What Is an Installment Agreement? A CPA ExplainsTax Relief
An installment agreement is an agreement between a taxpayer and a taxing authority — such as the IRS — that allows the taxpayer to pay off their tax debt over time rather than all at once.
Learn what installment agreements are, the different types of installment agreements, and how they work.
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Installment Agreement Definition and Example
An installment agreement is an arrangement that a taxpayer makes with the government to pay off their tax balance over a certain number of months.
- Acronym: IA
For example, let’s say a taxpayer owes the IRS $100,000. While the IRS could — if the taxpayer has the means to — demand that they liquidate assets and pay their tax debt immediately or else be subject to levy action, the taxpayer may persuade the IRS to accept a payment plan of, say, $1,400 per month over 72 months.
Related: 6 Best Tax Relief Companies
How Does an Installment Agreement Work?
If you are a resident or a citizen of the United States, you are subjected to its tax rules, which includes the payment of income tax.
However, for various reasons, sometimes taxpayers do not pay the tax they owe immediately.
This could, perhaps, be due to inability — yes, they earned some income that gave rise to their tax liability, but they had to spend all of that income on their daily needs — or unexpected emergencies — without setting aside the cash to pay the taxes on the income.
It could also be due to unwillingness — the taxpayer could very well have paid the taxes they owed if they wanted to but they believed there were better uses for their money elsewhere.
Whatever the case, these individuals need to pay the taxes they owe and likely want to avoid the IRS or state government coming in and garnishing their wages or levying their bank accounts.
In order to avoid this forced collection activity by the IRS, the taxpayer must pursue some sort of tax debt relief or else they will be at the mercy of the IRS.
And an installment agreement is one of the easier forms of tax relief to obtain.
With an installment agreement, the taxpayer has to reach out to the IRS and let them know that they would like to pay them over time.
The taxpayer generally has to propose an amount they’d like to pay monthly that the IRS will either approve or deny. The IRS may also give them a figure to pay monthly that the taxpayer may agree to.
Types of Installment Agreements
There are two primary types of installment agreements — partial-payment installment agreements and full-payment installment agreements.
And within full-payment installment agreements, there are several subtypes of installment agreements.
Partial-Payment Installment Agreements
Partial-payment installment agreements (PPIAs) are an incredible type of installment agreement that allow you to pay less than you owe to the IRS over time.
In a PPIA, you will pay the government a certain amount per month until the government’s time limit to collect on your tax debt runs out — this will happen on the collection statute expiration date (CSED) for your last-remaining tax debt.
So if you are able to convince the IRS to pay a certain amount every month — let’s call this amount “X” — and if X multiplied by the number of months remaining until your CSED is less than the total amount you owe to the IRS, then you have successfully negotiated yourself into a PPIA.
That said, although they are a form of tax relief that allows you to pay less than you owe to the IRS, PPIAs do not necessarily offer the finality that an offer in compromise does.
This is because a taxpayer could be removed from a partial-payment installment agreement and reverted to a full-payment installment agreement.
In fact Section 6159(d) of the Internal Revenue Code states that the IRS is to review partial-payment installment agreements every two years.
Now, this review doesn’t necessarily mean that your partial-payment installment agreement will only last two years; it means that if the IRS determines that you are in a substantially better financial position at that point than you were in when you entered into the PPIA, the terms of your installment agreement may be subject to change.
Note that as a practicing tax relief CPA, I routinely see the IRS not revisit a PPIA for as long as four years.
However, many taxpayers who enter into a partial-payment installment agreement successfully remain in it all the way until their last CSED, meaning that a portion of their balance was written off as a result of their PPIA.
Full-Payment Installment Agreements
A full-payment installment agreement is an installment agreement that will result in you paying off your entire balance to the government upon its completion.
For obvious reasons, the IRS is more willing to grant these kinds of installment agreements than partial-payment installment agreements.
