When to Consider an Installment Agreement: Pros, Cons, and Process

Quick summary

An Installment Agreement (IA) is a tool to manage federal tax debt by spreading payments over time. Consider an IA when you owe taxes you can’t pay in full now but expect to make regular monthly payments, want to avoid immediate levies or enforced collection, and can stay current on future filings. I draw on 15+ years helping clients: an IA often stabilizes a cash‑flow crisis but is not free — interest and penalties continue and setup fees may apply (check current IRS fees before applying) (IRS: Installment Agreements).

When an Installment Agreement is sensible (pros)

• Avoids immediate enforced collection: approved IAs generally stop new levies and seizures while the plan is in effect, giving you time to pay with less disruption (IRS: Collection Process).
• Predictable monthly payment: you convert an uncertain lump-sum balance into a fixed schedule you can budget for.
• Keeps business or household operations intact: regular payments may prevent bank levies or payroll garnishment that would otherwise disrupt income.
• Easier and faster than other options: streamlined IAs for eligible balances are often quicker to set up than an Offer in Compromise (OIC).
• Can be adjusted: the IRS may allow modification if your financial circumstances change.

Main drawbacks to weigh (cons)

• Interest and penalties continue: an IA does not stop the accrual of statutory interest and usually late-payment penalties until the balance is fully paid (IRS: Installment Agreements).
• Setup and maintenance fees: the IRS charges a user fee to establish a plan; fees depend on how you apply and your payment method. Check the IRS Online Payment Agreement page for current amounts.
• Risk of default: missing payments can revoke the IA and return you to active collection, possibly leading to liens, levies, or enforced collection actions.
• Possible lien: in some cases the IRS may file a Notice of Federal Tax Lien even if an IA is in place. A lien may affect credit and the sale or refinancing of property.
• May reduce options later: entering an IA can affect eligibility for an Offer in Compromise in some situations; compare options before committing.

Who typically qualifies

• Individuals, sole proprietors, and small businesses with unpaid federal tax balances.
• Taxpayers who can show a reasonable ability to make monthly payments.
• Streamlined IAs are available for many taxpayers with total tax, penalties, and interest of $50,000 or less and a proposed payment term under 72 months — this makes setup simpler for those who meet the threshold (IRS: Online Payment Agreement).

Common scenarios when I recommend considering an IA (practical examples)

• You owe a moderate tax bill (for example, several thousand dollars) and your monthly budget can absorb a payment that will retire the debt within a few years.
• The IRS has contacted you with pre-levy notices and you need time to avoid a bank levy or wage garnishment.
• You are not a candidate for an Offer in Compromise (OIC) because you have enough collectible income/assets but can’t pay in full now.

Real-world note from my practice: I’ve seen clients with $8,000–$20,000 balances regain financial footing by electing a Direct Debit Installment Agreement and setting modest automatic payments. The automated payment reduces the chance of default and simplifies compliance.

Step-by-step process to apply and what to expect

1. Confirm your tax balance: log in to your IRS account online or review the notice you received to verify the exact amount owed and tax years involved (IRS Online Account).
2. Choose the right plan type:

• Short-term payment plan: if you can pay within 120 days, this avoids a long-term IA fee in many cases.
• Long-term (monthly) installment agreement: for longer schedules, often up to 72 months for streamlined cases.

1. Estimate an affordable monthly payment: prepare a budget and prioritize affordable, sustainable payments. The IRS may request financial disclosure if the balance or proposed plan exceeds streamlined thresholds.
2. Apply online or file Form 9465: apply through the IRS Online Payment Agreement (recommended for speed and lower fees) or submit Form 9465 with or without Form 433-F if detailed financial info is required (IRS: How to set up an installment agreement).
3. Choose direct debit if possible: Direct Debit Installment Agreements reduce default risk and may carry lower setup fees.
4. Stay current: file all future tax returns and pay current tax liabilities on time — falling behind can void the IA.
5. Monitor notices and respond: reply promptly to any IRS requests for information. If you miss a payment, contact the IRS immediately to attempt reinstatement or renegotiation.

Alternatives and when to choose them

• Offer in Compromise (OIC): suitable when you can’t pay the full amount and your reasonable collection potential (RCP) is less than the tax owed. An OIC can reduce the total owed, but qualification is strict and the process takes longer. Compare IAs vs. OICs before deciding: Installment Agreements vs. Offers in Compromise: Which is Right for You?
• Currently Not Collectible (CNC): if you have no ability to pay, request CNC status. This halts collection temporarily but interest and penalties continue.
• Bankruptcy: rarely preferable for most income tax debts, and eligibility depends on many factors — consult a bankruptcy attorney.

What happens to liens and levies?

• If a Notice of Federal Tax Lien has already been filed, an IA does not automatically remove it. You may request lien withdrawal or subordination in limited circumstances; success depends on factors like payment history and balance. See options for dealing with liens and levies to understand immediate steps if you’re facing a bank levy: Options for Taxpayers Facing a Bank Levy: Immediate Steps.
• If the IRS hasn’t yet filed a lien, an IA may reduce the chance of immediate enforced collection actions while you pay, but it isn’t a guarantee against lien filing in every case.

Practical tips to improve your chances and protect yourself

• Use direct debit when possible to reduce the risk of missed payments.
• Keep records of all communications and confirmed payments.
• Stay current on tax filings — an IA typically requires you to file and pay on time going forward.
• If you experience a downgrade in income, contact the IRS quickly to renegotiate before missing a payment.
• Ask for a payment plan recalculation if you come into unexpected funds (inheritance, sale of asset) — the IRS will likely re-evaluate collectibility.

How I evaluate clients

In my practice I compare the IA against other options by running a simple collectibility model: available monthly cash minus basic living expenses, projected timeline to pay the balance at different monthly payments, and likely interest/penalty costs. If an OIC has a realistic chance, I present both routes; if not, an IA with direct debit usually wins for clients who can manage monthly payments.

Sources and further reading

• IRS — Installment Agreements: https://www.irs.gov/payments/installment-agreement
• IRS — Online Payment Agreement (how to apply and fee information): https://www.irs.gov/payments/online-payment-agreement-application
• IRS — Offer in Compromise: https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise

Internal resources:

• Compare options and next steps with Offers in Compromise in our guide: Installment Agreements vs. Offers in Compromise: Which is Right for You?
• If you’re facing an immediate levy, see our practical steps: Options for Taxpayers Facing a Bank Levy: Immediate Steps

Professional disclaimer
This article is educational and does not constitute individualized tax or legal advice. Tax situations vary — consult a CPA, enrolled agent, or tax attorney before making decisions about installment agreements or other IRS collection options.