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Tax Agreements with the IRS
Summary
When the IRS deals with taxpayer seeking to negotiate a tax bill, the first question asked, is, does the IRS expect to be able to get the money owed at any time during the taxpayer’s life or at the taxpayer’s death? If the answer is yes, the IRS expects to be able to collect the money at any time in the future, forgiveness of the tax debt will not be negotiated, offered or available. Instead, when the IRS expects to be able to collect at some time during the taxpayer’s life or at the taxpayer’s death, the negotiation is about how long and on what terms the agreement with the taxpayer to repay the tax debt.
In general, there are two types of payment plans: (1) Online Payment Plans, comprised of short term and long-term; and (2) Non-Online Payment Plans, with individually negotiated repayment terms of up to ten (10) years. Key features of Online Payment Plans is that when entered, in general, the IRS will not file a Tax Lien and the IRS does not require financial disclosure.
Length of time to repay - Online Payment Plans are available as either Short Term Payment Plans for terms of 180 days or less, or for term lengths up to ten (10) years. Who qualifies - Online Payment Plans may be available for individuals with balances up to $50,000 for long-term payment plans, or up to $100,000 for short-term payment plans, or businesses with balances up to $25,000. Application Fees - Short Term Plans have no application fee; Simple Payment Plans cost nothing if the taxpayer qualifies for low income, $22 for IRS direct debit payment agreement applications; and $69 for non-IRS direct debit payment agreement applications; $10 application fee to revise a plan. Interest - In general, the IRS starting immediately for all unpaid taxes owed [IRC section 6601], with interest abatement rarely available when collectible and only in narrow circumstances, such as excessive, assessed after statute of limitations period, or illegal [IRC 6602].
If a taxpayer does not qualify for an Online Payment Plan, the IRS may still negotiate a payment plan, but the IRS requires financial disclosure in order to evaluate the maximum amount that the IRS thinks that the taxpayer can pay each month, and the IRS may file a tax lien. In this is the case, an individual must complete and file a Form 9465 as well as financial disclosure forms either Form (Collection Information for Wage Earners) or (Collection Information Statements for Businesses).
Only when the IRS believes that it will never be able to collect, an may be available. An means settling the tax debt for less than the full amount owed. The IRS offers a tool for taxpayers to see if they may qualify at . There is also a Partial Payment Installment Agreement, which means that some tax will not be collected, in exchange for the taxpayer’s promise to “the maximum monthly payment based upon the taxpayer’s ability to pay” [IRM (9)].
The IRS assesses penalties for many reasons, most prevalently, failure to file, failure to pay, underpayment of estimated taxes, and others. A penalty may be disputed as unwarranted on the facts or a request for for the tax violation.
1. What Is an IRS Installment Agreement? Types and Key Features.
When a taxpayer owes taxes and cannot pay in full immediately, the threshold question the IRS asks is whether it expects to be able to collect the debt at any point during the taxpayer's lifetime or at the taxpayer's death. If the IRS believes collection is possible — now or in the future — debt forgiveness is not on the table. The only negotiation is over how long the taxpayer will have to repay, and on what terms.
A payment plan (installment agreement)
A payment plan is an agreement with the IRS to pay taxes owed within an extended timeframe. The IRS advises taxpayers to request a payment plan only if they believe they will be able to pay in full within the extended period. There are two principal categories:
Category One: Online Payment Plans
Online Payment Plans. These plans do not require financial disclosure, and the IRS generally does not file a Notice of Federal Tax Lien when a plan is entered. Online plans come in two forms:
Short-Term Payment Plans allow full payment within 180 days or less. Only individual taxpayers may apply online. There is no setup fee. Individuals with a combined balance of tax, penalties, and interest under $100,000 may qualify.
Long-Term Payment Plans (Simple Installment Agreements) allow monthly payments over terms up to ten years. Individuals with a combined balance of $50,000 or less in tax, penalties, and interest who have filed all required returns may apply online. Setup fees apply: $22 for direct debit (DDIA) applications made online; $69 for non-direct debit applications made online; $107 for DDIA applications made by phone, mail, or in person; $178 for non-direct debit applications made by phone, mail, or in person. Low-income taxpayers (adjusted gross income at or below 250% of the applicable federal poverty level) are eligible for fee waivers or reimbursement under the conditions specified by statute. The fee to revise an existing plan online is $10.
