payment Agreement tool to apply. (https://www.irs.gov/payments/online-payment-agreement-application)
• Streamlined installment agreement: A simplified setup for taxpayers who owe less than a threshold amount and can pay within the Collection Statute Expiration Date (CSED). Terms and thresholds have changed over time; check current IRS guidance before applying. For more on eligibility, see IRS guidance and our related guide on how streamlined agreements work.
• Partial-payment installment agreement (PPIA): If you cannot realistically pay the full liability before collection expires, the IRS may accept a partial-payment plan. These require a financial review and periodic re-evaluations. See our article on Partial-Payment Installment Agreements for details.
• Direct Debit Installment Agreement (DDIA): A DDIA requires automatic monthly withdrawals. While it does not automatically stop interest, DDIA is often preferred by the IRS and can reduce defaults because payments are reliable.

Step-by-step: How to request an installment agreement to limit penalties

1. Confirm returns are filed

• The IRS requires that tax returns are filed for the years in question before approving most agreements. If you haven’t filed, file as soon as possible—even if you can’t pay in full.

1. Get your balance and documents together

• Obtain a current account transcript (or recent IRS notice) showing the balance due. Gather pay stubs, bank statements or other records if you may need to demonstrate financial hardship for a partial-payment plan.

1. Choose the right application route

• Online: Use the IRS Online Payment Agreement tool for eligible taxpayers. This is the fastest method. (https://www.irs.gov/payments/online-payment-agreement-application)
• Phone or mail: If you don’t qualify online, call the number on your IRS notice or submit the required forms. Expect longer processing times.
• Form-based submissions: The IRS may request a Collection Information Statement (Form 433‑F, or the business/individual variant) for full financial disclosure when you seek a PPIA or a non-streamlined agreement.

1. Propose a realistic monthly payment

• Pick an amount you can sustain long term. Defaults often come from overestimating how much you can pay each month.
• If possible, set up direct debit (DDIA). Automatic payments reduce default risk and may be favored by the IRS when approving terms.

1. Request penalty abatement where applicable

• If you have reasonable cause (medical emergency, natural disaster, death in family, or other qualifying circumstances) or qualify for first-time penalty abatement, request abatement at the time you apply for the installment agreement. Include supporting documentation and reference relevant IRS penalty-relief guidance. (IRS penalty relief: https://www.irs.gov/newsroom/penalty-relief)
• If you prefer written submission, use Form 843 for certain penalty abatements or send a detailed letter as instructed on IRS notices.

1. Keep communication and payments current

• Make payments on time. If your financial situation changes, contact the IRS before missing a payment to request a modification rather than letting the agreement default.

What to expect after approval

• Collections hold: Approved agreements generally prevent levies and other enforced collection while you remain compliant.
• Continued accrual: Interest and some penalties usually continue to accrue until the balance is fully paid, unless you receive formal abatement.
• Compliance obligations: File future returns and make payments on time. Failing to remain current on future filings/payments can void an agreement.

When installment agreements reduce penalty accrual (and when they don’t)

• They reduce enforced collection actions immediately in most cases, which prevents extra fees or costs associated with enforced collection.
• They do not automatically wipe out failure-to-pay penalties or interest; the balance will still generally grow until paid in full.
• In some cases, combining an installment agreement with a direct-debit payment method and/or a request for penalty abatement (for reasonable cause or first-time abatement) can materially reduce what you owe in penalties. Always document your request and retain proof.

Practical examples (typical outcomes)

• Small balance, fast setup: Taxpayer A owes $3,000, applies online within weeks and uses DDIA at $150/month. Collections are suspended and interest/penalties accrue for a short period only — total extra costs remain small because the debt is paid quickly.
• Larger balance with hardship: Taxpayer B owes $40,000 and cannot pay within the statute period. After financial disclosure (Form 433-F) the IRS approves a partial-payment installment agreement; the monthly payment is low and subject to periodic review. Penalties continue to accrue but the taxpayer avoids immediate levy and gains breathing room.

Common mistakes and how to avoid them

• Don’t apply before filing required returns: The IRS often rejects requests from taxpayers who haven’t filed.
• Don’t promise unrealistic monthly payments: Choose a sustainable payment to avoid default.
• Don’t ignore penalty-relief options: If you have reasonable cause or qualify for first-time abatement, submit the request with your installment application.
• Don’t rely solely on verbal promises: Get agreement terms in writing and keep copies of notices and payment confirmations.

How to modify or reinstate an agreement

• Modification: If your financial situation changes, you can request a change to your plan. This usually requires updated financial information and IRS approval.
• Default and reapplication: If a plan defaults, the IRS may terminate it and resume collection. You can reapply, but you may face stricter terms or additional fees. See our guide on reapplying after default.

When to call a professional

• Complex balances (business tax debt, payroll taxes, large multi‑year liabilities).
• When seeking a partial-payment installment agreement that requires detailed financial statements and negotiation.
• If you’re pursuing penalty abatement for reasonable cause and need help compiling supporting documentation.

Helpful resources

• Apply online: IRS Online Payment Agreement application — https://www.irs.gov/payments/online-payment-agreement-application
• Penalty information and relief: https://www.irs.gov/payments/penalties and https://www.irs.gov/newsroom/penalty-relief
• Collection forms and statements: Search the IRS site for Collection Information Statement (Form 433 series)
• Related FinHelp articles:
• How to Apply for an Installment Agreement Online: Step-by-Step — https://finhelp.io/glossary/how-to-apply-for-an-installment-agreement-online-step-by-step/
• Partial-Payment Installment Agreements: What to Expect — https://finhelp.io/glossary/partial-payment-installment-agreements-what-to-expect/
• How Streamlined Installment Agreements Work for Small Balances — https://finhelp.io/glossary/how-streamlined-installment-agreements-work-for-small-balances/

Professional disclaimer

This article explains general IRS procedures and common strategies for requesting installment agreements and seeking penalty relief. It is educational only and does not constitute tax, legal, or financial advice for your unique circumstances. For personalized guidance, consult a licensed tax professional or attorney.

Author note (professional insight)

In my 15+ years assisting clients, quickly filing missing returns and applying for an installment agreement — even for a modest monthly amount — is one of the simplest, most effective steps taxpayers can take to limit additional collection pressure. Pair that action with a timely request for penalty relief when you have reasonable cause; the combination often reduces total costs far more than waiting to be contacted by the IRS.