Overview

An Automated Installment Agreement (AIA) is the IRS’s streamlined online payment plan that uses automatic monthly withdrawals (direct debit) to collect agreed payments from a taxpayer’s bank account. For many taxpayers this is the fastest way to stop collection actions, stay compliant, and budget for tax repayment. In my 15+ years helping clients, an AIA solves immediate cash-flow stress for those with manageable tax debts — but setup details, eligibility and account maintenance matter more than people expect.

Who qualifies and what the IRS requires?

  • Filed tax returns: You must have filed all required federal tax returns to be eligible. Unfiled returns block most installment agreements (IRS, Online Payment Agreement Application).
  • Balance limit for streamlined online enrollment: Taxpayers with total tax, penalties and interest at or below the IRS’s streamlined online threshold (commonly $50,000 or less) can usually enroll online without providing a full financial statement (see IRS online payment options and FAQs) (IRS, Online Payment Agreement Application; IRS, FAQ About Installment Agreements).
  • Current compliance: You must stay current with future tax returns and payments during the agreement term.
  • No open bankruptcy: The IRS cannot collect while a bankruptcy proceeding is open, so installment agreements are not available in many bankruptcy cases.
  • Bank account and identity verification: Because AIA uses automatic withdrawals, you need a U.S. bank account and ID verification to set up direct debit.

(Authoritative sources: IRS Online Payment Agreement Application and FAQ About Installment Agreements.)

Step-by-step: How to set up an Automated Installment Agreement

  1. Check eligibility online: Use the IRS Online Payment Agreement tool to see if you qualify and view plan options (IRS, Online Payment Agreement Application).
  2. Confirm filings: File any missing tax returns immediately; the IRS generally requires returns to be filed before approving an agreement.
  3. Choose payment type: For an AIA you’ll normally select direct debit (automatic bank withdrawal). This is required for many streamlined online plans and reduces setup fees and default risk.
  4. Pick the payment amount and term: The IRS will suggest a minimum payment. Streamlined agreements often allow repayment over up to 72 months. Choose a payment you can sustain; shorter terms reduce total interest and penalties.
  5. Authorize debit: Provide bank routing and account numbers and authorize monthly drafts. Keep a copy of the authorization and confirm the first draft date.
  6. Confirm agreement in writing: The IRS will send written confirmation with terms and a payment schedule. Save that document.

If you cannot enroll online, you can submit Form 9465 (Installment Agreement Request) or call the IRS. Online enrollment is faster and less likely to need follow-ups.

Payment calculation, penalties and interest

Installment agreements do not stop penalties and interest from accruing on the unpaid balance. The effective cost depends on the repayment term: longer terms mean more interest and penalty accrual. In practice I tell clients to treat the AIA as a bridge — pick the shortest sustainable term.

Note: The IRS typically enforces a minimum payment that will retire the balance within the maximum allowed term for a streamlined plan (commonly 72 months). If your payment is too low, your request may be denied or require a full financial review.

Common pitfalls and how to avoid them

  • Assuming the AIA halts all IRS monitoring: The IRS continues to assess penalties and interest and will monitor compliance. Keep filing and paying on time.
  • Choosing an unsustainable payment: Picking a monthly payment you can’t maintain is the leading cause of default. Run a cash-flow test and leave a small buffer for slow months.
  • Not using direct debit or changing bank details without notice: Automated plans rely on accurate bank info. If your account or routing number changes, update the IRS immediately to avoid missed drafts and default.
  • Forgetting future taxes: An active AIA usually requires you to stay current on future tax obligations. A new tax bill that isn’t paid can complicate or default the agreement.
  • Ignoring notices: If the IRS sends a notice about missed payments, fees, or required actions, respond quickly. Delays reduce options for remediation.

What happens if a payment is missed or an agreement defaults?

When a payment is missed the IRS can terminate the agreement, re‑accelerate the full balance, and resume collection actions (levies, liens) where appropriate. In many cases the IRS will send a default notice and give a short period to cure the missed payment. If you can’t make a payment, call the IRS immediately — sometimes a one-time delay or short-term modification is available. See our related guide on default consequences and fixes: Defaulting on an Installment Agreement: Consequences and Fixes.

Modifying or reinstating an agreement

If your financial situation changes you can request a modification of terms or a temporary suspension. Depending on circumstances, the IRS may require updated financial information. Our guide on modifying agreements explains timing and documentation: Modifying an Installment Agreement: When and How to Request Changes.

Real-world examples (anonymized)

  • Individual taxpayer: A client owed about $8,000 after filing and enrolled online with direct debit for 36 months. By choosing automatic payments and a slightly higher-than-minimum amount, they reduced total interest and avoided collection notices.
  • Small business owner: Another client had a surprise payroll tax balance. We filed any missing returns, set up a direct-debit AIA, and prioritized future payroll deposits to keep compliance. The plan stopped enforcement calls and allowed the business to stabilize.

These examples illustrate two themes: timely filing and realistic payment sizing matter more than the enrollment mechanics.

Alternatives to an Automated Installment Agreement

  • Offer in Compromise (OIC): If your reasonable collection potential is less than the tax owed, an OIC may reduce the principal. OIC requires extensive documentation and is harder to obtain (see IRS Offer in Compromise guidance).
  • Partial-payment installment agreement: If you can’t pay the full balance within the statutory collection period, a partial-payment plan may be available but usually requires a detailed financial review.
  • Bankruptcy or other collection alternatives: These are complex and should be considered with an attorney or tax professional.

Use our comparison guide when deciding: Choosing Between an Installment Agreement and an Offer in Compromise.

Practical tips from practice

  • Use direct debit whenever possible — lower default rates and smoother administration.
  • Document the agreement: Print and save the IRS confirmation and calendar the draft dates.
  • Maintain an emergency buffer: Keep one month’s payment in a separate account to cover bank timing errors or unexpectedly slowed cash flow.
  • Recalculate when income rises: If you suddenly can pay more, accelerate repayment to save on interest and penalties.
  • Work with a tax pro when liens or levies are threatened. They can often negotiate short-term holds or alternative plans.

Quick checklist before you apply

  • All required federal returns filed and accepted.
  • Reasonable monthly payment calculated and budgeted.
  • U.S. bank account and routing/account numbers ready.
  • Recent IRS notice(s) and tax year(s) identified.
  • Contact info up to date with the IRS.

Frequently asked questions (short)

  • Can the IRS file a lien if I have an AIA? Yes — an AIA does not automatically prevent a Notice of Federal Tax Lien if the IRS determines it’s necessary. A lien may be filed depending on collection priorities and balance.
  • Are fees required? Setup fees and reduced fees for low-income taxpayers may apply; check the IRS Online Payment Agreement tool for the current fee schedule.
  • Can I cancel an AIA? You can request to terminate or modify the plan; termination may restart collection action on the unpaid balance.

Professional disclaimer

This article is educational only and does not provide individualized tax, legal or financial advice. For decisions about your specific tax situation, consult a qualified tax professional, enrolled agent or the IRS directly.

Sources and further reading

If you want, I can convert this into a printable checklist or step-by-step worksheet tailored to a single-year balance.