IRS Installment Agreements: Payment Plans for Small Businesses That Owe Back Taxes

IRS payment plan options:

1. Short-term payment plan (120 days or less):

• Available for balances under $100,000 (including penalties and interest)
• No user fee
• No financial disclosure required
• Apply online at IRS.gov/payments or by phone
• Interest and penalties continue to accrue
• Best for: businesses that can pay within 4 months but need time to gather funds

2. Guaranteed installment agreement (individuals only):

• Balance owed: $10,000 or less (excluding interest and penalties)
• Must be payable within 3 years
• No financial disclosure required
• The IRS must grant this if: all returns are filed, no installment agreement in the prior 5 years, and the taxpayer agrees to timely compliance going forward

4. Streamlined installment agreement (individual):

• For individual tax debt (including Schedule C / S-Corp passthrough) of $50,000 or less
• No financial disclosure required (no Form 433)
• Monthly payments spread over up to 72 months
• Apply online using the IRS Online Payment Agreement tool
• Setup fee: $31 (direct debit), $130 (non-direct-debit online), $225 (phone/mail)
• Low-income taxpayers: fee waived or reduced
• Direct debit (auto-pay) is required if the balance is between $25,001 and $50,000
• The IRS will not file a federal tax lien if the balance is $25,000 or less and the taxpayer sets up direct debit

5. Streamlined installment agreement (business):

• For business tax debt (Form 941, Form 940, Form 1120) of $25,000 or less
• No financial disclosure required
• Monthly payments over up to 24 months
• The balance must be paid within the collection statute (typically 10 years from assessment)
• The business must be current on all filing requirements

6. Non-streamlined installment agreement:

• For balances exceeding the streamlined thresholds
• Requires financial disclosure: Form 433-B (Collection Information Statement for Businesses) or Form 433-A (for individuals)
• The IRS reviews the business’s assets, income, and expenses to determine the monthly payment amount
• The payment is generally based on the business’s disposable income (income minus allowable expenses)
• The IRS uses national and local expense standards for housing, transportation, and living expenses (not actual expenses, unless the taxpayer can demonstrate higher expenses are necessary)

7. Partial pay installment agreement (PPIA):

• Available when the full balance cannot be paid before the collection statute expires
• The IRS accepts monthly payments that will not fully satisfy the debt
• Requires Form 433-B/433-A and proof that the business cannot pay in full
• The IRS reviews the agreement every 2 years to determine if the taxpayer’s financial situation has improved
• Interest and penalties continue to accrue on the unpaid balance

8. Offer in Compromise (OIC):

• The IRS agrees to accept less than the full amount owed
• Three grounds: doubt as to liability, doubt as to collectability, or effective tax administration
• Most common: doubt as to collectability (the taxpayer cannot pay the full amount within the collection period)
• The offer amount is based on: reasonable collection potential (RCP) = equity in assets + future income (monthly disposable income x 12 for lump sum, x 24 for periodic payment)
• Application fee: $205 (waived for low-income)
• 20% down payment required with the application (lump sum offer)
• Processing time: 12-24 months
• All tax returns must be filed and current-year estimated payments must be current
• Acceptance rate: approximately 30-40% of offers submitted

9. Currently Not Collectible (CNC):

• The IRS suspends collection because the taxpayer cannot pay basic living expenses AND the tax debt
• The debt remains and interest accrues, but the IRS takes no collection action
• The 10-year collection statute continues to run, and the balance may expire when the statute lapses
• Requires financial disclosure (Form 433-A or 433-B)

Trust Fund Recovery Penalty warning (payroll tax debt): Payroll tax debt (Form 941) includes a trust fund component (employee withholding). If the business cannot pay, the IRS can assess the Trust Fund Recovery Penalty (IRC 6672) against the responsible person (owner, officer, bookkeeper) personally. An installment agreement on the business’s payroll tax prevents the IRS from pursuing TFRP while the agreement is active, but if the business defaults, the TFRP becomes the next enforcement step.

Beware of “OIC mills”: Some firms promise to settle tax debt for “pennies on the dollar,” charge $5,000 to $15,000 upfront, file an OIC that the IRS rejects, and the taxpayer is out the fee with no resolution. A qualified CPA or tax attorney can evaluate OIC eligibility before incurring the cost.