Yes, the IRS offers payment plans for tax debt you cannot pay in full

The IRS calls its payment plan a installment agreement. If you owe federal income tax and cannot pay the full amount by the deadline, you can request to pay in monthly installments instead of facing immediate collection action. The IRS has two main types: a short-term plan (120 days or less) and a long-term plan (longer than 120 days). Both require you to set up automatic payments from your bank account, and both charge a setup fee and interest on the unpaid balance.

You can request an installment agreement online through the IRS website, by phone, by mail, or in person at an IRS office. The online route is fastest — you can set it up in minutes if you have your Social Security number, filing status, and a bank account ready. The IRS will tell you immediately whether your request was accepted. If you use the phone or mail, approval takes longer, sometimes two to four weeks.

Key Takeaways

  • The IRS charges a setup fee (currently $31 to $225 depending on the method you use) and interest on the unpaid balance, so the total cost is higher than paying in full.
  • You must make payments automatically from your bank account; the IRS does not accept checks or credit card payments for installment agreements.
  • If you miss a payment, the agreement can be terminated and the IRS can resume collection action, including wage garnishment or bank levies.
  • The IRS will continue to charge penalties and interest until the debt is fully paid, even while you are on a payment plan.

The two types of IRS payment plans and how they differ

A short-term payment plan covers tax debt you can pay off within 120 days. There is no setup fee for this plan, and you do not need to file any paperwork — you simply contact the IRS and tell them when you can pay. The IRS will give you a deadline, and you pay the full amount by that date. This option is useful if you are waiting for a bonus, a tax refund, or a loan to come through.

A long-term installment agreement is what most people use when they owe more than they can pay in four months. You choose a monthly payment amount that fits your budget, and the IRS calculates how many months it will take to pay off the debt. The setup fee ranges from $31 (if you set up automatic payments online) to $225 (if you pay by phone or mail). Interest accrues monthly at the current IRS rate, which changes quarterly. As of early 2024, the rate is 8 percent per year, but this varies.

Both plans require that you file your tax return on time each year while the agreement is active. If you do not file or if you owe additional taxes in a future year, the IRS can terminate the agreement and demand full payment of everything you owe.

How to request an installment agreement online

The fastest way to set up a payment plan is through the IRS Online Payment Agreement tool on the IRS website. You will need your Social Security number or Individual Taxpayer Identification Number, your filing status, your tax year, and the amount you owe. You also need access to a bank account for automatic payments.

The tool walks you through a series of questions about your income and expenses, then shows you payment options. You can choose your monthly payment amount (within limits set by the IRS based on your debt), and the system tells you how many months the plan will run. Once you confirm, the agreement is active immediately, and you can print a confirmation letter. Your first payment is due on the date the IRS specifies, usually within 30 days.

If you owe less than $50,000 in federal income tax, penalties, and interest combined, you can use the online tool without talking to anyone. If you owe more, you will need to call the IRS or work with a tax professional to set up the agreement by phone.

Setup fees, interest, and the true cost of a payment plan

The IRS charges interest on unpaid tax debt at a rate set by law. The rate changes every three months and is currently 8 percent per year, compounded daily. This means the longer you take to pay, the more interest you owe. On a $5,000 debt paid over 24 months at 8 percent, you will pay roughly $1,000 in interest alone.

The setup fee depends on how you request the agreement. Online setup costs $31. Phone or mail requests cost $225. If you cannot afford the setup fee, you can ask the IRS to add it to your payment plan, but this means you will pay interest on the fee itself.

The IRS also continues to charge failure-to-pay penalties while you are on a payment plan. The penalty is 0.5 percent of the unpaid tax per month (up to 25 percent total). This penalty does not stop until the debt is paid in full. So the total cost of owing $5,000 for two years includes the setup fee, monthly interest, and monthly penalties — easily adding $1,500 to $2,000 to the original debt.

What happens if you miss a payment or your situation changes

If you miss a payment, the IRS will send you a notice. You have the right to reinstate the agreement if you pay the missed amount within 30 days. If you do not, the IRS can terminate the agreement and resume collection action, which may include wage garnishment, bank levies, or a tax lien on your property.

If your financial situation improves and you want to pay off the debt faster, you can increase your monthly payment or pay a lump sum at any time without penalty. If your situation worsens and you cannot afford the monthly payment, you can request a modification. The IRS will review your income and expenses and may lower your payment amount, though this will extend the length of the plan and increase the total interest you pay.

If you become unable to pay due to hardship — job loss, medical emergency, or other severe circumstances — you can request that the IRS place your account in currently not collectible status. This pauses collection action temporarily, but interest and penalties continue to accrue. The IRS will review your account periodically to see if your situation has improved.

Installment agreements versus other options for tax debt

An installment agreement is not the only way to handle tax debt. If you cannot pay even with a payment plan, you may be able to request an Offer in Compromise, which allows you to settle the debt for less than you owe. However, the IRS only accepts an Offer in Compromise if you can show that paying the full amount would create genuine financial hardship, and the process takes months.

You can also request currently not collectible status without a payment plan if you have no income or assets. This stops collection action but does not eliminate the debt — the IRS can resume collection attempts later, and interest keeps growing.

If you have a large tax debt and complex financial circumstances, working with a tax professional or a Certified Public Accountant can help you understand which option makes sense. The IRS also has a Low Income Taxpayer Clinic program in most areas that provides free or low-cost help to people earning below a certain threshold.

What to do before you miss a tax deadline

If you know you will owe taxes and cannot pay by the deadline, do not wait until the last day. Request a payment plan as soon as possible. The sooner you set one up, the less interest and penalties will accrue before your first payment is due.

If you have already missed the deadline and owe penalties, you can still request a payment plan. The penalties and interest become part of the total debt, and you pay them off along with the original tax. The IRS will not remove penalties unless you have a valid reason for missing the deadline — for example, you were seriously ill or a natural disaster prevented you from filing.

File your tax return even if you cannot pay. Filing late triggers additional penalties, so it is better to file on time and set up a payment plan than to file late and owe more. If you need more time to file, you can request a filing extension, which gives you six additional months — but an extension to file is not an extension to pay. Interest and penalties still begin accruing on the due date.

Frequently Asked Questions

Can I set up a payment plan if I owe state taxes too?

No. The IRS payment plan covers only federal income tax debt. Each state has its own payment plan rules. You will need to contact your state tax agency separately to set up a plan for state taxes. Some states offer similar installment agreements; others have different rules.

What if I cannot afford even a monthly payment?

You can request currently not collectible status, which pauses collection action temporarily. The IRS will not garnish your wages or levy your bank account while your account is in this status. However, interest and penalties continue to grow, and the IRS can resume collection efforts later if your financial situation improves.

Do I have to use automatic bank payments?

Yes. The IRS requires automatic payments for all installment agreements. You cannot pay by check, credit card, or cash. If you do not have a bank account, you will need to open one before you can set up a payment plan.

Can the IRS take my tax refund while I am on a payment plan?

Yes. The IRS will apply any future tax refunds to your installment agreement debt until it is paid off. This is called offset. You cannot prevent this, but it does reduce the amount you owe faster.

What if I pay off the debt early?

You can pay off an installment agreement at any time without penalty. There is no prepayment fee. However, you will still owe all interest and penalties that have accrued up to the payoff date — the IRS does not reduce these charges if you pay early.