How does an IRS installment agreement work? An IRS installment agreement allows an eligible taxpayer to pay outstanding federal taxes through periodic payments rather than paying the entire balance immediately. Once an agreement is approved, the taxpayer must comply with its payment terms and applicable tax obligations. In return, the agreement generally provides protection against new IRS levy action while it remains in effect.
However, an IRS installment agreement is not simply a matter of choosing a monthly payment. The IRS may consider the amount owed, the taxpayer’s financial circumstances, available assets, filing compliance, and the remaining period for collecting the tax.
For taxpayers with substantial IRS balances, the terms of an installment agreement can affect their finances for years.
Understanding how an IRS installment agreement works is important before committing to a long-term payment arrangement.
If you are unfamiliar with these agreements, begin with my previous article, What Is an IRS Installment Agreement?, which explains the basic purpose of an IRS payment plan and seven important facts taxpayers should understand.
How Does an IRS Installment Agreement Work in Practice?
An IRS installment agreement is an arrangement under which the Internal Revenue Service agrees to accept periodic payments toward an outstanding federal tax liability.
The agreement establishes payment obligations that the taxpayer must satisfy while also remaining compliant with applicable tax filing and payment requirements.
The process generally involves several important considerations:
- Determining the amount of federal tax owed.
- Evaluating whether the taxpayer qualifies for an available type of installment agreement.
- Determining acceptable payment terms.
- Considering the taxpayer’s financial circumstances when required.
- Evaluating existing IRS collection activity.
- Maintaining payments and future tax compliance.
Not every case requires the same level of financial review. Some taxpayers qualify for simplified payment arrangements, while others face a more detailed examination of income, expenses, assets, and collection potential.
The distinction is particularly important when the taxpayer owes a substantial amount or has already been contacted by an IRS Revenue Officer.
How Does the IRS Determine Monthly Installment Agreement Payments?
The IRS does not use one payment formula for every installment agreement.
The monthly payment depends on the type of arrangement, the outstanding balance, applicable repayment requirements, and the taxpayer’s financial circumstances.
For certain qualifying agreements, the IRS may use simplified eligibility and repayment rules without requiring the same level of financial disclosure as a more complex case.
For other agreements, the IRS may conduct a detailed financial evaluation to determine what it believes the taxpayer can afford to pay.
That evaluation can become a significant issue when the taxpayer disagrees with the IRS’s calculation of available income or financial resources.
Income and Living Expenses
In financially evaluated cases, the IRS may examine income and allowable living expenses to determine the taxpayer’s ability to make payments.
The IRS applies collection financial standards and other administrative guidelines when evaluating certain expenses.
As a result, the amount a taxpayer actually spends each month may differ from the amount the IRS recognizes for collection purposes.
This distinction can substantially affect the monthly payment the IRS expects.
Bank Accounts, Real Estate, and Other Assets
The IRS may also examine available assets, including bank accounts, real estate, investments, and other property.
Depending on the circumstances, the IRS may consider whether available equity or other financial resources could be used to satisfy some or all of the tax liability.
For taxpayers who own homes or businesses, asset-related issues may become an important part of installment agreement negotiations.
Business Income and Financial Circumstances
Self-employed taxpayers and business owners may face additional considerations because their income and expenses can fluctuate.
In some cases, the IRS may review business operations, cash flow, outstanding liabilities, and the taxpayer’s ability to maintain future tax compliance.
An installment agreement that does not account for the financial realities of a business may be difficult to maintain.
What Happens After the IRS Approves an Installment Agreement?
Once an IRS installment agreement is approved, the taxpayer becomes responsible for complying with its terms.
Generally, this means making the required payments and satisfying ongoing filing and tax payment obligations.
While the agreement remains in effect, federal law generally restricts the IRS from making new levies to collect taxes covered by the agreement, subject to applicable exceptions.
However, approval does not eliminate the underlying tax liability.
Interest generally continues to accrue, and applicable penalties may continue as well.
The IRS may also retain an existing federal tax lien or file a Notice of Federal Tax Lien when permitted by law.
An approved installment agreement can provide collection protection, but it does not necessarily resolve every consequence of unpaid federal taxes.
Does an IRS Installment Agreement Stop IRS Collection Actions?
One of the principal benefits of an installment agreement is the protection it can provide against certain IRS enforcement actions.
Under Internal Revenue Code Section 6331(k), the IRS generally may not levy to collect taxes covered by an installment agreement while that agreement is in effect.
Certain restrictions also apply during the consideration of qualifying installment agreement requests and specified appeal periods.
However, these protections are subject to statutory conditions and exceptions.
IRS Bank Levies
An installment agreement may help prevent future bank levies while the agreement remains in effect.
However, approval of an installment agreement does not automatically reverse a bank levy that has already occurred.
