Legacy Law Blog

Part 1 of a 2-Part Series

In an earlier blog post, we discussed options available to taxpayers facing a tax balance with either the Internal Revenue Service (IRS) or one of the states. Knowing which of these options is the best for you and your specific circumstances can be very difficult.

The result is that many taxpayers are left unsure of where to start when attempting to sort through which option is right for them.

This two-part series will describe in detail the two most common collection alternatives used by the IRS and the states to permanently resolve a taxpayer's outstanding tax liabilities. This post reviews installment agreements and the various types available to allow taxpayers to pay down their tax liabilities over time.

What is an Installment Agreement?

An installment agreement (IA) is a formal payment plan between you and the IRS (or state tax agency) that lets you pay your tax debt in monthly installments. Think of it as similar to a car loan or credit card. You have a set balance, a fixed monthly payment and a defined timeline to pay off your debt. This structure allows you to budget more effectively and avoid the stress of paying your entire tax bill at once.

What is the Process for Establishing an Installment Agreement?

The IRS and state tax authorities establish an IA with two main goals in mind that are balanced to arrive at an agreement that works for everyone. The first is that the IRS and state are in the business of collecting as much tax revenue as is possible from taxpayers.  

Statistics show that many taxpayers will not make all the payments necessary to complete an installment agreement. For this reason, the IRS and states generally front-load an IA to collect as much money as possible at the beginning of the agreement.

The second goal is to tailor the IA to the taxpayer’s actual ability to make the monthly payments. If the monthly payment is too high, the IRS and state know that the taxpayer is at an elevated risk of defaulting on the IA and the IRS may never collect the tax balance.

To accomplish the goal of an appropriately sized payment, the IRS and state can require the taxpayer to submit information outlining their monthly income and expenses. This information will be used to determine a reasonable IA payment that the taxpayer can afford.

For example, a taxpayer has monthly income of $4,000 and monthly expenses of $3,500. The taxing authorities will subtract the monthly expenses from monthly income to arrive at the amount available to contribute towards a monthly IA payment, which in this example is $500 per month.  

Once a payment amount is agreed upon, the IRS or state will prepare a written agreement that outlines the terms of the IA. The forms needed to establish the IA are relatively straightforward. They contain the taxpayer’s information, the tax years and balances that are covered by the agreement, and the dates of the first and last payments. Depending on the type of IA, the IRS or state may also require that the taxpayer consent to allowing the payments to be automatically withdrawn from their bank account. 

Once the IA is established, the taxpayer must remain in compliance by filing their returns and paying their taxes on time. Provided that there are no compliance issues, the IRS or state are generally content to collect the negotiated payments until the tax debt is resolved.

What are the Different Types of Installment Agreements?

Depending on the taxpayer’s goals, the amount of the tax owed and the time remaining for the IRS or state to collect the debt, there are several IA options available. Each has different advantages and disadvantages to consider when choosing the plan that best fits the taxpayer’s goals and ability to pay.

Short Term Installment Agreement

A short-term installment agreement is an option for the taxpayer who can pay the tax debt within 180-days. This type of IA is often suitable for a taxpayer who has filed their annual income tax return and simply needs additional time to pay the tax due. Since the balance is divided into six monthly payments, the IRS does not require any financial disclosures. A short-term IA can be established simply by calling the IRS and setting it up over the phone.

Guaranteed Installment Agreement

A guaranteed IA is a payment option with unique qualification terms that are tailored to a very specific taxpayer. If the taxpayer meets these terms, acceptance of the IA by the IRS is guaranteed. A taxpayer will be able to qualify for this IA if they owe less than $10,000 and:

• Have not owed any tax or had another installment agreement in the previous five-years; and
• Agree to pay the full amount owed within three-years.

Provided that the taxpayer meets these terms, a guaranteed IA also can be established through a phone call to the IRS. Like the short-term IA, there is no need to provide any financial information to qualify for a guaranteed IA.

Streamlined Installment

There are two slightly different versions of streamlined IA available depending on whether the taxpayer is an individual or a business.

