No one wants to owe extra money to the IRS at all. But if you owe less than $25,000 to the IRS, there are structured ways to handle your debt without sinking deeper into financial stress. One of the most common methods is through an installment agreement (IA), which allows taxpayers to make manageable monthly payments rather than paying the full amount upfront.
Below, wwe’ll explore how these agreements work, the types of plans available, and the benefits of using this option to manage your IRS debt. We’ll also examine recent data and insights to provide a clear picture of what to expect when dealing with IRS installment agreements for debts under $25,000.
What is an IRS installment agreement?
An installment agreement with the IRS is essentially a payment plan that allows you to pay your debt over time, often with a small interest charge and potential penalties. For individuals with debts under $25,000, this type of agreement can be a lifeline for avoiding more aggressive IRS collection tactics like wage garnishment or asset seizure.
In 2023 alone, over 2.7 million installment agreements were established between the IRS and taxpayers. $14.4 billion was paid back via installment during the same year.
The IRS offers different types of installment agreements depending on your financial situation. A short-term installment agreement is the most likely option if you can settle the tax debt within 180 days. You are not required to provide any financial disclosure, and it can be arranged simply by calling the IRS and setting everything up over the phone.
For debts under $25,000, a streamlined agreement is usually the most straightforward option. This agreement requires minimal paperwork, and as long as you stay compliant with the agreed-upon terms, this payment plan allows you to avoid immediate collection efforts.
An installment agreement with the IRS is essentially a payment plan that allows you to pay your debt over time, often with a small interest charge and potential penalties. For individuals with debts under $25,000, this type of agreement can be a lifeline for avoiding more aggressive IRS collection tactics like wage garnishment or asset seizure.
The benefits of an installment agreement
Opting for an IRS installment agreement offers several advantages, especially if your debt is below the $25,000 threshold. Firstly, it helps you avoid more aggressive IRS collection efforts, including severe penalties like tax liens or asset seizures, which can heavily impact your financial future.
Another significant benefit is that the monthly payments can be tailored to your budget, ensuring you’re not overburdened financially. The IRS considers your monthly income and expenses when determining a payment plan. If you have a low monthly income, your payments can be spread out over a longer period, making it easier to stay on top of your obligations.
Additionally, under the streamlined option for debts under $25,000, you may not be required to submit extensive financial documentation, such as bank statements or a detailed breakdown of expenses. This streamlined process simplifies the application and approval process, making it an attractive option for many.
Types of IRS installment agreements
There are different types of IRS installment agreements, but for debts under $25,000, the most relevant are the “Streamlined Installment Agreement” and the “Guaranteed Installment Agreement.”
- Streamlined Installment Agreement. A taxpayer can generally qualify for this IA if they owe less than $50,000. In order to qualify, you cannot owe any other tax or have had another installment agreement in the previous five years. The agreement can be arranged over the phone, and usually involves fixed monthly payments over a period of up to 72 months.
- Guaranteed Installment Agreement. If your debt is under $10,000, you may qualify for a guaranteed installment agreement, provided you meet certain criteria, such as having filed all previous tax returns and not having an installment agreement in the past five years. It also provides some additional benefits, such as avoiding a federal tax lien.
- Regular Installment Agreement. When other IA types are unsuitable, the IRS will ask the taxpayer to submit a Collection Information Statement that itemizes their income and expenses. They will propose an IA based on the cash remaining at the end of the month after all allowable expenses have been deducted from income.
No matter whichever IA type you agree to, staying current on your payments and filing future taxes on time is critical. Failing to meet these requirements can result in the cancellation of your agreement and the reinstatement of aggressive collection methods.
How to apply for an installment agreement
Applying for an installment agreement has become easier, especially with the rise of online services. The IRS offers an Online Payment Agreement system, which allows taxpayers to apply for an installment plan without having to fill out complicated paperwork.
To apply, you’ll need to provide basic information, including your Social Security number, current income, and tax-filing status. The website guides you through the process, and allows you to select a payment amount and a start date for your payments.
It’s important to remember that interest and penalties will continue to accrue until the debt is paid off in full, so make an effort to pay as much as you can each month to reduce the overall balance faster.
Key considerations and potential pitfalls
While an IRS installment agreement can provide relief, there are some important factors to consider. Firstly, according to the IRS, the interest rate on unpaid tax debt was 7% as of 2024. While an installment agreement allows you to avoid immediate collection actions, it’s not a cost-free solution.
Secondly, missing a payment can lead to the termination of your agreement. If your agreement is revoked, the IRS might send out a CP523 notice and exact more aggressive collection methods, including wage garnishment, bank levies, or tax liens. That’s why it’s crucial to maintain regular payments and stay up to date with your current tax obligations.
Lastly, if your financial situation improves, it’s worth considering paying off your IRS debt faster to avoid further interest and penalties. The sooner you can eliminate your tax liability, the sooner you’ll regain full financial control.
Installment agreements can provide ultimate flexibility
The good news is that you are almost guaranteed to be accepted onto some form of IA if the qualifying criteria are met. It’s a practical way to pay off your debt over time while avoiding aggressive collection tactics. You can manage your IRS debt effectively when you review the types of installment agreements available, and recognize the importance of staying current on payments.