If you’re having difficulty paying your tax bill, you’re not by yourself. Many people face this challenge, and the IRS provides payment plans to make it easier. However, not everyone can qualify for these plans. The first step is to determine if you meet the eligibility requirements for an IRS installment agreement and then select the best plan that fits your financial circumstances.
This guide will walk you through the essential details, including the minimum monthly payment needed, helping you take the first step toward resolving your tax debt.
Key Insights
The IRS minimum monthly payment is generally calculated by dividing your total tax debt by 72, unless you choose a different payment amount.
There are both short-term and long-term payment options based on your debt level and eligibility.
Opting for a direct debit payment plan online is the most affordable choice, as it helps reduce fees.
The IRS adjusts interest rates on unpaid balances every quarter, which can lead to higher repayment amounts over time.
What Is the Lowest Monthly Payment the IRS Will Approve?
When applying for a long-term payment plan, the IRS will determine your minimum monthly payment based on the amount of debt you owe.
The IRS will ask how much you can afford to pay each month. While you can choose your monthly payment, if you allow the IRS to decide, the minimum monthly payment is generally calculated by dividing your total debt by 72 months (6 years), unless you request a higher payment amount.
For example, if you owe $36,000, the minimum monthly payment would be $500 ($36,000 ÷ 72 months). Keep in mind that you can opt to pay more if you are able to, which could help reduce your total repayment period and minimize interest and penalties over time.
Understanding IRS Payment Plan Fees
The cost of setting up an IRS payment plan varies depending on your application method and whether you qualify for fee reductions. It’s important to check all available fees. For short-term payment plans, there is no setup fee, and low-income taxpayers may be eligible for discounted fees.
Short-term Payment Plan Setup Fee:
If you apply online, by phone, by mail, or in person, the setup fee is $0.
Long-term Payment Plan Setup Fee:
If you opt for direct debit payments:
- Apply online: The fee is $31.
- Apply by phone, by mail, or in person: The fee is $107.
If you choose Direct Pay, EFTPS, or other payment methods:
- Apply online: The fee is $130.
- Apply by phone, by mail, or in person: The fee is $225.
For low-income taxpayers, the setup fee is $43. These fees are intended to cover the processing costs of your installment agreement, with potential reductions based on your financial situation.
How the IRS Charges Interest and Penalties on Outstanding Taxes
The IRS determines interest on unpaid taxes based on the federal short-term rate plus 3%, with daily compounding. In addition to interest, taxpayers incur a failure-to-pay penalty of 0.5% per month, which can rise to 1% per month if the payment plan is breached. Paying your tax debt sooner helps reduce these extra costs.
- Interest on Unpaid Taxes: The rate is the federal short-term rate + 3%, compounded daily. The rate is updated quarterly.
- Late Payment Penalty: A 0.5% charge per month, increasing to 1% per month if a payment plan defaults.
- Late Filing Penalty: A 5% penalty per month, with a maximum of 25% of your total tax debt. This applies if you don’t file your return on time.
- Early Payment Savings: By paying early, you can avoid penalties and reduce interest, which helps you save money over time.
The sooner you settle your tax debt, the more you minimize the extra costs associated with interest and penalties, making the process more manageable.
What Are the Consequences of Not Paying Your Taxes On Time?
If you fail to pay your taxes on time, the IRS will impose interest charges and a monthly late payment penalty on your outstanding balance after the payment deadline. Additionally, there is a penalty for not filing your tax return, even if you cannot fully pay the amount due. It’s important to file your return on time, even if you can’t make the full payment, as this can help minimize further penalties.
Understanding the IRS Payment Plan
An IRS payment plan is an agreement that enables you to pay off your tax liabilities over time. You are required to settle your balance within the designated period. These payment plans make it more feasible for taxpayers to manage their tax obligations. However, if you fail to keep up with your payments, you may still face penalties, such as tax liens, garnishments, or other collection measures.
If your financial situation doesn’t qualify for an Offer in Compromise or Currently Not Collectible status, an installment plan might be the right option to consider.
Can an IRS Installment Plan Halt a Garnishment?
Yes, if you qualify, setting up an installment agreement can stop wage garnishments. Once you request a payment plan, the IRS will review your request. During this review period, the IRS cannot seize your assets or income, and the collection timeline may be paused or extended. However, if your request for an installment plan is denied, the collection period will be suspended for 30 days. You also have the right to appeal the rejection or termination of your agreement, and while the appeal is being processed, the collection period will be on hold until a final decision is made.