Existing levies and requests for release involve separate legal considerations.
Learn more about IRS bank levy representation.
IRS Wage Levies
An installment agreement may also restrict new IRS wage levy action while the arrangement remains in effect.
However, an existing wage levy may require separate action or evaluation.
The status of collection enforcement when the agreement is approved can therefore be important.
Federal Tax Liens
An installment agreement does not automatically remove a federal tax lien.
The IRS may retain an existing lien or file a public Notice of Federal Tax Lien when permitted under applicable law.
For taxpayers who own real estate or business assets, this distinction can have significant consequences.
Does Interest Continue During an IRS Installment Agreement?
Yes. Interest generally continues to accrue on unpaid federal taxes during an IRS installment agreement.
Applicable penalties may also continue, although certain taxpayers may qualify for a reduced failure-to-pay penalty rate while an installment agreement is in effect.
Consequently, the outstanding balance may not decrease as quickly as the taxpayer expects.
Over a lengthy repayment period, interest and penalties can significantly affect the total amount paid.
This is one reason the monthly payment should be evaluated in the context of the entire liability and expected repayment period.
How Long Does an IRS Installment Agreement Last?
The duration of an IRS installment agreement depends on the type of arrangement, the balance owed, payment terms, and applicable collection deadlines.
Under Internal Revenue Code Section 6502, the IRS generally has 10 years from the date of assessment to collect a federal tax liability, subject to applicable suspensions and extensions.
This period is commonly referred to as the Collection Statute Expiration Date, or CSED.
Some installment agreements are designed to fully satisfy the liability within the applicable repayment period.
Other arrangements may permit payments that do not fully satisfy the balance before the IRS’s collection period expires.
The remaining collection period can therefore be a significant factor in determining the appropriate resolution.
What Is a Partial Payment Installment Agreement?
A Partial Payment Installment Agreement is an arrangement under which the IRS accepts payments even though those payments are not expected to fully satisfy the outstanding tax liability before the applicable collection period expires.
These arrangements may be available when the taxpayer has some ability to pay but cannot fully satisfy the liability within the remaining collection period.
Partial payment agreements generally require financial evaluation and may be subject to periodic review.
If the taxpayer’s financial circumstances improve, the IRS may seek to modify the payment terms.
A Partial Payment Installment Agreement does not immediately forgive the unpaid tax balance.
Instead, it provides a collection arrangement based on the taxpayer’s financial circumstances and the applicable collection rules.
What Happens if You Miss an IRS Installment Agreement Payment?
An IRS installment agreement can default when the taxpayer fails to comply with its terms or other applicable requirements.
Potential problems include:
- Missing required installment payments.
- Failing to file required tax returns.
- Incurring new unpaid tax liabilities.
- Failing to provide requested financial information when required.
- Failing to comply with other applicable agreement conditions.
When an agreement is in default, the IRS may issue a notice proposing to terminate it.
For example, IRS Notice CP523 commonly concerns proposed installment agreement termination.
Taxpayers may have applicable notice and appeal rights, but those rights do not guarantee that an agreement will remain in effect.
Once an agreement is terminated and applicable restrictions expire, the IRS may resume collection enforcement.
A monthly payment that is not financially sustainable can create the risk of renewed IRS collection action.
Can the IRS Change an Existing Installment Agreement?
Depending on the circumstances, an IRS installment agreement may be modified.
Changes in income, expenses, financial condition, or compliance may affect the terms of an arrangement.
Some agreements, particularly Partial Payment Installment Agreements, may involve periodic financial reviews.
The IRS may also consider modification or termination when applicable statutory or administrative requirements are met.
For taxpayers with fluctuating income or significant changes in financial circumstances, the possibility of modification is an important consideration.
How Do IRS Installment Agreements Work for Business Owners?
Business installment agreements can involve additional considerations, particularly when the liability includes unpaid employment taxes.
Businesses are generally expected to remain compliant with current federal tax filing and deposit obligations.
Unpaid payroll taxes can create significant collection concerns because certain amounts withheld from employees are held in trust for the United States.
Depending on the circumstances, the IRS may investigate whether individuals associated with the business should be assessed the Trust Fund Recovery Penalty under Internal Revenue Code Section 6672.
A business installment agreement does not necessarily eliminate potential personal liability for unpaid trust fund taxes.
Learn more about IRS Trust Fund Recovery Penalty representation.
What if an IRS Revenue Officer Is Assigned to the Case?
Some IRS collection cases are assigned to Revenue Officers, particularly when the liability is substantial, involves business employment taxes, or presents complicated collection issues.
A Revenue Officer may investigate the taxpayer’s financial circumstances, request information, evaluate collection alternatives, and pursue enforcement when authorized.
In these cases, installment agreement negotiations may involve a more detailed review of financial information and available assets.
