How installment agreements differ from other tax-relief options

An installment agreement is a collection tool the IRS uses to collect taxes over time while keeping the taxpayer in compliance. It is not debt forgiveness (that is an Offer in Compromise) and it does not erase penalties and interest — those continue to accrue until the balance is paid in full (IRS — Payment Plans). If you need permanent reduction in what you owe, see alternatives such as an Offer in Compromise (learn more in our guide: What Is an Offer in Compromise? Eligibility, Process, and Alternatives — https://finhelp.io/glossary/what-is-an-offer-in-compromise-eligibility-process-and-alternatives/).

Types of installment agreements

  • Short-term payment plan: Typically allows up to 120 days to pay in full. There is usually no setup fee but penalties and interest continue to accrue.
  • Long-term (monthly) installment agreement: Spreads payments beyond 120 days, commonly up to 72 months (6 years) in many cases. For longer plans or larger balances you may need to provide a financial statement.
  • Streamlined installment agreement: For many taxpayers who owe smaller amounts and meet IRS thresholds, the IRS allows a simplified online setup without full financial disclosure (see IRS Online Payment Agreement).
  • Partial-payment installment agreement: The IRS may approve a plan where monthly payments are based on what they determine you can afford; the balance may remain unpaid for a period and could be revisited if your circumstances change.
  • Payroll-deduction or direct-debit plans: The IRS favors automatic payments (direct debit) because they reduce defaults and typically carry a lower setup fee.

(Author’s note: in my 15 years as a CPA I’ve found that direct-debit plans reduce missed payments and simplify record-keeping.)

Who is eligible and common threshold rules

Eligibility depends on the total balance, filing status, filing compliance, and whether you have open bankruptcy or certain other collection actions. Key points:

  • You must be current with required tax returns; the IRS generally won’t approve an agreement if returns are unfiled.
  • The IRS has streamlined online options for many taxpayers who owe below published thresholds; taxpayers who owe larger amounts can still request a plan but often must provide a Collection Information Statement (Form 433 series) or other financial documentation (IRS — Payment Plans Installment Agreements).
  • Short-term plans are available for most taxpayers; long-term plans are common for balances that cannot be paid within 120 days.

Note: thresholds and documentation requirements can change; always confirm current rules on the IRS payment plans pages.

How to apply: step-by-step

  1. Gather documents: copies of recent tax returns, paystubs, bank statements, and records of monthly expenses.
  2. Check the IRS Online Payment Agreement (OPA) tool: many taxpayers can apply online, which is faster and often cheaper than phone or mail (IRS — Online Payment Agreement).
  3. Choose payment method: direct debit (recommended), payroll deduction (if employer permits), or manual payments.
  4. Complete the application online, by phone, or with Form 9465 (Installment Agreement Request) if applicable. If the IRS requests Form 433-A/B (Collection Information Statement), complete it promptly.
  5. Review and accept the terms: set the monthly date, payment amount, and duration. Make the first payment promptly to reduce risk of cancelation.

Fees, penalties and interest — what to expect

  • Interest and late-payment penalties continue until the full tax liability is paid. The IRS posts current interest rates on its website.
  • The IRS charges a user fee to set up most installment agreements. As a common practice, direct-debit online agreements carry the lowest setup fee and low-income taxpayers may have fees reduced or waived. Exact dollar amounts and fee policies are set by the IRS and can change; confirm current fees at the IRS Online Payment Agreement page and in IRS publications.
  • If you default and the agreement is terminated, you may face a reinstatement fee and the IRS may resume aggressive collection (levy, lien, passport restrictions). In my practice I’ve seen defaults lead to tax liens that complicate real estate transactions.

What the IRS requires from you while on an installment agreement

  • Make timely payments every month. Missed payments can terminate the agreement.
  • File and pay all future tax returns on time.
  • Inform the IRS immediately if your financial situation changes — you can request modification of the plan.

How the IRS calculates monthly payments

The IRS will consider your monthly income and necessary living expenses, especially for plans requiring a Collection Information Statement (Form 433 series). For streamlined agreements the IRS often uses a formula based on the balance owed and the maximum allowable time (e.g., up to 72 months) to set a monthly payment amount. For partial-payment plans the IRS will set a payment that it determines is affordable based on verified expenses and future income projections.

Pros and cons of an installment agreement

Pros:

  • Stops most aggressive collection actions while in good standing.
  • Keeps taxpayer in compliance and prevents some enforcement costs.
  • Flexible options (short-term, long-term, direct-debit) and potential fee reductions for low-income filers.

Cons:

  • Interest and penalties continue to accrue until paid in full.
  • Larger balances may require detailed financial disclosure.
  • Default can lead to liens, levies, and additional fees.

Alternatives and when to consider them

  • Offer in Compromise (OIC): May permanently reduce the balance if you can’t pay in full and meet strict eligibility rules. OICs are appropriate in a minority of cases — review our Offer in Compromise guide for details and pre-qualifying questions: Practical Alternatives to an Offer in Compromise for Tax Debt Relief — https://finhelp.io/glossary/practical-alternatives-to-an-offer-in-compromise-for-tax-debt-relief/.
  • Currently Not Collectible (CNC) status: The IRS may temporarily halt collection if you have no ability to pay.
  • Bankruptcy: In some cases, bankruptcy can discharge certain tax debts — consult a bankruptcy attorney.

Common mistakes I see and how to avoid them

  • Waiting until you receive a levy notice. Apply early — the IRS is more flexible before enforcement escalates.
  • Choosing a non-direct-debit plan without considering higher setup fees and greater risk of missed payments.
  • Failing to file required returns. The IRS will generally require all returns filed before approving a formal agreement.
  • Relying on an unlicensed tax company offering to negotiate a deal for upfront fees; use a credentialed CPA, EA, or tax attorney.

Practical tips to improve approval odds and reduce cost

  • Be organized: have paystubs, bank statements, and a clear monthly budget ready.
  • Choose direct debit if possible (reduces fees and default risk).
  • If eligible for low-income status, apply for fee reduction or waiver.
  • Consider paying more than the minimum monthly payment when cash flow improves to shorten the agreement and reduce interest.

What happens if you default

If you miss payments and the agreement terminates, the IRS can:

  • File a Notice of Federal Tax Lien to secure collection against property.
  • Levy bank accounts, wages, or other assets.
  • Assess additional penalties and require you to start the application process again.

If you default, contact the IRS immediately. In many cases you can reinstate or modify the agreement if you act quickly and demonstrate changed ability to pay.

Documentation and records to keep

  • Copies of the agreement, all IRS correspondence, proof of each payment, bank statements showing direct debits, and verification of any financial statements submitted.

Where to find official information (authoritative sources)

Final takeaways and next steps

Installment agreements are often the simplest, fastest way to stop collection activity and pay a tax balance over time. Start by verifying you’ve filed required returns, using the IRS Online Payment Agreement if eligible, and choosing direct debit when possible to lower fees and reduce the chance of default. If your situation is complex or you face large balances, consult a licensed CPA, enrolled agent, or tax attorney for a personalized plan.

Professional disclaimer: This content is educational and based on professional experience; it does not substitute for personalized tax advice. For specific guidance, consult a licensed tax professional or the IRS directly.

(Author credits: CPA with 15 years’ tax practice experience.)