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What is better, setting up a payment plan with IRS or paying monthly without their plan? Why?

Robert James, 20+ years of experience in IRS matters
Answered on September 16,2023

One of the main advantages to setting up a Long-term Installment Agreement is that the Failure to Pay (FTP) penalty can be reduced from 0.5% per month to 0.25% per month, as long as you filed your return on time.

Failure to Pay Penalty

The user fee to set up a Long-term Installment Agreement is only $31 if you set it up online and select Direct Debit. Depending on how much you owe, the reduced FTP penalty might be a better savings even with the user fee.

Apply Online for a Payment Plan

You can then make additional payments using IRS Direct Pay - you would select Payment Plan as the reason once the Installment agreement is approved. There's no penalty to pay it off sooner.

The other main reason to set up a payment plan is to avoid IRS collections enforcement like levy of your bank accounts or wages. If you can pay the balance due in four months or so you probably don't have to worry about this, but it would be a good idea to set up a Short-term plan. This doesn't get you a lower FTP penalty, just gives you up to 180 days to pay what you owe.

If you have a good history of compliance for the previous three years you may qualify for First time penalty abatement. This would waive any Failure to Pay and Failure to File penalties, but you would still have to pay interest and any underestimated payment penalties. The best time to request this is after you have paid off the original tax balance due and only have penalties and interest left to pay.

Penalty Relief due to First Time Abate or Other Administrative Waiver

You won't get arrested just for owing money. There would have to be some serious tax crimes committed for the government to want to have you arrested - they have plenty of authority to get their money without resorting to arrest.

What is better, setting up a payment plan with IRS or paying monthly without their plan? Why?

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