Category Two: Non-Online Payment Plans.
When a taxpayer does not qualify for an online plan, the IRS may still negotiate a payment arrangement, but requires financial disclosure. The IRS may file a Notice of Federal Tax Lien. Individual taxpayers must complete Form 9465 (Installment Agreement Request) and, where required by the instructions, attach Form 433-F (Collection Information Statement) or Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) or Form 433-B (Collection Information Statement for Businesses). Business taxpayers must contact the IRS by phone or visit a Taxpayer Assistance Center. Repayment terms of up to ten years may be negotiated individually.
A Partial Payment Installment Agreement (PPIA) is available when the taxpayer cannot pay the full liability even over the collection statute period. Under a PPIA, the taxpayer pays the maximum monthly payment based on demonstrated ability to pay. Internal Revenue Manual § 5.14.2.2.1(9). The IRS reviews these arrangements periodically and may adjust the payment amount.
Interest.
Interest begins accruing immediately on all unpaid taxes from the due date of the return, regardless of any extension of time to file. Internal Revenue Code § 6601. Interest continues to accrue daily on any amount not paid, including on penalties and interest, throughout the life of any payment plan. Interest rates vary and may change quarterly. Internal Revenue Code § 6621. Interest abatement is available only in narrow circumstances — specifically, where the interest results from an unreasonable error or delay by an IRS officer or employee. Internal Revenue Code § 6404; IRS Interest Abatement page, . Interest is not removed or reduced for reasonable cause or as first-time relief.
Levy Suspension.
When an installment agreement request is pending, the IRS is generally prohibited from levying, and the collection statute is suspended or extended. The levy prohibition and statute suspension also apply while a plan is in effect, for 30 days after a plan is rejected or terminated, and during the pendency of any appeal of a rejected or terminated agreement. Internal Revenue Code § 6331(k); IRS, Payment Plans; Installment Agreements, .
2. How Does a Payment Plan Compare with an Offer in Compromise or Penalty Abatement?
These are fundamentally different tools, each operating under different legal standards and serving different purposes. Conflating them is a common and costly mistake.
Payment plans assume the taxpayer will repay the full liability. They address the timing and mechanics of repayment, not the amount owed. Interest and penalties continue to accrue throughout. The IRS's authority to levy is stayed. Nothing about a payment plan reduces the underlying debt.
Offer in Compromise. An OIC is only available when the IRS concludes it will never be able to collect the full liability — whether during the taxpayer's lifetime or at death. The OIC allows a taxpayer to settle a tax debt for less than the full amount owed. The IRS evaluates ability to pay, income, expenses, and asset equity. The IRS approves an OIC when the amount offered represents the most it can expect to collect within a reasonable period of time. The IRS explicitly instructs taxpayers to exhaust all other payment options before submitting an OIC, and cautions that the program is not for everyone. IRS, Offer in Compromise, . The IRS provides a pre-qualification tool for taxpayers to assess preliminary eligibility. IRS, Offer in Compromise Pre-Qualifier Tool, . The application requires Form 433-A (OIC) or 433-B (OIC), Form 656, a $205 non-refundable application fee (waived for low-income taxpayers), and an initial non-refundable payment. While an OIC is under review, the IRS suspends other collection activities, but may file a Notice of Federal Tax Lien, and the collection statute is extended.
Penalty Abatement. Penalty abatement is a separate mechanism entirely and can be pursued concurrently with a payment plan. The IRS assesses penalties for, among other things, failure to file, failure to pay, underpayment of estimated taxes, accuracy-related violations, and failure to deposit employment taxes. Internal Revenue Code §§ 6651, 6654, 6655, 6662, 6656. Penalties eligible for relief include information return penalties, failure-to-file, failure-to-pay, accuracy-related, failure-to-deposit, dishonored check, and underpayment of estimated tax penalties. IRS, Penalty Relief, . Relief is available under three grounds: (1) first-time penalty abatement and administrative waiver; (2) reasonable cause; and (3) statutory exception. IRS, Penalty Relief, ; IRM § 20.1.1.3.
