IRS Payment Plans

The short version

If you owe federal taxes but can't pay them all at once, the IRS might allow you to make payments over time. This lesson explains two main ways to do this: installment agreements (where you pay the full amount over time) and offers in compromise (where the IRS agrees to accept a lower amount than you owe). Understanding these options can help you avoid further penalties and resolve your tax debt.

The law this is built on

Every point below comes from the authority named next to it. Verify the current text before relying on it.

26 U.S.C. § 6159
This section allows the IRS to enter into an installment agreement with you if you cannot pay your tax liability in full. The agreement lets you pay your taxes in periodic installments.
Why it matters: This means you can arrange to pay your tax debt over time instead of all at once, potentially preventing more severe collection actions.
26 U.S.C. § 7122
This section allows the IRS to compromise (settle for less than the full amount) your tax debt if there's doubt about your ability to pay, doubt about the amount owed, or if it would be unfair to collect the full amount.
Why it matters: This means you might be able to resolve your tax debt by paying less than what you originally owed, under certain circumstances.

Words you need to know

Installment Agreement: A payment plan with the IRS that allows you to pay off your total tax debt, plus penalties and interest, in monthly payments over an agreed period, typically up to 72 months (6 years). This is outlined in 26 U.S.C. § 6159.
Offer in Compromise (OIC): An agreement with the IRS that allows you to pay off your tax debt for a lower amount than what you originally owe. The IRS may agree to this if you can't pay the full amount, if there's doubt about the amount owed, or if collecting the full amount would be unfair (as per 26 U.S.C. § 7122).
Ability to Pay: When considering an OIC, the IRS evaluates your income, expenses, and asset equity to determine if you can reasonably pay the full tax debt. If you cannot, an OIC might be considered.
Doubt as to Collectibility: One reason the IRS may accept an OIC, meaning they don't believe they can collect the full amount of tax owed from you. This is a common basis for an OIC under 26 U.S.C. § 7122.
Doubt as to Liability: Another reason the IRS may accept an OIC, meaning there's a genuine disagreement about whether you owe the tax amount or if the amount is correct. This is also covered by 26 U.S.C. § 7122.
Effective Tax Administration: A reason the IRS may accept an OIC even if you could technically pay the full amount, if collecting it would cause significant economic hardship or be unfair. This is a ground for an OIC under 26 U.S.C. § 7122.

Your rights

✓You have the right to request an installment agreement if you cannot pay your taxes immediately (26 U.S.C. § 6159).
✓You have the right to propose an Offer in Compromise to settle your tax debt for a lower amount under certain conditions (26 U.S.C. § 7122).
✓You have the right to appeal an IRS decision to reject your Offer in Compromise.
✓If you enter an installment agreement, the IRS generally cannot take enforced collection actions like levies or liens, as long as you meet the terms.
✓The IRS must consider your financial situation when evaluating your ability to pay.

How the process actually works

1
Assess Your Situation
Before contacting the IRS.
Figure out exactly how much you owe and whether you can pay it in full. Review your income, expenses, and assets.
2
Choose a Plan Type
After assessing your financial situation.
Decide if an Installment Agreement (paying the full amount over time) or an Offer in Compromise (settling for less) is more appropriate for your financial situation. The IRS offers an online tool to help you determine which option is best.
3
Prepare Necessary Forms
Before submitting your request.
For an Installment Agreement, you might file Form 9465, Installment Agreement Request. For an Offer in Compromise, you'll need Form 656, Offer in Compromise, and Form 433-A (OIC) or 433-B (OIC) for financial information.
4
Submit Your Request
Once forms are ready and you've filed all required tax returns.
Send your completed forms to the IRS. For an OIC, you usually need to include an application fee and an initial payment.
5
IRS Review
After your submission, typically within a few weeks to several months depending on the complexity.
The IRS will review your application, often asking for more information or clarification. For an OIC, they will analyze your ability to pay, using the criteria in 26 U.S.C. § 7122.
6
Decision and Agreement
After the IRS review is complete.
The IRS will either approve or deny your request. If approved for an Installment Agreement, you'll get a payment schedule. If approved for an OIC, you'll receive a formal acceptance and instructions for payment.

