How to set up a payment plan with the IRS

In any given year, about a third to a quarter of taxpayers owe the IRS money. Depending on how much is owed and for how long, failing to pay your tax bill can result in wages being garnished, a lien being placed on your home, or even your passport being revoked.

Getting an extension will give you more time to submit the proper forms, but you're still on the hook for an estimated payment by April 15.

Fortunately, the IRS has payment plans that can help filers who come up short.

If you don't have the cash on hand, there's no getting around interest and penalties. But the IRS offers installment agreements that can help you avoid more severe consequences, like wage garnishment and asset seizure.

Short-term plan: The IRS's short-term payment plan allows taxpayers to pay their debt over 180 days. There is a failure-to-pay penalty of 0.5% per month, however, and compound interest accrues on what you owe until it reaches 25% of the total due. The maximum debt eligible for a short-term payment plan is $100,000 in combined tax, penalties and interest, although there are some high-debt plans with $250,000 ceilings.

Long-term plan: There are plans that give you up to 72 months, but they come with additional fees. And you'll still be hit with that 0.5% failure-to-pay penalty. The maximum amount for a streamlined IRS long-term payment plan is $50,000.

IRS Guaranteed Installment Agreement: Most taxpayers are eligble for this automatic-approval plan if they owe $10,000 or less. Other requirements include:

• You can pay the full balance within 36 months (3 years).
• You have filed and paid taxes for the last five years
• You haven't enrolled in another installment agreement in the past five years
• You agree to stay current on all future tax filings and payments

How to set up a payment plan with the IRS

You can set up a payment plan online via the IRS Online Payment Agreement or by or submitting IRS Form 9465. To register for automatic monthly withdrawals online, a $22 setup fee applies. If you set up direct debit over the phone, through the mail or in person, the fee is $107.

Non-direct debit payments can be made each month, as well. The setup fee is $69 online or $178 by phone, mail, or in person. (Low-income taxpayers can qualify for a $43 setup fee that may be reimbursed if certain conditions are met.)

You can typically choose your monthly payment, but you must select an amount that allows you to clear your debt within 72 months.

If you don't qualify for a payment plan, there are other options.

Offer in compromise

You can apply to the IRS for an offer in compromise (OIC), a request to settle your tax bill for less than the full amount owed. The agency considers your income, expenses and ability to pay, among other factors, and approvals are rare: According to the most recent data from the IRS, only about a third of the 36,000 OICs submitted in 2022 were accepted.

Personal loan

If you don't have great credit, a personal loan may be easier to get approved for than a 0% APR credit card. Before you apply, however, compare rates and fees with what you would pay through an IRS installment plan. (Be sure to consider how long it will take to settle your tax bill.)

Avant Personal Loans is a good option if you have poor credit since it accepts borrowers with scores as low as 580. Loans are capped at $35,000, however, and you'll have 12 to 60 months to repay the loan.

You only need a credit score of 300 to be approved by online lending platform Upstart, which offers loans of up to $50,000 and repayment terms of between 36 and 60 months.

Tax relief company

Tax relief companies work with the IRS or your state revenue department to reduce or eliminate your tax debt, arrange installment plans and stop garnishments and liens.

Community Tax offers a free initial consultation and charges an average of $295 for the investigation phase, the lowest among the tax relief companies we've reviewed. You do need to owe at least $7,500 in taxes and Community Tax doesn't operate in Minnesota or North Dakota.

Precision Tax Relief requires clients to have a tax debt of at least $10,000, but it has a 94% success rate with offers in compromise. It received an A+ rating from the Better Business Bureau and offers a free 30-day money-back guarantee.

Borrow against your home equity

If you own your house, you can use your home equity to get cash with a home equity line of credit (HELOC). The interest rates are usually lower than with a credit card or personal loan. But they typically start at $10,000, so only consider it if your tax bill is at least five figures.

Fairway Independent Mortgage Corporation ranks highly for customer satisfaction and can provide funding in as little as five days. PNC combines low rates with flexible credit requirements and has a low $100 minimum draw.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every tax article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of tax products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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