Opening a tax bill you cannot afford is stressful, but the IRS has formal ways to let you pay over time. The most common is an IRS payment plan, either a short-term plan or a longer installment agreement. Setting one up is often easier than people expect, and many taxpayers can do it online in minutes. This guide explains the types of plans, who qualifies, what it costs, and what to do if even a payment plan is out of reach.
*This article is for general information only and is not tax advice. Rules and fees change, so confirm current details at IRS.gov or with a qualified tax professional.*
First rule: file on time even if you cannot pay
The single most important step is to file your return by the deadline, or request an extension, even if you cannot pay the balance. The penalties for not filing are far larger than the penalties for not paying:
- Failure-to-file penalty: generally 5% of the unpaid tax for each month or part of a month the return is late, up to 25%.
- Failure-to-pay penalty: generally 0.5% of the unpaid tax per month, up to 25%.
When both apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount, but the combined cost is still much higher than paying late alone. An extension gives you more time to file, not more time to pay, so interest and the failure-to-pay penalty still accrue on any balance after the April deadline.
Types of IRS payment plans
Short-term payment plan
A short-term plan gives you up to 180 days to pay the full balance. According to the IRS, individuals who owe less than $100,000 in combined tax, penalties, and interest can generally apply online. There is no setup fee for a short-term plan, though penalties and interest continue until the balance is paid.
This option works well if you expect to have the money within a few months, for example from a bonus, an asset sale, or seasonal income.
Long-term payment plan (installment agreement)
A long-term plan lets you pay in monthly installments over a longer period. Individuals who owe $50,000 or less in combined tax, penalties, and interest, and have filed all required returns, can generally apply online. Balances above that may still qualify, but you may need to apply by phone, mail Form 9465, or provide financial information.
Long-term plans come in two main forms:
- Direct debit installment agreement: payments are automatically withdrawn from your bank account each month. This option has the lowest setup fee and reduces the risk of missed payments.
- Non-direct debit installment agreement: you make payments yourself each month by Direct Pay, check, card, or another method.
Setup fees
The IRS charges setup fees for long-term plans, which are lower when you apply online and lowest for direct debit. Low-income taxpayers may have the fee waived or reimbursed. Because fee amounts are updated periodically, check the IRS payment plan page for current figures before applying.
Costs that continue during a payment plan
A payment plan stops collection actions such as levies in most cases, but it does not stop the balance from growing:
- Interest continues to accrue on unpaid tax, penalties, and interest. The IRS rate is set quarterly and is based on the federal short-term rate plus 3 percentage points, compounded daily.
- Failure-to-pay penalty continues, but if you filed on time, the rate is generally cut in half to 0.25% per month while an installment agreement is in effect.
Because of these ongoing costs, it usually pays to make the largest monthly payment you can comfortably afford and to pay off the balance early if your finances improve. Long-term plans have no prepayment penalty.
How to apply
- File all required returns. The IRS generally requires all returns to be filed before approving a plan.
- Know your balance. Your IRS Online Account shows what you owe, including penalties and interest to date.
- Choose a plan type. Short-term if you can pay within 180 days; long-term if you need monthly payments.
- Apply online through the IRS Online Payment Agreement tool, if you qualify. You will need identity verification, your balance information, and bank details if you choose direct debit.
- Alternatively, apply by phone or mail. Use the number on your notice or submit Form 9465, Installment Agreement Request.
- Set your payment amount and date. Pick a date shortly after you are paid to avoid missed payments.
The IRS also allows changes to an existing plan online, such as adjusting the payment amount or date.
Staying in good standing
A payment plan can default if you miss payments or fail to meet other requirements. To keep it active:
- Make every monthly payment on time. Direct debit removes the risk of forgetting.
- File all future returns on time.
- Pay future taxes in full. If you are self-employed, keep up with quarterly estimated taxes, and if you are an employee, review your W-4 withholding so you do not owe again next year.
- Expect refunds to be applied. Future refunds are generally applied to your outstanding balance until it is paid.
If you default, contact the IRS quickly. Reinstating a plan is usually possible but may involve a fee.
Other options if you cannot afford a payment plan
Offer in compromise
An offer in compromise lets certain taxpayers settle tax debt for less than the full amount when paying in full would cause financial hardship or is not realistically possible. The IRS evaluates your income, expenses, assets, and future earning potential. Eligibility is limited, and an application fee and initial payment are generally required unless you meet low-income guidelines. The IRS offers a free online pre-qualifier tool.
Currently not collectible status
If you cannot pay anything without being unable to cover basic living expenses, you can ask the IRS to temporarily delay collection by placing your account in currently not collectible status. Interest and penalties still accrue, and the IRS may review your finances periodically.
Penalty relief
You may qualify to have penalties reduced or removed:
- First-time abatement: available if you have a clean compliance history for the prior three years and meet other requirements.
- Reasonable cause: for situations such as serious illness, natural disaster, or inability to obtain records.
Penalty relief does not erase the underlying tax, but it can significantly reduce the balance. Interest on removed penalties is generally removed as well.
Taxpayer Advocate Service
The Taxpayer Advocate Service is an independent organization within the IRS that can help if you are facing significant hardship or cannot resolve a problem through normal channels. Low Income Taxpayer Clinics also provide free or low-cost help to eligible taxpayers.
Should you pay with a loan or credit card instead?
Sometimes borrowing to pay the IRS makes sense, but compare carefully. A credit card charges processing fees and often a high interest rate. A personal loan with a low rate may cost less than IRS interest and penalties, but it converts tax debt into ordinary debt without IRS hardship protections. Avoid using retirement funds, since early withdrawals can create more tax and penalties.
Beware of tax relief scams
Some companies advertise that they can settle tax debt for “pennies on the dollar.” Many people do not qualify for an offer in compromise, and you can apply directly with the IRS. The IRS does not demand payment by gift card or wire transfer, and it typically contacts you by mail first. Be cautious of upfront fees and guarantees.
Related reading: No Tax on Tips Deduction: Who Qualifies and How to Claim It.
Frequently Asked Questions
How much do I need to owe to qualify for an IRS payment plan?
Individuals who owe $50,000 or less in combined tax, penalties, and interest can generally apply online for a long-term plan. Short-term plans of up to 180 days are generally available online for balances under $100,000. Larger balances may still qualify through other application methods.
Does an IRS payment plan stop penalties and interest?
No. Interest continues to accrue, and the failure-to-pay penalty continues, though it is generally reduced to 0.25% per month during an installment agreement if you filed on time.
Will an IRS payment plan hurt my credit score?
The IRS does not report payment plans to the credit bureaus. However, unresolved tax debt can lead to a federal tax lien in some cases, which is a public record.
Can I pay off my installment agreement early?
Yes. There is no prepayment penalty, and paying early reduces the interest and penalties you owe.
What happens if I miss a payment?
Your agreement may default, and the IRS may resume collection. Contact the IRS promptly to ask about reinstating the plan.
Do I still get my tax refund while on a payment plan?
Generally, future refunds are applied to your outstanding balance until it is paid off.
The bottom line
If you cannot pay your tax bill in full, file on time anyway, then set up an IRS payment plan that matches your budget. Short-term plans work if you can pay within 180 days; long-term installment agreements offer monthly payments, ideally by direct debit. Interest and reduced penalties still apply, so pay as much as you can as fast as you can, and look into penalty relief or an offer in compromise if you truly cannot pay.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