How to Determine If You Qualify for an IRS Payment Plan
If your tax debt is relatively small, the IRS may not ask for an in-depth explanation of your financial situation. However, for larger amounts owed, you will be required to provide detailed financial information and documentation. To begin the process of setting up an IRS payment agreement, there are specific eligibility requirements you must meet, including not being involved in bankruptcy proceedings, having filed all necessary tax returns, and not having any previous installment agreements in place. These criteria are important to ensure that your application is considered for approval.
Available IRS Payment Plan Options for Individuals and Businesses
The IRS offers a variety of payment plans tailored to the amount of your debt and your ability to repay it over time. These options are designed to make repaying taxes more manageable, whether you’re an individual or a business.
For Businesses:
- Long-Term Payment Plan: Businesses that owe $25,000 or less in total taxes, penalties, and interest, and have filed all required tax returns, are eligible for a long-term payment plan. This arrangement allows businesses to pay off their debt over an extended period. However, if your business owes more than $25,000, you will need to arrange for direct debit payments as part of the qualification process. Direct debit payments help ensure that payments are made on time, and this may be a necessary requirement to qualify for the plan.
For Individuals:
- Short-Term Payment Plan: If your total tax liability, including penalties and interest, is less than $100,000, you may qualify for a short-term payment plan. This plan allows you to pay off your debt within 90 to 180 days, depending on the specific circumstances of your case. It’s a good option for those who are facing a manageable debt and need temporary relief to pay off the balance within a short period.
- Long-Term Payment Plan: For individuals who owe $50,000 or less in combined tax, penalties, and interest, the IRS offers a long-term payment plan. To qualify, you must have filed all your tax returns, and you need to be able to commit to a repayment schedule that lasts for more than 180 days. This option provides a more extended period for repayment and may be a great fit for those who need more time to clear their tax debt.
How to Apply for an IRS Payment Plan
If you qualify for either a short-term or long-term payment plan, you can easily apply online using the IRS Online Payment Agreement tool. This online platform simplifies the process, allowing you to request a payment plan quickly and conveniently from the comfort of your home. If you need help with your IRS payment plan, Tax Resolution Services of Hawaii specializes in tax debt relief and can assist you in navigating the process with ease.
However, if you are ineligible for online application or cannot apply online for other reasons, you still have options. Individuals can complete Form 9465, which is available on the IRS website, or directly contact the IRS for further assistance. For more detailed guidance on the application process and to confirm your eligibility, make sure to visit the official IRS website for the most accurate and up-to-date information.
It’s important to note that while an IRS payment plan allows you to make periodic payments toward your tax debt, it does not eliminate the obligation to pay interest and penalties. These additional charges will continue to accrue until your balance is fully paid off. The primary purpose of the payment plan is to help you settle your tax debt over time, but it’s crucial to remain aware of the ongoing interest and penalties that will be added to your total balance.
Different Types of IRS Installment Agreements
The IRS offers several installment agreements to help taxpayers manage their tax debts. The type of agreement you qualify for depends on the amount you owe and your ability to repay it. Here’s an overview of the options available:
- Guaranteed Installment Agreements: For tax debts less than $10,000 (excluding penalties and interest), you may qualify for a guaranteed installment agreement. If you meet the eligibility criteria, your plan will likely be automatically approved, and you will have three years to pay off your debt. Your total balance will be divided by 36 months to determine the minimum monthly payment. With a guaranteed installment agreement, the IRS will not place a lien on your property.
- Streamlined Installment Agreements: If your tax debt is under $100,000 (including penalties and interest), a streamlined installment agreement may be available to you. This plan gives you up to 72 months (6 years) to pay your debt, though in some cases, the term can extend to 84 months. The minimum monthly payment is calculated by dividing your total debt by 72 months. As with guaranteed agreements, the IRS will not place a lien on your property unless you owe more than $50,000. For debts exceeding $50,000, direct debit payments or payroll deductions are required to avoid a lien.
- Non-Streamlined Installment Agreements: If you owe more than $100,000 or more than $50,000 without opting for direct debit or payroll deductions, you may qualify for a non-streamlined installment agreement. This type of agreement cannot be automatically approved, and the IRS may place a lien to secure its claim.
- Partial Payment Installment Agreements: If you cannot pay off your debt within the terms of the other agreements, a partial payment installment agreement might be an option. You must negotiate this plan with the IRS, and it will involve periodic reviews. The IRS may place a lien on your property and reassess your case every two years.
Each type of agreement comes with specific terms, and choosing the right one depends on your unique financial situation.
How Much Interest Will You Pay on IRS Payment Plans?
When you have an outstanding balance with the IRS, they will charge interest on your account until the debt is fully paid. Even if you’re on an IRS payment plan, this interest continues to accumulate. The IRS adjusts the interest rate quarterly based on the federal funds rate, which is determined in the first month of each quarter. While this process might seem a bit complex, it’s important to understand that the interest rate is subject to change every few months. This means the total amount you owe could increase as the interest rate fluctuates. It’s a good idea to regularly check the IRS updates to stay informed about any changes to the interest rate that may affect your repayment.
