What a tax deferral actually does

A tax deferral postpones when you pay taxes you owe, but does not erase the debt. You still owe the full amount plus interest and penalties that accrue while the payment is delayed. The IRS or your state tax authority agrees to let you pay later instead of by the original important date — usually because you cannot pay in full right now, or because you are disputing part of the bill.

The key difference from forgiveness: with a deferral, the clock keeps running. Interest compounds. Penalties accumulate. You are buying time, not reducing what you owe. This matters because a deferral that lasts two years can add 15 to 20 percent to your original bill through interest alone, depending on the rate and how long the deferral lasts.

Deferrals come in two broad shapes: short-term deferrals (typically 120 days or less) and long-term payment plans (installment agreements that can run several years). The IRS handles these differently, with different fees and different approval processes.

Key Takeaways

  • A deferral delays payment but adds interest and penalties, so the total you owe grows while you wait.
  • The IRS offers short-term deferrals of up to 120 days with no setup fee, and installment agreements for longer timelines that charge between $31 and $225 depending on the plan type.
  • You request a deferral by contacting the IRS directly through their payment plan line, by mail, or through your online account; state tax agencies have separate processes.
  • The IRS will not approve a deferral if you have unfiled tax returns or if you are currently in an audit, so those must be resolved first.
  • Interest accrues daily at a rate set quarterly by the IRS, currently around 8 percent annually, plus a failure-to-pay penalty that typically runs 0.5 percent per month.

How the IRS short-term deferral works

If you need to delay payment for a few months, the IRS offers a short-term extension of up to 120 days with no process fee. You contact the IRS, explain that you cannot pay by the important date, and request the extension. The IRS does not require you to prove hardship or explain why — the extension is available to anyone who asks before the important date passes.

To request this, call the IRS at 1-800-829-1040 during business hours, or go to IRS.gov and use the Online Payment Agreement tool. You can also send a written request by mail to the address on your notice. The IRS will send you a confirmation letter with your new due date, usually 120 days out. Interest and penalties continue to accrue on the unpaid balance during those 120 days.

After 120 days, if you still cannot pay, you will need to move to a longer-term plan — either another short-term extension (which the IRS may or may not grant a second time) or an installment agreement. The short-term extension is meant as a bridge, not a permanent solution.

Installment agreements for longer payment timelines

If you need more than 120 days, you can set up an installment agreement — a formal plan to pay your tax debt in monthly chunks over months or years. The IRS offers several types, each with different fees and approval standards.

A short-term installment agreement covers balances under $25,000 and runs up to 24 months. The setup fee is $31 if you pay by direct debit from your bank account, or $225 if you pay by check or credit card. You can request this online through the IRS payment agreement tool, by phone, or by mail.

A long-term installment agreement covers larger balances and longer timelines — up to 72 months or more depending on how much you owe. The setup fee ranges from $31 to $225 depending on the payment method. These require more documentation and take longer to approve, typically two to four weeks. You cannot request these online; you must call the IRS or submit Form 9465 (Installment Agreement Request) by mail.

Once approved, you make monthly payments on a schedule the IRS sets. If you miss a payment, the agreement can be terminated and the full balance becomes when ready due. Interest and penalties continue to accrue on the unpaid portion throughout the agreement.

State tax deferrals and payment plans

Most states offer their own deferral and installment options, separate from the federal IRS process. The rules, fees, and timelines vary significantly by state. Some states charge no setup fee for short-term deferrals; others charge $50 to $100. Some allow online requests; others require phone calls or mailed forms.

To find your state's process, go to your state tax agency website — usually listed as "Department of Revenue" or "Department of Taxation" — and search for "payment plan" or "installment agreement." Most states have a dedicated phone line for payment arrangements. You will need your state tax ID number and the amount you owe.

If you owe both federal and state taxes, you must handle each separately. Approving a federal deferral does not automatically defer your state bill, and vice versa. Some states will coordinate with the IRS if you request it, but you have to ask.

Interest and penalties that accrue during a deferral

While your payment is deferred, two charges grow on top of your original bill: interest and penalties. Understanding how much these add up is important because a deferral that lasts years can nearly double what you owe.

Interest is charged daily on the unpaid balance. The IRS sets the rate quarterly; it is currently around 8 percent per year, but this changes. The rate is the federal short-term rate plus 3 percent, recalculated every three months. Your state may charge a different rate — typically 5 to 10 percent annually.

