IRS Payment Plans: An Inside Look at the Hidden Downsides

An IRS payment plan is typically a taxpayer’s first move when they owe back taxes.

On the surface, it appears straightforward: enter a plan, pay each month, and, over time, chip away at the debt.

It’s not that simple.

The details are in the fine print and taxpayers need to think through what type of payment plan is most favorable to them. Not only that, they need to think about the downsides.

Today, we’re exploring IRS Installment Agreements and their downsides, as well as practical steps you can take to help your clients navigate their payment plans successfully.

Three Downsides of an IRS Installment Agreement

1. The IRS Still May File a Lien

Resolving tax debt through an installment agreement does protect taxpayers against enforced collection action from the IRS, including bank levies, seizures, and wage garnishments.

However, the IRS can still file a tax lien even with a payment plan in place when you don’t know the rules.

Streamlined installment agreements require you to pay the full balance within six years or before the collection?statute of limitations?expires, whichever is sooner.

If the balance is less than $50,000, or you can pay the balance down to less than $50,000 and then establish a streamlined installment agreement, you can avoid a lien.

When you owe less than $25,000 and you enter into a streamlined installment agreement, a lien will never be filed. However, if you owe from $25,000 to $50,000, you can prevent a lien only if you agree to a streamlined installment agreement AND set up a Direct Debit Installment Agreement, where payments are taken directly from your bank account or paycheck.

On the flip side, if you owe more than $50k and you enter into an installment agreement, a lien will be filed even if you pay off the balance owed over 6 years with the streamlined.

When they can’t pay taxes owed to the IRS, taxpayers need to understand the IRS rules regarding Installment Agreements to avoid a tax lien.

2. You Cannot Incur Additional Debts or Miss Filing a Tax Return

One of the greatest misunderstandings about IRS payment plans is the idea that once they’re set up, clients are in the clear.

In reality, the IRS requires strict compliance with ongoing tax obligations.

When your client is in a payment plan, the IRS expects any new taxes owed to be paid in full on top of their existing payment plan.

Any new tax liability—even from an honest underpayment or unexpected income tax—will immediately default the agreement in place.

By helping clients understand these requirements and plan accordingly, you position yourself as a proactive advisor who sees the full scope of the issue.

3. High Penalties and Interest Rates Cause Debt to Balloon

Penalties: There’s two types of penalties: late filing and late payment.

1. Late-Payment Penalty: When you file a tax return late, the IRS adds a penalty of 0.5% per month on the unpaid taxes. This penalty continues up to a maximum of 25% of the total tax owed.

For example, on a $10,000 debt, that’s an additional $50 per month, with the potential to add up to $2,500 in penalties over time.

2. Late-Filing Penalty: If you miss the tax return filing deadline, the IRS also applies a late-filing penalty, which is much steeper—5% of the unpaid tax per month up to 25%.

Interest: Additionally, interest compounds daily on the taxes owed.

It’s based on the federal short-term rate plus 3%, which means it can change year to year.

A couple of years ago, the rate was around 5% but because interest rates increased, taxpayers today are now looking at an interest rate of around 8%.

Action Steps to Support Clients Facing IRS Payment Plans

Now that we’ve covered where problems arise with IRS payment plans, there are some proactive steps you can recommend to clients who are considering or are already in an installment agreement:

1. Make Sure Clients Understand the Details

Liens may still be filed and interest and penalties will accrue.

Are they aware of the downsides of entering into an Installment Agreement?

2. Plan for Future Compliance

Advise clients that entering an IRS payment plan means committing to stay current on all future tax obligations.

Suggest setting aside funds or even making quarterly payments to avoid falling behind on new tax obligations while in a payment plan.

3. Recommend an Experienced Guide

If clients are dealing with significant debt or fluctuating income, recommend they seek support from a professional well-versed in tax debt resolution.

Having someone who understands the regulations that guide IRS agreements can help clients avoid the pitfalls of IRS payment plans.

So, while an IRS payment plan can ease immediate financial pressure, it comes with significant downsides, including (potentially) a federal tax lien, a strict requirement that they do not incur further tax debt or miss filing a tax return, and added interest and penalties that make the debt more expensive over time.

TL;DR: The Downsides of IRS Payment plans and How You Can Support Your Clients

• The IRS still may file a tax lien even when you enter into an Installment Agreement, unless you know the IRS rules and regulations.
• Clients must remain compliant with ongoing tax obligations, or their payment plan will default.
• Penalties and interest can add up quickly, creating a much higher final debt than anticipated.
• Encourage clients to perform a full financial review before entering an IRS agreement to prevent overcommitment.
• Advise clients to prepare for future compliance and potential new tax liabilities that could jeopardize the agreement.

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Have you seen clients struggle with IRS payment plans, whether it be the IRS filing a lien, compliance issues, or penalties and interest that brought the amount owed to a ridiculous amount?

Drop a comment below with your thoughts and experiences—let’s work together to make navigating tax debt a little easier for our clients.