When you owe more taxes than you can pay immediately, the IRS offers several payment plan options to help manage your tax debt over time. These plans provide structured ways to avoid harsh collection actions, such as liens or levies, while making payments more manageable.
Understanding IRS Payment Plan Options
IRS payment plan options are formal arrangements with the IRS to pay outstanding taxes incrementally rather than in a one-time payment. These plans cater to diverse financial situations and help ensure compliance with tax obligations while preserving taxpayer financial stability.
How Do IRS Payment Plans Work?
If you cannot pay your tax bill by the due date, you can apply for an IRS payment plan. After evaluating your income, expenses, assets, and overall ability to pay, the IRS approves a plan that suits both you and the agency. Note that while these plans delay payment, interest and penalties typically continue to accrue until the debt is fully paid.
Types of IRS Payment Plans
1. Short-Term Payment Plan
This plan gives you up to 180 days to pay your tax debt in full. It carries no setup fee but interest and penalties will continue to accrue. It’s suited for taxpayers who expect to pay their balance soon and owe less than $100,000 including penalties and interest. You can apply online, by phone, or indicate this on your tax return.
2. Installment Agreement
The most common payment plan, it allows payments for up to 72 months. Types include:
- Guaranteed Installment Agreement: Available if you owe $10,000 or less and meet IRS criteria. Approval is guaranteed.
- Streamlined Installment Agreement: For individual debts up to $50,000 or business debts up to $25,000 payable within 72 months without detailed financial disclosure requirements.
- Non-Streamlined Installment Agreement: For larger debts, requiring submission of detailed financial information using forms such as Form 433-F or 433-A.
You must have filed all required tax returns to qualify. Applications can be submitted online via the IRS Online Payment Agreement portal or by filing Form 9465, Installment Agreement Request.
For more details on installment agreements, see Installment Agreement.
3. Offer in Compromise (OIC)
An OIC lets you settle your tax debt for less than the full amount owed if you prove that paying full taxes would cause financial hardship or the IRS doubts full collection is possible. It requires submitting Form 656 and detailed financial disclosures via Form 433-A (OIC) or Form 433-B (OIC). Acceptance is not guaranteed, and the application process involves an evaluation of your ability to pay.
Learn more about this program at Offer in Compromise.
4. Currently Not Collectible (CNC) Status
If you cannot afford any payments, the IRS may designate your account as Currently Not Collectible. This halts collection efforts temporarily but interest and penalties still apply. Eligibility requires proving severe financial hardship by providing detailed financial documentation. The IRS reviews this status regularly.
More information can be found at Currently Not Collectible (CNC).
Comparing IRS Payment Plan Options
| Feature | Short-Term Payment Plan | Installment Agreement | Offer in Compromise | Currently Not Collectible |
|---|---|---|---|---|
| Payment Term | Up to 180 days | Up to 72 months | Varies (often lump sum or 24 months) | Temporary withholding of payments |
| Setup Fees | None | Yes (waived/reduced for low income) | Yes (waived/reduced under conditions) | None |
| Financial Review | Limited | None to detailed (depends on type) | Extensive financial disclosure | Extensive documentation |
| Interest and Penalties | Accrue | Accrue | Accrue until acceptance or rejection | Accrue |
| Debt Reduction | No | No | Potential reduction | No |
| IRS Collection Actions | Delayed | Suspended if compliant | Suspended during evaluation | Suspended temporarily |
Tips for Managing Your Tax Debt
- File on time, even if you cannot pay in full to avoid failure-to-file penalties.
- Pay as much as you can promptly to reduce interest and penalties.
- Choose the payment plan that fits your financial situation.
- Provide accurate, thorough financial information when applying.
- Consider consulting a tax professional (such as an Enrolled Agent or CPA) for guidance, especially for complicated cases like OICs.
- Set up direct debit for installment payments to reduce fees and avoid missed payments.
Common Misconceptions and Pitfalls
- Failing to file tax returns worsens your tax situation more than non-payment.
- The IRS generally prefers installment plans over asset seizures, which are last resorts.
- Delaying communication with the IRS increases interest, penalties, and risk of liens or levies.
- Offers in Compromise are scrutinized carefully and not easily granted.
- Missing payments on an agreement can lead to default and resumed collections; always keep the IRS informed of changes in your financial situation.
Frequently Asked Questions
Do interest and penalties stop when I enter a payment plan?
No, interest and penalties typically continue to accumulate on unpaid balances except in rare situations like accepted OICs.
Can I apply for a payment plan if I have not filed all tax returns?
No. You must be current with all filings to qualify for most IRS payment plans.
What if my financial situation changes after approval?
Contact the IRS promptly to adjust your plan based on new circumstances.
How long does approval take?
Short-term and streamlined plans can be approved quickly online, while offers in compromise and non-streamlined agreements may take longer due to detailed review.
Will payment plans affect my credit score?
The IRS does not report payment plans directly to credit bureaus, but a Notice of Federal Tax Lien may affect your credit score. Payment plans can help avoid or release liens.
Conclusion
IRS payment plan options offer taxpayers essential tools to manage and resolve tax debts effectively. Understanding your options and acting quickly can help minimize financial strain and prevent escalated IRS collection actions.
References
- IRS Tax Topic 202, Tax Payment Options: https://www.irs.gov/taxtopics/tc202
- IRS Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise
- IRS Online Payment Agreement Application: https://www.irs.gov/payments/online-payment-agreement-application