The Basics of an Installment Agreement with the IRS

On: April 19, 2023

What are the basic elements of an Internal Revenue Service installment agreement? As a taxpayer who finds that you are not able to make full payment of the federal income tax due on or before the annual due date, you may need an installment agreement. There is an individual and business payment plan available, but they are on very different terms. The individual plan includes a full payment, a short-term payment paying in 180 days or less, and a long-term payment plan paying monthly with a specific due date and a specific payment amount per month. To qualify for a short-term payment plan, you must owe less than $100,000 in combined tax, penalties, and interest. For the long-term plan, you must owe $50,000 or less in combined tax, penalties and interest and have filed all tax returns. If you are an independent contractor or sole proprietor, you would file for a payment plan as an individual.

Will there be a fee to setup the installment agreement? There are user fees charged to setup installment agreements on the long-term plan, the direct debit installment agreement or to setup the payment plan by going through an IRS representative on the phone. The user fee charged when establishing a long-term payment plan with automatic withdrawals by direct debit is $31.00. If the long-term payment plan is setup without the direct debit feature the user fees increases to $130.00. The user fee when you want to pay by check or money order, credit card or debit card and you use the online payment agreement tool is $149.00.  When you call an IRS representative and setup the payment plan while on the telephone with the representative, the user fee is $225.00. If you or your tax preparer, or representative request a payroll deduction agreement using the IRS form 2159 the user fee will be $225.00. If you are considered a low-income taxpayer, then you may qualify for a reduced user fee of $43.00, or for a reimbursement of the user fee charged.

What if my income is at the poverty level or below? The IRS representative may not say to you that you qualify for a low-income user fee, if that happens, you can request for the IRS to consider your reduced fee by filing IRS Form 13844. If you are a low-income taxpayer, and you agree to make payments by direct debit the IRS will waive the user fee for you. A low-income taxpayer is one with an adjusted gross income for the most recent tax year at or below 250% of the federal poverty guidelines for family size.

What type of payment methods can I use in my installment agreement? There is a new process where an individual taxpayer can setup an online payment agreement with the IRS. The user must create the account by verifying their identity through ID.me by being able to provide a credit card account number, mortgage account number, car loan account number or other forms that are acceptable. You will also need photo identification. If the taxpayer wants to setup direct debit payments, the bank routing and account numbers will be required. If the taxpayer just filed his or her tax return and it was examined or you did not yet receive a tax balance notice, you will need to enter the tax balance from your return There is also a user fee charged when the taxpayer requests to revise an existing installment agreement.

Can my installment agreement be reinstated if I default?  Yes, there is a process to reinstate your payment plan or installment agreement with an additional fee.  When you file the next tax return after your installment agreement was approved, part of that agreement is to file all tax returns on time and pay all taxes due by the due date. All of the terms and conditions of the installment agreement are mailed to the taxpayer upon approval.