How to Set Up a Tax Payment Plan With the IRS
Receiving a tax bill you cannot pay in full is a stressful situation for any business owner. The good news is that the IRS offers payment plan options that allow you to settle your tax debt over time while staying in good standing.
This guide explains what IRS payment plans are, the types available, how to apply, what it will cost you, and what to watch out for along the way.
Key Highlights
- The IRS offers short-term and long-term payment plans for taxpayers who cannot pay their full tax bill by the deadline.
- Interest and penalties continue to accrue while you are on a payment plan, but the failure-to-pay penalty rate is reduced.
- You must have filed all required tax returns to qualify.
- Setting up a plan online is the fastest and least expensive option for individuals.
What Is an IRS Payment Plan?
An IRS payment plan is a formal agreement between you and the IRS to pay your federal tax debt over time rather than in a single lump sum. It is sometimes referred to as an installment agreement. Once approved, the IRS generally agrees not to take collection actions such as levies or liens as long as you stay current with your payments.
Payment plans are available to both individuals and businesses. They are not a way to reduce or eliminate what you owe. Interest and penalties continue to accrue on the outstanding balance until it is paid in full. However, being on an approved plan does reduce the failure-to-pay penalty rate, which can make a meaningful difference over time.
It is important to understand that a payment plan does not change your underlying tax obligation. It simply gives you a structured and manageable way to meet it.
Failing to address a tax balance can have serious consequences beyond penalties and interest. The IRS has broad collection powers, including the ability to file liens against your assets, levy bank accounts or wages, and in extreme cases seize property. A payment plan is one of the most effective ways to stay in good standing and avoid these outcomes.
Types of IRS Payment Plans
The IRS offers two main types of payment plans depending on how much you owe and how long you need to pay it off.
Short-Term Payment Plan
A short-term payment plan gives you up to 180 days to pay your full tax balance. There is no setup fee to apply. To qualify, you generally need to owe less than $100,000 in combined tax, penalties, and interest, and you must have filed all required returns.
This option works well if you have a temporary cash flow issue and expect to be able to pay your balance in full within six months. While there is no setup fee, interest and the standard failure-to-pay penalty continue to apply until your balance reaches zero.
Long-Term Payment Plan
A long-term payment plan, also called an installment agreement, gives you up to 72 months (six years) to pay your balance in monthly installments. To qualify, you generally need to owe $50,000 or less in combined tax, penalties, and interest, and have filed all required returns.
This is the more common option for business owners who need extended time to resolve a larger balance. Monthly payment amounts are flexible, though your payments must be enough to pay off the full balance within the 72-month window.
Does the IRS Still Charge Interest on a Payment Plan?
Yes. Getting on an IRS payment plan does not stop interest or penalties from accruing. The IRS charges interest based on the federal short-term rate plus 3 percentage points, which adjusts quarterly.
However, there is a meaningful benefit: if you file your return on time and set up an installment agreement, the failure-to-pay penalty is cut in half. Instead of accruing at 0.5% per month, it drops to 0.25% per month. Over the course of a multi-year payment plan, that reduction can add up.
The key takeaway is that it always makes sense to file your return on time, even if you cannot pay. Filing late adds a separate failure-to-file penalty on top of everything else. The IRS consistently recommends filing your return, paying what you can, and then applying for a payment plan for the remaining balance.
How to Apply for an IRS Payment Plan
The application process differs depending on whether you are applying as an individual or a business account.
For individuals, there are three ways to apply:
Online: The IRS Online Payment Agreement tool at IRS.gov is the fastest and most affordable option. It provides an immediate decision with lower setup fees. If you already have an IRS online account, you can log in directly. If not, you will need to create one and verify your identity through ID.me, which requires a valid photo ID and access to a smartphone or webcam.
By phone: Call 800-829-1040 to set up a plan. Phone applications carry higher setup fees than online applications.
By mail: Submit IRS Form 9465, Installment Agreement Request, along with your tax return or separately. This method takes longer and also carries higher setup fees.
For business accounts, the online application is not available. Business accounts must call the IRS at 800-829-4933 or contact the number listed on their IRS notice to set up a payment plan. Representatives are available Monday through Friday, 7 a.m. to 7 p.m. local time.
IRS Payment Plan Fees
The cost of setting up a payment plan depends on which type you choose and how you apply.
| Plan Type | Maximum Owed to Qualify | Setup Fee and Payment Details |
| Short-term payment plan (180 days or less) | $100,000 in combined tax, penalties and interest | $0 to apply online, by phone or by mail. Pay by Direct Pay, check, money order or debit/credit card. |
| Long-term payment plan (more than 180 days) | $50,000 in combined tax, penalties and interest | Automatic debit withdrawals: $22 online, $107 by phone or mail. Fee may be waived for low-income taxpayers. Other methods (Direct Pay, EFTPS, money order): $69 online, $178 by phone or mail. Low-income taxpayers: $43, may be reimbursed. |
Applying online is always the least expensive option. Low-income taxpayers may qualify to have the setup fee waived or reimbursed. To see if you qualify, refer to IRS Form 13844.
If you make payments by debit or credit card, additional processing fees apply. Debit card payments typically carry a small flat fee per transaction, while credit card payments may run close to 2% of the payment amount. Setting up automatic bank withdrawals (direct debit) is generally the most cost-effective approach.
What Happens If You Miss a Payment?
If you miss a payment or fall behind, your installment agreement may default. A defaulted agreement means the IRS can resume collection actions, including issuing a tax lien or levy against your assets or bank accounts.
If you realize you are going to miss a payment, it is important to contact the IRS as soon as possible. In some cases, you can reinstate a defaulted agreement or request a modification through the Online Payment Agreement tool. You may also need to submit additional financial documentation if you are requesting a change to your monthly payment amount.
Alternatives to an IRS Payment Plan
A payment plan is not the only option available. Depending on your situation, there may be other ways to address a tax balance you cannot pay in full.
Currently Not Collectible status: If you are experiencing genuine financial hardship and cannot make any payments, you may be able to request that the IRS temporarily suspend collection activity. Interest and penalties continue to accrue, but the IRS pauses active collection.
Offer in Compromise: In limited circumstances, the IRS may accept less than the full amount owed. This is a complex process with strict eligibility requirements and is not available to most taxpayers. Be cautious of third-party companies that aggressively market this option, as the Federal Trade Commission has noted that many taxpayers do not qualify for the programs these companies advertise.
How Eco-Tax Can Help
If you find yourself unable to pay your tax bill in full, the most important thing you can do is act quickly. Ignoring a tax balance does not make it go away. It allows penalties and interest to accumulate and puts you at risk of more serious collection actions. The IRS offers options, and the sooner you explore them the better positioned you will be.
At Eco-Tax, our team of CPAs and Enrolled Agents is here to help you understand your options and take the right steps forward. Do not hesitate to reach out. We are just a message away.
