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I am a CPA and CFP® with more than 15 years helping individuals and small businesses resolve tax debts. In my practice I’ve negotiated installment agreements, partial-payment plans, penalty abatements and offers in compromise for more than 500 clients. This article explains how partial payments are accepted, how they change penalty and interest accrual, and practical steps you can take.

Why this matters

A timely partial payment—combined with the right agreement—can preserve cash flow, prevent enforced collection (levies or liens), and reduce the monthly failure-to-pay penalty in many cases. But partial payments won’t automatically stop interest or erase penalties by themselves. Understanding the differences between standard installment agreements and partial-payment installment agreements (PPIA) shapes your negotiation and tax outcome.

How the IRS accepts partial payments: the main paths

  • Streamlined or standard installment agreement: For many taxpayers the IRS will accept a monthly payment schedule that pays the full balance over time. These agreements are available online and through IRS debt-collection units. See IRS payment plan options for details (irs.gov/payments/payment-plans).

  • Partial-Payment Installment Agreement (PPIA): A PPIA is a formal plan where the IRS accepts monthly payments that do not fully satisfy the balance within the statute of limitations. The IRS treats the unpaid balance as collectible during the term; the arrangement is reviewed periodically. More details are on our PPIA guide and on IRS guidance (see “Partial-Payment Installment Agreement” resources).

  • Currently Not Collectible (CNC): If you can show insufficient income for basic expenses, the IRS may place your account in CNC status, which suspends collection activity but preserves interest and penalties. CNC is not technically a partial payment agreement, but it achieves a temporary halt to enforced collections.

  • Informal partial payments: You can send partial payments while you negotiate, but without a formal agreement you remain at higher risk of levies, liens, or continued penalties. Always try to secure a written agreement.

Key IRS effects on penalties and interest

1) Interest continues to accrue

Interest on unpaid tax accrues until the balance is paid in full. Interest is set by the IRS and is compounded daily; it changes quarterly based on short-term federal rates. For the current rate, check IRS interest-rate publications (irs.gov).

2) Failure-to-pay (FTP) penalty often reduces under an installment agreement

When you enter into a formal installment agreement, the FTP penalty rate generally drops from 0.5% per month to 0.25% per month on the unpaid balance while the agreement is in effect. That reduces penalty costs, but interest still accrues and other penalties (failure-to-file) may remain in full force. The IRS explains these rules in its installment agreement FAQs (irs.gov/payments/faq-on-installment-agreements).

3) Partial-payment agreements (PPIA) and penalty treatment

PPIAs still allow the reduced FTP penalty (commonly the 0.25% monthly rate) while the agreement is active, but the unpaid principal continues to incur interest. Because a PPIA does not eliminate the balance, penalties and interest can still be significant over time. PPIAs are subject to periodic review; your employer or bank records may be requested.

4) Failure-to-file and other penalties remain unless separately abated

Partial payments or installment agreements usually don’t remove failure-to-file penalties. If you have a failure-to-file penalty or other penalties (accuracy-related, trust-fund recovery, etc.), you’ll need separate penalty relief or abatement. The IRS offers relief programs, including first-time penalty abatement and reasonable-cause relief—see IRS penalty relief guidance.

Common scenarios and practical outcomes

Scenario A: You owe $10,000, can pay $250/month and request a standard installment agreement

  • You enter a standard installment agreement that pays the balance over time. The FTP penalty typically drops to 0.25% per month while the plan is active, lowering monthly penalties. Interest still compounds daily on the unpaid amount. You avoid immediate enforced collections if you keep current with payments.

Scenario B: You owe $40,000, can only pay $200/month and apply for a PPIA

  • The IRS may accept a PPIA if collection now would cause economic hardship. Under a PPIA the IRS will periodically review your financial situation; the unpaid balance remains subject to interest and penalties, but filing and cooperation may help you avoid levies. If your income improves, the IRS can require higher payments or change the agreement.

