IRS Payment Plans & Installment Agreements

IRS Payment Plan Overview

If you owe the IRS and cannot pay in full, an installment agreement allows you to pay over time — typically up to 72 months. Interest and penalties continue to accrue during the payment period, but an installment agreement prevents the IRS from taking enforced collection action (liens, levies, wage garnishment) as long as you remain current on payments. The IRS approves the vast majority of installment agreement requests for taxpayers who owe less than $50,000 and are current on filing obligations.

Types of IRS Installment Agreements

Eligibility Requirements

To qualify for any IRS installment agreement, you must be current on all filing obligations — all required returns must be filed, even if you cannot pay the balance due. You must also be current on any estimated tax payments if you are self-employed. The IRS will not enter into a payment plan with a taxpayer who has unfiled returns.

Interest, Penalties & Fees

Interest on unpaid IRS balances is the federal short-term rate plus 3% — currently approximately 7–8% annually. The failure-to-pay penalty is 0.5% per month (up to 25% of the unpaid balance). These charges continue to accrue during an installment agreement. The setup fee for an online installment agreement is $31 for direct debit or $130 for other payment methods. This is why KDA always evaluates whether an Offer in Compromise or penalty abatement request makes more financial sense than a long-term payment plan.

Alternatives to Payment Plans

Before committing to a payment plan, KDA evaluates three alternatives: (1) Currently Not Collectible (CNC) status — if your income does not cover basic living expenses, the IRS can temporarily suspend collection. (2) Offer in Compromise — settle your tax debt for less than the full amount if you qualify. (3) Penalty abatement — if you have a clean compliance history, the IRS will often waive the first year of failure-to-pay penalties, reducing the total balance before setting up a payment plan.

California FTB Payment Plans

The FTB offers installment agreements for California tax balances. The FTB charges 3% interest on unpaid balances plus a 0.5% monthly penalty, and the FTB will file a state tax lien if your balance exceeds $2,000 and you do not enter into a payment arrangement. KDA negotiates both IRS and FTB payment plans simultaneously when clients owe both agencies — coordinating the payment amounts to be manageable while keeping both agencies satisfied.