How to Request an Installment Agreement to Pay Your Federal Income Taxes

If you owe federal income taxes and are not able to pay, one option may be to request an installment agreement from the IRS that allows you to pay over time. This option is not cheap, since penalties and interest continue to accumulate on the unpaid balance, and the IRS itself advises pursuing other financing options before requesting an installment agreement. But if other options are not open to you, an installment agreement allows you to pay off your tax debt and avoid other collection efforts by the IRS.

If you meet certain conditions, your request for an installment agreement cannot be denied. The amount you owe must not be more than $10,000. You must have filed all your tax returns for the past 5 years on a timely basis and paid any tax due, without applying for an installment agreement. You must agree to pay the full amount due within 3 years. The IRS must determine that you cannot pay the tax you owe in full, and you must provide the IRS with any information they request to make that determination.

If you owe a total of $25,000 or less in combined taxes, penalties and interest, you can apply for an Online Payment Agreement. You need to get together the required information and determine the highest amount you can pay before you apply. By submitting your application online, you can get immediate notification of acceptance. You could also complete Form 9465 - Installment Agreement Request, and mail it to the IRS. Generally you can have up to 5 years to pay when an installment agreement is approved.

If you owe more than $25,000, you may still qualify for an installment agreement, but you have to submit Form 9465 and Form 433-F - Collection Information Statement. On Form 433-F you have to provide information on your bank accounts, investments, retirement accounts, real estate and other assets, your credit cards, wages (including your spouse's wages if you are married), other household income, and your monthly living expenses. You also need to propose the amount you could pay in 60 to 120 days, or the monthly payment you could make, and the down payment you could make to lower the balance due.

The IRS uses Collection Financial Standards to help determine your ability to pay. There are national standards established for living expenses including food, clothing and health care, and local standards for housing, utilities, and transportation, that vary by area. Generally, you will be allowed the standard expenses unless you can show with documentation that the standard amounts do not cover your basic living expenses.

In order to apply for an installment agreement, you must have filed all your tax returns. You must attach a signed copy of any unfiled returns to Form 433-F. Any refunds that you are due on tax returns you file in the future are applied against the balance you owe until your outstanding balance is paid off. The application of refunds does not mean that you do not have to continue making your monthly payments under the installment agreement.

There is a fee of $105 for requesting an installment agreement. If you agree to make the payments by electronic funds withdrawals the fee is $52. And if your income is below a certain level, the IRS may determine that you qualify for a reduced fee of $43. You can make your monthly payments under the installment agreement by check, money order, credit card, electronic funds withdrawal, or payroll deduction.

Late payment penalties will continue to accrue on the unpaid balance due while the installment agreement is in effect. The late payment penalty is generally 0.5% of the tax owed for each month it remains unpaid, and accumulates up to a maximum penalty of 25% of the balance owed.

The interest rate charged by the IRS is adjusted quarterly and is the federal short-term rate plus 3%. Interest accrues on the unpaid balance of tax owed plus the accumulated penalties and interest.

Sources:
Collection Financial Standards - IRS
Form 433-F - Collection Information Statement - IRS
Form 9465 - Installment Agreement Request - IRS
Online Payment Agreement Application - IRS
Payment Plans, Installment Agreements - IRS
Topic 653 - IRS Notices and Bills, Penalties and Interest Charges - IRS
Why an Installment Agreement Will Cost You More - IRS