Do you owe money to the IRS that you can’t afford to pay at once? If so, you may be able to use an installment agreement to get more time to pay your tax debt without ruining your credit or worrying about the IRS coming after you. Here’s what you’ll need to know about installment agreements to get started.

What’s an Installment Agreement?

Installment agreements are payment plans directly from the IRS. They work just like traditional loans with monthly payments and interest. Once an installment agreement is in place, the IRS will not take additional collection steps or report you to the credit bureaus as long as you comply with the terms of the agreement.

How Do I Get an Installment Agreement?

If you owe $50,000 or less ($100,000 if you can pay within 120 days), you can apply online, and approval is automatic if you meet the stated criteria. For higher amounts, you will need to apply by mail or over the phone.

When you apply, you can propose your own monthly payment amount, but the IRS typically does not approve installment agreements that won’t be repaid within 72 months.

Installment Agreements Vs. Credit Cards

Installment agreements have three costs:

• A setup fee ranging from $0 to $225 depending on your income, how you apply, and the length of your agreement.
• Late payment penalties of 0.5 percent per month still apply to your outstanding balance. They are reduced to 0.25 percent per month if you sign up for automatic payments.
• Variable interest equal to the short-term federal rate plus three percent.

Because of the setup fee, using a low-interest credit card or one with a zero percent interest offer may be cheaper than an installment agreement if you can quickly pay off the debt. If you expect to take a year or longer to pay it off, installment agreement interest is almost always less than credit card interest.

What’s the Catch?

There is no catch other than the fees, penalties and interest will cost you more than paying your tax on time. The IRS is simply trying to keep taxes from going unpaid because taxpayers are having temporarily financial difficulty.

The only thing you need to be aware of is that you must file all of your future returns and make all of your tax payments on time. Otherwise, the IRS may revoke the installment agreement and take you into collections.

Getting Started with Installment Agreements

Installment agreements are a great option for paying off tax debt at a relatively low cost. As long as you follow the agreement, you’ll be free from worry about the IRS or damaging your credit.