If I have a payment plan with the IRS, will they take my refund?

An agreement made with the IRS to pay the tax owed to them is a payment plan. These debts are to be repaid in the provided timeframe that got extended. It is also known as the Installment Agreement (IA)One can ask the IRS for a payment plan if they believe that they can pay their remaining tax in a fixed period.

However, the most significant question that comes to the back of the mind is that ‘if I have a payment plan with the IRS, will they take my refund?’ In this article, you will get all your facts cleared related to the question. 

Understanding IRS payment plans


Like loans, there will be an interest or a fee that gets charged until the debt is repaid. It is one of the most used methods to pay up the IRS. The plan varies based on the amount owed.

Let us take an example to make this easier. Assume that you owe the IRS back taxes of about $40,000. Now, you wish to pay it off in a time frame and finished with it. What you do further is agree to a $300 payment plan. This amount is to be paid every month with interest and penalties, which will tally up to 10% in a year.

This will put an extra amount of $4000 for you. That means, in one year you will be able to pay $3,600 from your $40,000 back taxes, and an extra $4,000 is paid in interest. There are terms and conditions for the payment plan:

  • If you do not own any amount of money after your living expenses, you cannot negotiate a payment plan. The best you can do is resort to a compromise by the suspension of collection activities. Either that or file for bankruptcy.
  • Also, if the debt owed in back taxes is $50,000 or less than that, then you can apply for payment plans from IRS’ official website.
  • Recently, the IRS has been making changes to this plan. It is to ensure that more people can opt for installment agreements easily. The timeline provided to pay the taxes was 60 months. Now, it got increased to 72 months. The amount set before was $25,000 and got changed to $50,000.
  • Furthermore, one should be up-to-date on their current year’s tax returns. If you have not filed for tax returns before, you are eligible to apply for an Installment Agreement.
  • Considering you are self-employed. You have to be up-to-date with your quarterly tax payments. In case, you have employees, the employee payroll deposits should get updated. Following this, you will be asked to fill the Form 941 and apply for a payment plan.

Though, the Installment Agreement has its drawbacks. Just because you have back taxes does not mean you should resort to this option.

There are a huge interest rate and penalty charge that gets imposed upon you. And it can go up to 10% a year. You could be repaying your tax debts for years and still not be done with it as the interest rate keeps on increasing the amount.

If I have a payment plan, will IRS take my refund?

The answer is yes. The first condition of the Installment Agreement is that you will not receive your refund. Instead, they will be applied to your back taxes. Meaning, if you have overpaid at some point, the money will be not be credited to you. It will be added to your payment plan schedule.

Although, if your refund is more than the total balance owed, you will receive it. That is applicable only if you do not have other tax liabilities like child support, student loans, federal non-tax, or state income, etc.

For more information, you can reach out to the IRS’ Bureau of the Fiscal Service or BFS at 800-304-3107

How can I negotiate with the IRS for the Installment Agreement?

  • First, select a plan that is ideal for you. When you have filled Form 433-A and submitted it to the collector, choose a plan.
  • The amount you will be paying to the IRS should not include your living expenses costs. Pay the smallest amount from your income. The left cash will be for other necessities.
  • Don’t offer to pay more than you can afford. Just being eligible for the payment plan is not enough. Do not make rash decisions to get your request for IA approved.
  • IRS is likely not to renegotiate after you set a promised amount. There are exceptions but making decisions that are not in your best interest isn’t counted as one.
  • Be consistent about the payment. If you are to pay $300 each month, submit it on time. In case your payment plan has not gotten approved, this is a show of good faith. The agency will be inclined to offer you an IA given your consistency.
  • It takes a few months to get the IA plan approved and you to be informed about it. In these months, keep your tax records straight. And if possible, save up beforehand for the potential payment plan. This will give you a head start and allow you to stay ahead of any late payments. You will be able to avoid any rainy day situation with this plan.

The IRS payment plan is not meant for everyone, you should apply for it after thinking it through. Choosing the right payment plan is the trick, so negotiate with the IRS. They are not unreasonable but once the plan has been approved, it may not be reset. The IRS does consider exception cases like changed financial situations etc. 

Not only that, the payment plans can be terminated if you are not regular about the payments. They give you 60 days to make the back payments with the interest increasing. Following this, the IA will be terminated, and you will not be allowed to apply for IA again. 

Even though a tax refund is seen as a bonus for the taxpayer, it is better to let it be added to the payment plan. The rising interest will make it that much more burdensome for you to pay them back taxes.