Penalties are separate from interest. The failure-to-pay penalty is 0.5 percent of the unpaid tax per month (or part of a month), up to a maximum of 25 percent. This runs from the original due date until you pay in full. If you filed your return late, you may also owe a failure-to-file penalty of 5 percent per month, which is steeper. If you have both, the combined penalty caps at 25 percent.

Example: You owe $5,000 in federal income tax due April 15. You request a 120-day deferral on April 10. By July 13 (120 days later), interest has added roughly $100, and penalties have added $75. Your new balance is $5,175. If you then set up a 24-month installment agreement, interest and penalties continue to accrue on the remaining balance until you pay it off.

What disqualifies you from a deferral

The IRS will not grant a deferral if you have unfiled tax returns from prior years. You must file all back returns before requesting a deferral. This is a hard requirement, not a guideline. If you owe taxes for 2020, 2021, and 2022, and you have not filed 2020 or 2021, you cannot defer the 2022 bill until those earlier returns are filed.

You also cannot get a deferral while you are under audit. If the IRS is examining your return, you must wait until the audit closes before requesting a deferral. If you disagree with the audit result and file an appeal, the deferral request can sometimes proceed in parallel, but this requires explicit approval from the appeals office.

If you are in bankruptcy, a deferral is not available — the bankruptcy court controls the payment timeline. If you owe back taxes and are behind on current-year payments, the IRS may require you to file the current return and pay current taxes before deferring older debt.

How to request a deferral from the IRS

The fastest route is the IRS Online Payment Agreement tool at IRS.gov. Log in with your credentials, enter the amount you owe, and select either a short-term extension (up to 120 days) or a short-term installment agreement (up to 24 months). You will get when ready confirmation and a new due date. This works for balances under $25,000.

If you owe more than $25,000 or need a longer timeline, call the IRS at 1-800-829-1040 and ask for the payment plan line. Have your Social Security number, the tax year in question, and the amount you owe ready. The IRS representative will walk you through the options and either approve a plan on the spot or send you forms to complete by mail.

You can also mail Form 9465 (Installment Agreement Request) to the address shown on your tax notice. Include a cover letter explaining your situation and your preferred payment amount. Mail takes longer — typically four to six weeks for a response — but it creates a paper record.

For state taxes, visit your state tax agency website and look for a "Payment Plan" or "Installment Agreement" link. Most states have an online portal similar to the IRS tool. If not, call the phone number listed on your state tax bill.

What happens after you request a deferral

If you request a short-term extension online through the IRS, you receive confirmation when ready and can see your new due date in your online account. The extension is active right away.

If you request an installment agreement by phone or mail, the IRS sends you a notice within one to three weeks confirming the terms: the monthly payment amount, the due date each month, and the total number of payments. Your first payment is usually due 30 days after the agreement is approved. If you miss a payment, the IRS sends a notice and may terminate the agreement, making the full balance due when ready.

You can check the status of a pending request through your IRS online account or by calling 1-800-829-1040. If you need to change the payment amount or the due date, you can request a modification online or by phone, though the IRS may charge a small fee ($31 to $225 depending on the change).

Frequently Asked Questions

Does a deferral stop the IRS from garnishing my wages or seizing my bank account?

A deferral does not automatically stop collection action, but it usually pauses it. Once you have an approved payment plan in place, the IRS typically stops wage garnishments and bank levies. However, if you miss a payment on the plan, collection action can resume. If a levy is already in place when you request the deferral, you must contact the IRS when ready to request that it be released.

Can I get a deferral if I owe taxes from multiple years?

Yes, but you must have filed all back returns first. If you owe 2020, 2021, and 2022 taxes, you cannot defer any of them until you have filed returns for all three years. Once all returns are filed, you can set up a single installment agreement covering the total amount owed across all years.

What happens to my deferral if I get a refund next year?

The IRS will automatically explore your refund to the deferred balance, reducing what you owe. This happens without your involvement. If your refund is larger than the remaining balance, the IRS sends you the difference. This is called "offset" and it is standard practice.

Can I pay off a deferred balance early without a penalty?

Yes. You can pay off an installment agreement at any time without penalty. Interest and penalties stop accruing once you pay in full. There is no prepayment fee or early-payoff charge. If you come into money and want to clear the debt, you can do so when ready.

What if I cannot afford the monthly payment the IRS offers?

Call the IRS at 1-800-829-1040 and request a modification to your agreement. You can ask for a lower monthly payment, which extends the timeline and increases the total interest you pay. The IRS will work with you to set a payment you can actually make, though there are limits — the payment must be high enough that the debt is paid off within a reasonable timeframe (usually no more than six years for most taxpayers).