The IRS may also consider whether the taxpayer has complied with filing and current payment obligations.
For taxpayers already facing Revenue Officer enforcement, the timing and terms of a proposed installment agreement can be particularly important.
Is an IRS Installment Agreement Always the Best Tax Resolution?
Not necessarily.
Although an installment agreement may provide a practical way to address outstanding federal taxes, it is not the appropriate resolution for every taxpayer.
Depending on the circumstances, other options may warrant consideration, including:
- Partial Payment Installment Agreements.
- Currently Not Collectible status.
- Offers in Compromise.
- Penalty abatement.
- Challenges to disputed tax liabilities.
- Other available administrative or collection remedies.
These alternatives have different eligibility requirements and consequences.
The appropriate strategy depends on the tax liability, the taxpayer’s financial circumstances, collection status, and applicable law.
Learn more about the available options on my IRS Tax Relief service page.
Do You Need a Tax Attorney to Negotiate an IRS Installment Agreement?
Not every installment agreement requires legal representation.
However, representation may be particularly valuable when the case involves substantial tax debt, existing collection enforcement, complicated finances, or potential personal liability for business taxes.
Examples include:
- IRS balances involving multiple tax years.
- Large federal tax liabilities.
- Bank levies or wage levies.
- Federal tax liens affecting property.
- IRS Revenue Officer investigations.
- Unpaid business payroll taxes.
- Potential Trust Fund Recovery Penalty assessments.
- Disputes concerning allowable expenses or ability to pay.
- Prior installment agreement defaults.
- Financial circumstances that make the proposed payments difficult to sustain.
In these situations, the legal and financial consequences of the arrangement may extend well beyond the monthly payment amount.
How GMD Tax Law Helps With IRS Installment Agreements
GMD Tax Law represents individuals and business owners facing federal tax collection problems, including matters involving installment agreements and substantial unpaid tax liabilities.
I am Gregory M. Dzialo, Esq., LL.M. in Tax, and I work directly with clients to evaluate their IRS liabilities and available resolution options.
My representation may include:
- Reviewing IRS account balances, tax periods, and collection status.
- Evaluating existing or threatened collection enforcement.
- Analyzing financial circumstances relevant to payment terms.
- Communicating directly with IRS collection personnel and Revenue Officers.
- Evaluating appropriate installment agreement arrangements.
- Considering other collection alternatives when warranted.
- Addressing related filing and compliance issues within the scope of representation.
Clients work directly with me rather than a sales representative or non-attorney case manager.
For information about representation, visit my IRS Installment Agreement Attorney service page.
Frequently Asked Questions About How IRS Installment Agreements Work
How does an IRS installment agreement work?
An IRS installment agreement permits an eligible taxpayer to pay outstanding federal taxes through periodic payments under approved terms. The taxpayer must maintain required payments and applicable tax compliance.
How does the IRS calculate installment agreement payments?
The payment amount depends on the type of agreement, outstanding liability, repayment requirements, and financial circumstances. Some agreements involve simplified eligibility rules, while others require detailed financial analysis.
Does an IRS installment agreement stop collections?
An approved agreement generally restricts new IRS levy action for the taxes covered while the agreement remains in effect, subject to applicable exceptions. It does not automatically eliminate existing liens or reverse completed levies.
Does an IRS installment agreement stop penalties and interest?
No. Interest generally continues to accrue, and applicable penalties may continue, although certain penalty rates may be reduced during qualifying agreements.
Can the IRS terminate an installment agreement?
Yes. The IRS may terminate an agreement when applicable statutory or agreement requirements are not satisfied, subject to relevant notice and appeal protections.
Can an IRS installment agreement be changed?
Depending on the circumstances, an agreement may be modified. Changes in financial condition, compliance, or other relevant factors may affect the terms.
Can a business obtain an IRS installment agreement?
Potentially, yes. Businesses may qualify for installment agreements, although employment tax liabilities and current deposit compliance can create additional considerations.
Can an installment agreement last until the IRS collection statute expires?
In some cases, a Partial Payment Installment Agreement may involve payments that do not fully satisfy the liability before the applicable collection period expires. Eligibility depends on the taxpayer’s circumstances and IRS requirements.
Get Help With an IRS Installment Agreement
An IRS installment agreement can provide an important way to address unpaid federal taxes, but the terms of the arrangement can affect your finances and exposure to collection enforcement for years.
For taxpayers facing substantial tax debt, IRS levies, Revenue Officer investigations, or business payroll tax problems, the appropriate resolution requires careful consideration of the full circumstances.
GMD Tax Law provides direct attorney representation for individuals and business owners dealing with IRS installment agreements and other federal tax collection matters.
Contact GMD Tax Law to discuss your IRS installment agreement options.
Call 617-237-6347.
