How an IRS payment plan lets you pay what you owe over time

An IRS payment plan is an agreement that lets you pay your tax debt in monthly installments instead of all at once. The IRS calls this an installment agreement. When you set one up, you make a monthly payment to the IRS until your full balance — including penalties and interest — is paid off. The IRS will not take collection action against you as long as you make your payments on time and stay current with new tax bills.

The IRS offers different types of payment plans depending on how much you owe and your situation. Some plans require you to prove your income and expenses; others do not. Some have setup fees; others do not. The key is that you are making a formal commitment to pay, and the IRS is giving you time to do it.

Key Takeaways

  • A payment plan is a written agreement with the IRS that lets you pay your tax debt in monthly installments instead of a lump sum.
  • You can set up a plan online through IRS.gov, by phone at 1-800-829-1040, or by mail using Form 9465 if you prefer not to use the online system.
  • Monthly payments vary based on your total debt and how long you want to take to pay it off, and the IRS charges a setup fee that ranges from $31 to $225 depending on the type of plan and how you set it up.
  • Interest and penalties continue to accrue on your unpaid balance each month, so a longer payment plan means you will pay more in total.
  • If you miss a payment or fail to file a future tax return, the IRS can cancel your plan and resume collection action.

The three main types of IRS payment plans

The short-term payment plan is for people who owe $10,000 or less and can pay it off within 120 days. You do not need to prove your income or expenses, and there is no setup fee. You straightforward contact the IRS, tell them when you can pay, and they record your commitment. This is the fastest and cheapest option if you can pay within four months.

The long-term installment agreement is for people who owe more than $10,000 or need more than 120 days to pay. You must file Form 9465 (Installment Agreement Request) or set up the plan online through IRS.gov. The IRS will ask about your income and expenses to determine a payment amount you can afford. Setup fees range from $31 to $225 depending on whether you set it up online or by mail, and whether you choose automatic payments from your bank account. This is the most common type of plan.

The Currently Not Collectible status is not a payment plan but a temporary pause. If you truly cannot pay anything right now, you can ask the IRS to put your account on hold while you deal with a financial hardship. Interest and penalties still accrue, but the IRS stops collection action. You will need to prove your hardship and your income and expenses. This status typically lasts one year, after which the IRS reviews your situation again.

How to set up a payment plan

The fastest way is to set up your plan online at IRS.gov using the Online Payment Agreement tool. You will need your Social Security number or Individual Taxpayer Identification Number, your filing status, and the tax year(s) you owe for. The tool will show you payment options and let you choose a monthly amount and due date. You can set up automatic payments from your bank account, which reduces the setup fee from $225 to $31. The entire process takes about 15 minutes, and you get a confirmation number when ready.

If you prefer to use the phone, call the IRS at 1-800-829-1040 during business hours. A representative will walk you through the same questions and set up your plan over the phone. There is no difference in the terms or fees — it is just a different way to communicate.

If you do not have internet access or prefer to use mail, you can print Form 9465 (Installment Agreement Request), fill it out, and mail it to the IRS address shown on your tax bill. Include a check or money order for your first payment if you can. The IRS will process your form and send you a written agreement by mail. This method takes two to four weeks.

What your monthly payment will be

Your monthly payment depends on three things: how much you owe, how long you want to take to pay it, and which type of plan you choose. If you owe $5,000 and want to pay it off in 24 months, your payment will be roughly $208 per month (before interest and penalties are added). If you want to take 60 months, it drops to roughly $83 per month. The longer you stretch the payments, the lower each one is — but you will pay more in total interest and penalties.

The IRS does not set a minimum monthly payment, but they do set a maximum time frame. For long-term installment agreements, the IRS typically will not allow you to stretch payments beyond 72 months (six years) unless you owe a very large amount. If you cannot afford even a small payment, you may need to ask for Currently Not Collectible status instead.

When you set up your plan online or by phone, the IRS will show you the exact monthly payment before you commit. You can try different payment amounts and timeframes to see what works for your budget.

Setup fees and how interest works

The IRS charges a setup fee to create your payment plan. If you set it up online and choose automatic bank payments, the fee is $31. If you set it up online without automatic payments, the fee is $225. If you set it up by phone or mail, the fee is $225. The setup fee is usually added to your first payment or to your total balance.

Interest and penalties continue to accrue on your unpaid balance every month. The interest rate is set by the IRS quarterly and is currently around 8 percent per year, though this changes. Penalties also explore — typically 0.5 percent of your unpaid balance per month if you are on a payment plan. This means that if you owe $10,000 and take 60 months to pay it, you will pay significantly more than $10,000 by the time you are done. The IRS will send you a statement each month showing your payment, the interest and penalties added, and your remaining balance.

What happens if you miss a payment

If you miss a payment, the IRS will send you a notice. You have 30 days to make the payment or contact the IRS to explain. If you do not respond within 30 days, the IRS can cancel your payment plan and resume collection action, which may include wage garnishment or bank levies.

If you miss a payment by accident, call the IRS when ready at 1-800-829-1040 and make the payment as soon as you can. If you are having trouble making your regular payment, contact the IRS before the due date and ask about modifying your plan — lowering the monthly amount and extending the timeframe. The IRS will work with you if you communicate early.

You must also stay current with any new tax bills. If you file a return for a new tax year and owe more, that new debt is separate from your payment plan. You need to pay it or set up a new plan for it. If you do not, the IRS may cancel your existing plan.

When a payment plan makes sense and when it does not

A payment plan makes sense if you owe money you cannot pay right away but believe you can pay it off over time. It stops the IRS from taking collection action and gives you a clear path forward. It also keeps your debt from growing as fast — you are making progress each month.

A payment plan does not make sense if you cannot afford any monthly payment at all, even a small one. In that case, ask about Currently Not Collectible status. A payment plan also may not make sense if you are about to receive a large sum of money (an inheritance, a bonus, a settlement) — you might be better off waiting to pay in full and avoiding the interest and penalties that accrue during a long plan.

If you are self-employed or your income varies, a payment plan can be risky because your income might drop and you might miss a payment. In that case, you may want to explore other options or set up a very short plan if you can.

Frequently Asked Questions

Can I set up a payment plan if I have not filed my tax return yet?

No. You must file your return first so the IRS knows what you owe. If you have not filed and you are late, file as soon as you can. Once your return is processed and you receive a bill, you can set up a payment plan.

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

You can propose a lower payment when you set up your plan online or by phone. The IRS will work with you, though they may ask you to prove your income and expenses. If you truly cannot afford any payment, ask about Currently Not Collectible status, which pauses collection action temporarily.

Does a payment plan affect my credit score?

The payment plan itself does not appear on your credit report. However, the original tax debt may have been reported to credit bureaus before you set up the plan. Making your payments on time will not improve your credit, but missing payments will make it worse.

Can I pay off my plan early without a penalty?

Yes. You can pay off your balance at any time without penalty. In fact, paying early saves you money because you stop accruing interest and penalties sooner. You can send extra payments whenever you have the money.

What if my situation changes and I cannot keep making payments?

Contact the IRS before you miss a payment. You can modify your plan to lower the monthly amount and extend the timeframe, or you can ask about Currently Not Collectible status if your hardship is temporary. The IRS prefers to work with you rather than cancel your plan.