New IRS Policies for 2025 That Could Affect Your Tax Debt
- Increased Standard Deductions The IRS has raised the standard deduction for 2025 to account for inflation. Here are the updated amounts:
- Single filers and married individuals filing separately: $15,000 (up from $14,600)
- Married couples filing jointly: $30,000 (up from $29,200)
- Heads of household: $22,500 (up from $21,900)
These higher deductions could affect your eligibility for IRS payment plans or installment agreements by adjusting your taxable income.
- Revised Tax Brackets Income thresholds for tax brackets have been adjusted to reflect inflation. For 2025:
- Top tax rate (37%): Applies to incomes exceeding $626,350 for individuals and $751,600 for married couples filing jointly.
These updates could influence your eligibility for IRS payment plans by adjusting your overall taxable income, possibly qualifying you for a different payment plan structure.
- Increased Retirement Contribution Limits For 2025, the 401(k) contribution limit is raised to $23,500, while IRA contributions remain capped at $7,000. Workers aged 60–63 can make additional catch-up contributions of $11,250 to their 401(k) plans. Although not directly related to payment plans, these updates could impact your overall financial situation and help with managing installment agreements by freeing up funds for tax debt repayment.
- Higher Flexible Spending Accounts (FSAs) Limits Healthcare FSA contribution limits are increasing to $3,300 for 2025. This could help taxpayers allocate more pre-tax funds toward medical expenses, thereby freeing up additional income to make payments on IRS debt.
- Expanded Earned Income Tax Credit (EITC) For 2025, the maximum EITC is increased to $8,046 for taxpayers with three or more qualifying children. This boost in the EITC could provide more financial resources for low-income taxpayers, making it easier to meet the terms of an IRS payment plan.
These changes reflect the IRS’s response to inflation and could have a significant impact on how taxpayers manage their tax debts in 2025. Be sure to keep track of these updates as you navigate your own IRS payment plan options.
Conclusion
If you’re struggling with tax debt, knowing your payment options is the first step toward relief. The IRS offers various plans, like installment agreements, to help you settle your obligations. While the minimum monthly payment is often based on dividing your debt by 72 months, there are other factors that can affect your payment, including interest rates and penalties. By opting for a payment plan, you can stop collection efforts such as wage garnishments and liens. Understanding these details and choosing the best payment method for your situation will not only make it easier to manage your debt but also help you save on additional costs.
At Tax Resolution Services of Hawaii, we can guide you through every step of the process to ensure you find the solution that fits your financial situation and takes advantage of available programs like the IRS Fresh Start Program. Don’t let tax debt weigh you down—take the first step toward tax relief today.
FAQs
What’s the minimum monthly payment the IRS will accept?
Is it possible to reduce what I owe to the IRS?
Yes, through an Offer in Compromise, which is available if you can demonstrate financial hardship or an inability to pay in full.
The IRS typically calculates the minimum monthly payment by dividing your total tax debt by 72 months (6 years), but you can request a higher payment if you’re able.
What happens if I don’t pay my taxes on time?
Failing to pay your taxes on time will result in interest charges, penalties, and the potential for wage garnishments or liens. It’s important to address the issue as soon as possible.
What is the IRS Fresh Start Program and how can it assist with payment plans?
This program makes it easier to qualify for payment plans and lowers setup fees for taxpayers with low income.
What happens if the IRS rejects my payment?
You can adjust your payment proposal and submit it again or get assistance from a tax expert.
Users Also Say
Can I set up an installment plan if I owe $6,000 in taxes this year?
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Yes, you can pay your $6,000 tax bill in installments.
- File on Time: First, make sure to file your complete and correct return by the April 15th deadline. Pay as much as you can comfortably afford by then to reduce your balance.
- Wait for Notice: After e-filing, you will receive a notice in mid-May from the IRS, demanding full payment.
- Set Up Installment Agreement: With this notice, you can access the Online Payment Agreement tool on IRS.gov to set up your Installment Agreement.
- Monthly Payment Amount: If the notice shows a balance of $6,000, your monthly minimum payment would be approximately $85.
This method allows you to spread out your tax payments while avoiding more severe penalties.
How is the monthly payment amount for an IRS installment plan determined?
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The minimum payment is calculated by dividing the total amount you owe by 72 months. You can make extra payments toward the balance whenever you like.
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They take into account your income, allowable expenses, total amount owed, and how long it will take to repay the debt. You can propose a specific payment amount that will pay off the balance within 6 years, and they’ll agree to it.