Importantly, the IRS will automatically reduce related interest if a penalty is reduced or removed. However, interest is never reduced or removed solely for reasonable cause or as first-time relief. IRS, Interest, . This makes the sequencing of penalty abatement requests — before or alongside entering a payment plan — strategically significant, since reducing the penalty balance reduces the interest accrual base going forward.
3. How Do You Know If a Payment Plan Is Right for You?
A payment plan is appropriate when the IRS believes it can collect the full debt, either now or in the future. In that circumstance, debt forgiveness through an OIC is not available, and the negotiation is only about repayment terms. The IRS itself frames the analysis this way: a payment plan should be requested when the taxpayer believes they will be able to pay in full within the extended timeframe. IRS, Payment Plans; Installment Agreements, .
The practical considerations are: Can you qualify for an online plan (no financial disclosure, generally no lien)? If your individual balance is under $100,000 for a short-term plan or under $50,000 for a long-term plan, and all required returns are filed, online application is available. If your balance exceeds those thresholds, or you cannot make minimum required payments at those levels, you will need a non-online plan with full financial disclosure.
The IRS advises that it is always in the taxpayer's best interest to pay as much as possible as soon as possible, to minimize accruing interest and penalties. IRS, Payment Plans; Installment Agreements, . Future tax refunds will be applied to the outstanding balance throughout the life of a payment plan.
Before concluding a payment plan is the right path, taxpayers should determine whether any assessed penalties are eligible for abatement, because reducing the penalty balance before entering a plan reduces the total cost. The OIC Pre-Qualifier Tool is a useful starting point to determine whether an OIC is even potentially available before defaulting to a payment arrangement.
4. When Should You Seek Professional Help?
Immediately in any of the following circumstances:
Your balance exceeds the online plan thresholds ($50,000 for long-term; $100,000 for short-term), placing you in non-online territory where financial disclosure through Form 433-A, 433-B, or 433-F is required and a Notice of Federal Tax Lien may be filed.
You have unfiled returns. The IRS will not approve a payment plan without full filing compliance. A practitioner can often negotiate simultaneous compliance and plan approval.
You have received a Notice of Intent to Levy (CP504) or a Final Notice of Intent to Levy and Notice of Your Right to a Collection Due Process Hearing (Letter 1058 or LT11). Collection Due Process rights under Internal Revenue Code § 6330 have a 30-day response deadline from the date of the notice, and failure to timely request a CDP hearing waives those rights.
You are a business owner with employment tax liabilities. Unpaid payroll taxes carry Trust Fund Recovery Penalty exposure under Internal Revenue Code § 6672, which creates personal liability for responsible persons — an analysis that is fact-intensive and consequential.
You believe the underlying tax liability is incorrect. A payment plan does not waive the right to dispute the underlying liability, but separate procedures (audit reconsideration, amended return, CDP hearing) must be pursued on their own timelines.
You are considering an Offer in Compromise. The IRS itself warns taxpayers to carefully check the qualifications of any tax professional they hire to help file an OIC. IRS, Offer in Compromise, . Poorly prepared OICs waste the application fee, extend the collection statute, and can result in tax lien filings during the review period — outcomes that are worse than no application at all.
You need to pursue penalty abatement. While first-time abatement requests can sometimes be handled over the phone, reasonable cause abatement requires a documented factual record and, in complex cases, written submission via Form 843 (Claim for Refund and Request for Abatement).
Official Sources
IRS, Payment Plan Options — Fast, Easy and Secure:
IRS, Payment Plans; Installment Agreements:
IRS, Simple Payment Plans for Individuals and Businesses:
IRM § 5.14.2.2.1(9) — Partial Payment Installment Agreements:
IRM § 20.1.1.3 — Criteria for Relief From Penalties:
Internal Revenue Code
Ted Broomfield is a California civil litigation attorney and CPA with prior experience as an IRS economist in the Large Business and International Division. He practices at Ted Broomfield Law, P.C., 201 Spear Street, Suite 1100, San Francisco, CA 94105. Nothing in this commentary constitutes legal or tax advice for any specific situation.
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