Individual Streamlined Installment Agreement

A streamlined IA Is very similar to a guaranteed IA except that the terms under which a taxpayer can qualify are more permissive. A taxpayer can qualify for an individual streamlined IA if they meet the following criteria:

• The taxpayer owes less than $50,000;
• The taxpayer has not had a back tax debt or an installment agreement in the previous five-years; and
• The taxpayer agrees to fully pay the tax liability the earliest of 72 months or before the expiration of the collection statue, which is 10-years from the date of assessment.

Like a guaranteed IA, no financial information is required to establish this type of agreement which can be accomplished by a phone call to the IRS.

Business Streamlined Installment Agreement

The business variation of a streamlined IA is available when a taxpayer owes no more than $25,000 and agrees to pay the tax debt over a 24-month period. Like the individual version, if the business meets the qualification requirements, no financial disclosures are necessary to establish the IA.

Regular Installment Agreement

When a taxpayer cannot meet the specific requirements of the previous three IA types, the IRS will require that they submit a Collection Information Statement that itemizes the taxpayer’s income and expenses.

The IRS will establish an IA based on the cash remaining at the end of the month after all allowable expenses are deducted from income. Provided that the resulting monthly payment is sufficient to fully pay the tax balance on or before the 10-year collection statute, the IRS will approve the regular IA.

The benefit of this type of IA is that if the taxpayer makes the required monthly payments and otherwise remains in tax compliance, they will never need to revisit their payment plan again.  

Conversely, if the financial health of a taxpayer ever gets worse, they can always contact the IRS or state to have their payment adjusted to reflect their new financial reality. The option to renegotiate the payment amount during challenging financial periods without the corresponding need to adjust the payment during positive financial periods is a powerful feature of a regular IA. An experienced tax practitioner can help a taxpayer navigate their current and future financial health to establish an IA that best meets their needs. 

Partial Pay Installment Agreement

A partial pay IA, or PPIA, is very similar to a regular IA in that both begin by submitting financial information to the IRS to determine the ability to make a monthly payment.

The key difference between these two IA types is that the payment for a PPIA will not be enough to fully pay the tax balance before the collection statute expires. The IRS may choose to accept a lesser amount because it prefers to collect some amount based on what the taxpayer can afford rather than to put the taxpayer in an IA that they have little chance of paying.

The IRS will revisit the taxpayer’s financial condition every 18-months or so to determine if the taxpayer’s financial condition has improved such that it can increase the monthly payment as a condition for accepting this lesser payment amount. A PPIA can be helpful to the taxpayer with a small amount of disposable income each month who does not expect that their financial situation will change.

The One Year Rule

For many taxpayers who begin a new IA, absorbing the new payment can be a shock to their monthly budget. They might benefit from additional time to adjust their monthly expenses to accommodate the new payment.

Normally, the IRS limits certain expenses based on national standards that it uses to determine what it believes are appropriate expense levels based on the region or city where a taxpayer resides. When using these national standards, the IRS will use the lesser of the national standard or the taxpayer’s actual expenses to determine the payment amount.  

To help taxpayers adjust to the new payment, the IRS will allow a taxpayer to use their actual expenses for the first year of a regular IA or PPIA. By using actual expenses, the payment for the first year is often much smaller than the normal payment that the taxpayer will pay for the remaining duration of the IA.

What’s New for 2025?

• Simple Payment Plans: The IRS introduced new "Simple Payment Plans" for individuals. These plans are easier to set up, require no financial disclosure or lien determination, and are available online or with IRS assistance. If you owe $50,000 or less and are up to date on tax filings, you likely qualify.
• Streamlined Agreement Changes: The IRS removed the 72-month cap for streamlined agreements with Revenue Officers. Now, if you owe under $50,000, you can pay over the remaining collection statute (usually up to 10 years), not just 72 months

IRS installment agreements have become more flexible and accessible in 2025, especially for individuals with balances under $50,000. Most taxpayers can now set up a payment plan online with minimal paperwork and no need for a financial disclosure.

Other Options for Settling Tax Balances

As we have seen, an IA can be a useful tool to pay an outstanding tax balance. Many are guaranteed to be accepted if the qualifying criteria are met. Other IAs can be tailored to allow for payments based on what the taxpayer can afford.  

The next part of this series will cover the second most popular collection alternative to permanently settle large tax balances with the IRS or state. This is called an Offer in Compromise.