Deadlines that can end your case

IRS tax return filing deadline
April 15th (for most individual filers)
You must file all required tax returns to be eligible for an installment agreement or an offer in compromise.
Offer in Compromise appeal deadline
30 days from the date of the rejection letter
If you miss this, you lose your right to appeal the OIC rejection.
Installment Agreement default
Immediate upon missing a payment or failing to file a future tax return
If you default on an installment agreement, the IRS can restart collection actions and may issue notices of intent to levy or file a Notice of Federal Tax Lien.

Costly mistakes

✕Not filing all required tax returns before applying for a payment plan, which makes you ineligible.
✕Ignoring IRS notices, which can lead to collection actions like liens or levies.
✕Not being truthful or accurate about your financial situation when applying for an Offer in Compromise.
✕Failing to make proposed payments while an Offer in Compromise is being considered, or missing payments on an approved installment agreement.
✕Assuming the IRS will automatically accept your proposed Offer in Compromise without providing thorough justification.
✕Waiting too long to address tax debt, allowing penalties and interest to grow significantly.

Your checklist

Gather all your tax notices and statements to determine the exact amount you owe.
Ensure you have filed all required federal tax returns, even if you can't pay the tax due.
Complete a thorough financial review, including income, expenses, and assets, to understand your ability to pay.
Determine if an Installment Agreement (paying in full over time) or an Offer in Compromise (settling for less) is the right option for you.
Prepare the necessary IRS forms (e.g., Form 9465 for Installment Agreement, Form 656 and Form 433-A/B for OIC).
Submit your forms to the IRS, including any required application fees or initial payments for OIC.
Keep accurate records of all correspondence and payments made to the IRS.
Adhere strictly to the terms of any approved payment plan to avoid default.

Common questions

Will an Offer in Compromise hurt my credit score?

An Offer in Compromise itself doesn't directly appear on your credit report. However, if the IRS filed a Notice of Federal Tax Lien against you, that would likely appear on your credit report. Resolving your tax debt may help you eventually remove the lien.

Do I have to pay interest and penalties if I have an installment agreement?

Yes, even if you have an installment agreement, interest and penalties will continue to accrue on your unpaid balance until the debt is paid in full. The installment agreement under 26 U.S.C. § 6159 helps you pay the total, but doesn't stop the accrual of these additions.

What happens if my Offer in Compromise is rejected?

If your OIC is rejected, the IRS will send you a letter explaining why. You generally have 30 days to appeal the decision. If you don't appeal or your appeal is denied, the IRS will continue with collection actions, and you may explore other payment options like an installment agreement.

Can I get an installment agreement if I owe a lot of money?

For individual taxpayers, if you owe less than $50,000 in combined tax, penalties, and interest, and can pay within 72 months, you can usually get a "guaranteed" or "streamlined" installment agreement. If you owe more or need a longer time, the IRS will review your financial situation more closely. The ability to enter an agreement is outlined in 26 U.S.C. § 6159.

Are there any upfront fees for these payment plans?

There is typically an application fee for an Offer in Compromise, which must be submitted with your Form 656. There is no application fee for an installment agreement, though penalties and interest continue to accrue as noted earlier.

How this changes by state

IRS payment plans are for federal taxes, so the rules for installment agreements and offers in compromise (26 U.S.C. § 6159 and 26 U.S.C. § 7122) are set at the federal level and do not vary by state. However, individual states may have their own tax agencies and procedures for handling state income tax debt. If you owe state taxes, you must check with your state's department of revenue or equivalent agency for their specific payment plan options.

When you need a lawyer

You should consider getting legal help if your tax debt is large and complex, if you disagree with the amount of tax the IRS says you owe, or if you believe your Offer in Compromise was unfairly rejected. If the IRS has already taken collection actions against you (like a levy or lien), a tax attorney can help you navigate those issues. Also, if you need help understanding complex financial disclosure requirements or negotiating with the IRS, a tax professional can be valuable.

Do this today

→Visit the IRS website (IRS.gov) to review information on payment options and download the relevant forms.
→Use the IRS's Offer in Compromise Pre-Qualifier Tool to see if an OIC might be an option for you.
→Collect all financial documents (pay stubs, bank statements, expense records) needed to assess your ability to pay.
→If you're unsure how to proceed, consider contacting a tax professional or a low-income taxpayer clinic for assistance.

This lesson is legal information for educational purposes only, based on 26 U.S.C. § 6159; 26 U.S.C. § 7122. It is not legal advice and does not create an attorney-client relationship.