IRS payment plans: what you can set up yourself, and when it is worth paying someone

If you owe the IRS and cannot pay it today, there is a well-worn path, and a lot of it you can walk yourself for free. Knowing which parts are self-service and which are genuinely worth paying for is most of what this article is.

What is actually on offer

Short-term payment plan. Up to 180 days, for balances under $100,000 including penalties and interest. No setup fee. Penalties and interest keep accruing. Set it up online.

Long-term installment agreement. Monthly payments, for individuals owing under $50,000 in combined tax, penalties and interest, with all returns filed. There is a setup fee, reduced for direct debit and waived or refunded for low-income taxpayers. This is the workhorse, and the online application takes about fifteen minutes.

Business installment agreement. For businesses owing under $25,000, with all returns filed. Payroll tax is treated far more severely than income tax — see below.

Partial payment installment agreement. You pay what you can afford monthly, and whatever remains when the collection statute expires is written off. Not available online: it requires a full financial disclosure (Form 433-A or 433-F) and negotiation. This is one where representation earns its money.

Currently not collectible. Not a plan — a pause. If paying anything would leave you unable to meet basic living expenses, the IRS can suspend collection. Interest still accrues and the status is reviewed periodically, but levies stop.

Do it yourself if this describes you

• You are an individual owing less than $50,000 in total.
• All your required returns are filed.
• You have not previously defaulted on an agreement.
• Nothing has been levied and no lien has been filed.
• You can afford a monthly payment that clears the balance inside 72 months.

Go to the Online Payment Agreement tool at irs.gov, have last year’s return and a bank account to hand, and it is done in one sitting. Choosing direct debit lowers the setup fee and considerably reduces the chance of an accidental default.

Nobody needs to charge you hundreds of dollars for this, and a provider who quotes a large fee for exactly this without saying it is available free is not being straight with you.

Pay for help if this describes you

You have unfiled returns. This is the most common reason people get stuck. The IRS will not grant most arrangements until returns are filed, and if they have filed a substitute return on your behalf it will include none of your deductions, credits or filing status advantages — so the assessed balance is often far larger than the real one. Getting returns prepared and the assessment corrected can reduce what you owe before any negotiation starts. This is real work with a real payoff.

You owe payroll tax as a business. Unpaid trust fund taxes — the amounts withheld from employees’ wages — are treated as close to theft rather than debt, and the IRS can assess the Trust Fund Recovery Penalty personally against owners, officers and anyone with signing authority. Do not handle this alone.

Your balance is above the online thresholds. Over $50,000 for an individual, or over $25,000 for a business, and you are into Form 433 territory with a financial disclosure and a negotiation. The IRS will examine your assets, income and allowable expenses against national and local standards, and knowing which expenses are allowable is a specialist skill.

A lien has been filed or a levy has begun. Time-critical and procedural. A levy on a bank account can often be released, and a lien can sometimes be withdrawn after entering a direct debit agreement — but both require knowing which form and which unit.

You are arguing hardship. Currently-not-collectible status and partial-pay agreements are both won or lost on how the financial disclosure is prepared and presented.

What a plan does not do

It does not stop interest. Interest runs on the balance until it is paid, full stop.

It does not stop the failure-to-pay penalty, though the rate is halved while an installment agreement is in effect.

It does not remove an existing lien. A lien already filed generally stays until the balance is satisfied, with limited withdrawal routes.

It does not survive a new balance. Owing for a new tax year while on a plan defaults the agreement. This catches out self-employed people constantly: get the current year’s estimated payments right, or the plan collapses under you.

The penalties, and how to get them removed

Two penalties do most of the damage:

• Failure to file — 5% of the unpaid tax per month, up to 25%. This is ten times the failure-to-pay rate, which is why filing on time matters even when you cannot pay.
• Failure to pay — 0.5% per month, up to 25%, halved while an installment agreement is active.

Both can be removed. First-time abatement is close to automatic if you have a clean compliance history for the previous three years — it is worth one phone call, and many people who qualify never ask. Reasonable cause abatement covers serious illness, a death in the family, natural disaster, or records destroyed, and is argued in writing with documentation.

A note on the advertising

You will see offers to settle tax debt for a fraction of what is owed. That refers to an offer in compromise, which is real, and rare, and depends entirely on your finances rather than on anyone’s negotiating skill. Most people who call about one end up on an installment agreement, which is a perfectly good outcome — just not the one in the advertisement.

There is no federal forgiveness program for tax debt, and anyone describing one as new, limited-time, or something you must call today to access is describing something that does not exist.