Partial Payment Installment Agreements: When They Make Sense

Overview

A Partial Payment Installment Agreement (PPIA) is a long-term IRS collection tool designed for taxpayers who cannot fully pay their assessed tax debt now but can make smaller monthly payments. Unlike a standard installment agreement that aims to pay the full balance over time, a PPIA accepts a reduced monthly payment based on your reasonable collection potential (RCP). The unpaid portion remains outstanding and continues to accrue interest and penalties; however, the IRS will not take enforced collection action while the PPIA is in effect — unless your circumstances change or you default.

(For IRS guidance on payment plans and how collection works, see the IRS payment plans page.) IRS: Payment Plans (Installment Agreements)

Why a PPIA might be a better option than other relief

When you can’t realistically pay the full tax debt, PPIA sits between a normal installment agreement and an Offer in Compromise (OIC). An OIC settles the tax for less than the full amount but requires demonstrable inability to pay and can be harder to win; a full installment agreement requires enough monthly payment to satisfy the balance before the Collection Statute Expiration Date (CSED). A PPIA is appropriate when:

• You can pay something monthly but not enough to clear the debt before the CSED.
• Your financial condition is likely to remain tight for an extended period but not permanently hopeless.
• You don’t meet OIC criteria or prefer a plan that starts more quickly.

For side-by-side guidance, see our explainer: Choosing Between an Installment Agreement and an Offer in Compromise.

How the IRS evaluates PPIA requests

The IRS calculates a taxpayer’s RCP to determine whether a partial-pay plan is appropriate. RCP includes:

• Realistic, documented value of available assets (net equity in property, bank accounts, investments).
• A projection of future monthly disposable income available for collection during the period before CSED.

A PPIA is essentially a plan where the monthly payment equals what the taxpayer can afford now while the leftover is preserved for potential collection later. The IRS will compare the present value of payments you can make to the amount it could collect through enforced collection (levy, seizing assets) and the time value until the CSED.

Key points:

• You’ll need to provide a Collection Information Statement (Form 433‑F for most individuals) or equivalent (Form 433‑A or 433‑B in some cases). Do not use Form 656 (that’s for Offers in Compromise).
• The IRS may request tax transcripts, pay stubs, bank statements, mortgage or lease agreements, and proof of recurring expenses.
• The IRS assigns a CSED (generally 10 years from the assessment date) as a hard deadline; if the balance is not collectible before CSED, it can no longer be enforced (see IRS guidance on the Collection Statute Expiration Date).

Authoritative resource on the 10-year rule: IRS — Collection Statute Expiration Date (CSED)

How to apply: step-by-step

1. Confirm you are current on tax returns. The IRS generally requires all required returns filed before approving a PPIA.
2. Gather documentation: recent pay stubs, bank statements, rent/mortgage, utility bills, proof of childcare or medical expenses, investment/retirement account statements, and evidence of exceptional circumstances (job loss, medical bills).
3. Complete the appropriate Collection Information Statement:

• Form 433‑F (simpler, for many individuals)
• Form 433‑A or 433‑B (for some individuals or businesses — check IRS instructions)

1. Contact the IRS Collections office handling your case (the letter you received will include contact info), or call the IRS at the collection phone number on notices. You can also work with a tax professional or attorney who negotiates with IRS on your behalf.
2. Propose a monthly payment you can sustain and be ready for the IRS to counter with a different amount or request more documentation.
3. If approved, get the agreement terms in writing. Make payments on time and stay current with future tax obligations — failure to do so can terminate the PPIA and restore collection actions.

For practical application steps specific to PPIAs, see: How to Request a Partial Payment Installment Agreement (PPIA).

What to expect after approval

• Interest and penalties continue to accrue on the unpaid balance. The monthly payment applies first to fees, then interest and penalty, then principal, following IRS rules.
• The IRS may review your financial situation periodically or when notified of a change in circumstances. You must report improved income; failing to do so can lead to default or assessed collection actions.
• The unpaid balance remains collectible until the CSED. If the CSED passes while the agreement is in place and the IRS has not collected the remaining amount, the balance may become uncollectible.

See our practical expectations page: Partial-Payment Installment Agreements: What to Expect.

Pros and cons (practical view)

Pros:

• Immediate relief from aggressive collection actions (levies, bank seizures) while the agreement is in effect.
• Keeps you in the IRS system and avoids the uncertainty and credit impact of enforced collection.
• Flexibility for people whose incomes are temporarily low.

Cons:

• Interest and penalties continue to grow on the unpaid balance.
• The unpaid balance remains a lienable, collectible debt until CSED.
• The IRS can revisit your monthly payment if your finances improve; you must be ready to increase payments or consider other remedies.

Real-world examples (illustrative)

Example 1 — Temporary job loss

Maya lost her job and can afford $150/month while searching. She owns little in liquid assets and has children to support. A PPIA allows her to make $150 monthly; the IRS leaves the remainder unpaid and will not levy while the plan is adhered to.

Example 2 — Business downturn

Carlos, a sole proprietor, had several slow years. He provided the IRS financial statements and secured a PPIA with modest monthly payments. While he rebuilt the business, he avoided levies and kept operations running. Years later, after revenue recovered, Carlos increased payments to reduce the balance.

Common mistakes and how to avoid them

• Submitting Form 656 by mistake: that form is for Offers in Compromise; use Form 433‑F (or 433‑A/433‑B) to request a PPIA.
• Under-documenting expenses: the IRS will ask for proof. Keep organized records for quicker resolution.
• Missing payments or future tax returns: always stay current. Missing payments usually terminates the plan and allows immediate collection action.

Practical negotiation tips from a financial advisor

• Be conservative when proposing a monthly amount: choose an amount you can sustain for years if necessary.
• Use direct debit if you can; it lowers the chance of missed payments and sometimes reduces IRS administrative friction.
• Keep detailed notes of all conversations with the IRS (agent name, date, time, what was discussed) — this helps if accounts are disputed later.
• Revisit your plan annually: if income rises, proactively propose a new payment plan or an Offer in Compromise if that now makes sense.

Frequently Asked Questions

Q: Will interest stop during a PPIA?

A: No. Interest and penalties generally continue to accrue on the unpaid balance during a PPIA. See IRS guidance on penalties and interest for details.

Q: How long will the IRS leave the balance unpaid?

A: The IRS can collect the unpaid balance any time before the collection statute expiration date (CSED). The CSED is typically 10 years from the assessment date but can be extended in specific situations (bankruptcy, installment agreements, etc.) IRS — CSED guidance.

Q: Can I convert a PPIA to a full installment agreement or Offer in Compromise later?

A: Yes. If your finances improve, you can propose a higher monthly payment (a full installment agreement) or apply for an Offer in Compromise if you meet the criteria. Each option has different rules and documentation requirements.

When to involve a professional

If your tax balance is significant, your financial situation is complex (business losses, multiple years of unpaid returns, bankruptcy history), or the IRS is taking aggressive collection action, consult a qualified tax professional, enrolled agent, or tax attorney. They can prepare the Collection Information Statement correctly, represent you in negotiations, and help choose between PPIA, OIC, or other relief.

Final thoughts

A PPIA is a useful tool when you can’t pay your full tax debt but can make regular, sustainable payments. It provides breathing room and avoids immediate levies, but it does not erase the debt — interest, penalties, and collection rights remain until the tax is paid or the CSED passes. Document carefully, stay compliant with future filing and payment obligations, and revisit your agreement if your financial picture changes.

Professional disclaimer: This is educational information, not legal or tax advice. For personalized guidance, consult a qualified tax professional. For official IRS rules and forms, refer to the IRS website: https://www.irs.gov/.