Scenario C: You file for an installment agreement but continue to receive IRS notices

  • Notices may continue for interest, penalties, or to request verification of your financials. Respond promptly. If you miss payments, the IRS can default the agreement and resume collection actions, including liens or levies.

How to request and improve the chance of acceptance

  1. File all required tax returns

You generally must have filed all returns before the IRS will accept a formal agreement. Missing returns increase the likelihood of denial.

  1. Start the process early

Contact the IRS as soon as you recognize you can’t pay. Early contact gives you more options and can limit additional penalties.

  1. Be prepared with documentation

For PPIAs and CNC status especially, assemble pay stubs, bank statements, monthly expense worksheets and proof of assets. The IRS uses these to determine reasonable collection potential.

  1. Choose the right agreement
  • Streamlined agreements are faster when the balance is below threshold amounts the IRS sets.
  • Standard installment agreements work well when you can commit to full payment within the statute of limitations.
  • PPIAs are a tool when full payment is unlikely before collection statutes expire; they carry reviews and stricter documentation requirements.
  1. Consider professional help

A qualified tax practitioner can prepare the financial statements the IRS expects, negotiate terms, and request penalty abatement where appropriate. In my experience, professional representation increases the chance of favorable terms.

Step-by-step checklist to request an agreement

  • File all tax returns.
  • Run a quick budget to determine a realistic monthly payment.
  • Use the IRS Online Payment Agreement tool for streamlined cases or contact the IRS Collection unit named on notices for complex cases.
  • If seeking a PPIA, provide a complete Collection Information Statement (Form 433-A or 433-F for individuals; Form 433-B for businesses) and be ready for periodic reviews.
  • Make the agreed payments on time to avoid defaulting.

Key risks and mistakes to avoid

  • Don’t assume a partial payment stops penalties: Payments without an agreement do not change penalty accrual.
  • Don’t ignore notices: Silence increases enforcement risk.
  • Don’t under-report income on your Collection Information Statement; that can generate penalties and produce a denial.

Options when penalties are the main problem

  • First-Time Penalty Abatement (FTA): For qualifying taxpayers with a clean history this can remove certain penalties.
  • Reasonable-cause penalty abatement: If circumstances like serious illness or natural disaster prevented timely payment, you can request relief with supporting documents.
  • Offer in Compromise (OIC): If you can’t pay in full and collection is unlikely, an OIC may settle the liability for less than the full amount. OICs require a rigorous financial review and are harder to obtain than installment agreements (see IRS offer in compromise guidance).

How a default affects penalties

Defaulting on an installment agreement often restores the higher FTP penalty rate and can trigger enforced collection—levies, liens, and wage garnishments. Reinstating an agreement may be possible, but you typically must pay a reinstatement fee and any missed amounts.

Internal resources and related reading

  • For step-by-step PPIA instructions: How to Request a Partial Payment Installment Agreement (PPIA) (finhelp.io/glossary/how-to-request-a-partial-payment-installment-agreement-ppia/)
  • To understand expectations under a PPIA: Partial-Payment Installment Agreements: What to Expect (finhelp.io/glossary/partial-payment-installment-agreements-what-to-expect/)
  • To reduce penalty accrual strategies: How to Request an Installment Agreement to Reduce Penalty Accrual (finhelp.io/glossary/how-to-request-an-installment-agreement-to-reduce-penalty-accrual/)

Authoritative sources

Practical takeaway

Partial payments are useful tools to limit immediate collection action and, when combined with a formal installment agreement, usually lower the monthly failure-to-pay penalty. However, interest continues to accrue and other penalties may remain unless you get specific abatement. File returns, gather documentation, and consider professional help early to protect your finances and negotiate the best terms.

Professional disclaimer

This content is educational and does not replace individualized tax advice. Tax law and IRS procedures change—consult a CPA or tax attorney for guidance tailored to your circumstances.