Here are the kinds of full-payment installment agreements that taxpayers can enter into with the IRS:
- Guaranteed Installment Agreements
- Streamlined Installment Agreements
Guaranteed Installment Agreements
The IRS is not required to approve an installment agreement for any taxpayer unless a taxpayer meets the following requirements:
- The amount of tax (not including penalties and interest) is $10,000 or less
- The taxpayer has been in compliance with their tax filings and payments for the previous five years and remains in compliance throughout the duration of the installment agreement
- The taxpayer has not had an installment agreement with the IRS in the last five years
- The taxpayer is unable to pay their tax liability in full
If a taxpayer meets these criteria, then the government is obligated under Internal Revenue Code Section 6159(c) to approve a three-year installment agreement.
Streamlined Installment Agreements
While not guaranteed, a streamlined installment agreement is an installment agreement that the IRS tends to approve for individuals owing $50,000 or less in total IRS balance — including not only taxes but also penalties and interest.
If a taxpayer meets this criteria, they can enter into an installment agreement with the IRS to pay off their balance within 72 months or by their tax debt’s last CSED if the CSED falls within the 72-month period after the taxpayer enters into their installment agreement.
Note that while entering into an installment agreement with the IRS does not necessarily lien proof a taxpayer, the IRS will generally not file a Notice of Federal Tax Lien for taxpayers in a guaranteed or streamlined installment agreement if they agree to make their installment payments via direct debit.
Routine Installment Agreements
A routine installment agreement is any installment agreement that the taxpayer enters into with the IRS that is not a guaranteed installment agreement or a streamlined installment agreement.
Unlike for guaranteed or streamlined installment agreements, the IRS may request financial information from the taxpayer in order to approve a routine installment agreement.
However, the IRS generally does not request financial information from a taxpayer if their balance is currently with the IRS’s Automated Collection System (ACS) and is no greater than $250,000
This threshold drops to $100,000 if the taxpayer’s case is currently with a revenue officer, though a revenue officer may still request this information.
How to Get an Installment Agreement
The IRS offers taxpayers several options for applying for an installment agreement.
Option 1: Apply Online
Taxpayers can apply for a payment agreement online at irs.gov/OPA if they owe $50,000 or less in taxes, penalties, and interest.
Option 2: Apply Over the Phone
You can call the IRS at the number on the latest notice you received regarding your balance due or at 1-800-829-1040.
Option 3: Apply Via Mail
You can apply via mail by completing Form 9465 and sending it in to the IRS.
If you owe more than $50,000, you will need to complete and attach Form 433-F to your Form 9465 before sending it in.
Option 4: Apply in Person
You can apply for an installment agreement in person at a local IRS office.
Use the IRS’s Taxpayer Assistance Center Office Locator to find the nearest IRS Taxpayer Assistance Center to you.
Option 5: Hire a Tax Relief Company
Of course, if you’d rather somebody else do the work for you, you can hire a tax relief company to negotiate your installment agreement with the IRS.
How to Qualify for an Installment Agreement
In order to qualify for an installment agreement, you must have filed the last six years’ worth of tax returns to the extent required.
Note that a specific type of installment agreement may have its own specific requirements as discussed above.
Alternatives to an Installment Agreement
There are other tax debt relief options than installment agreements that you may qualify for.
In fact, these other options may be better for your overall tax and financial situation than an installment agreement — if you qualify for them.
The two most popular tax relief options other than installment agreements are currently not collectible status and an offer in compromise.
- Currently Not Collectible Status: Currently not collectible (CNC) status is a hardship status that you can petition the IRS to place you in if you can show that you do not have any disposable income to pay them in an installment agreement and that you do not have any accessible equity in assets. The IRS’s 10-year time limit to collect your tax debt continues to run while you are in CNC status.
- Offer in Compromise: An offer in compromise is an agreement with the IRS to pay less than you owe to them with the balance between written off — forever!
Installment Agreement Frequently Asked Questions
Here are some common questions people ask about installment agreements.
How much does the IRS charge for an installment agreement?
For installment agreements set up online, the IRS charges $31 for a direct-debit installment agreement and $149 for other installment agreements.
For installment agreements not set up online, the IRS charges $107 for a direct-debit installment agreement and $225 for other installment agreements.
Will entering into an installment agreement prevent the IRS from filing a Notice of Federal Tax Lien?
The IRS will not file a Notice of Federal Tax Lien against a taxpayer if their balance is $50,000 or less and they enter into a direct-debit installment agreement that will pay off their balance in full within 72 months.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.