You can owe the IRS and still sleep. You just have to ask

Figures relate to tax year 2025-26 (UK) · 2025 (US)

A streamlined filing or a late return sometimes produces a number nobody budgeted for. Several years of tax, interest on top, and a demand with a date on it.

The instinct is to panic or to ignore it. Both are worse than the third option, which is to ask for time.

An IRS payment plan is an ordinary administrative arrangement, not a confession of failure. The IRS grants most requests under the common thresholds automatically, and living in Britain does not stop you applying.

Key takeaways

• Short term extensions of up to 180 days carry no setup fee.
• Longer instalment agreements run up to 72 months.
• Owing under $50,000 usually means automatic approval.
• Interest and penalties continue while you pay.
• The late payment penalty halves once a plan is live.
• A US bank account makes direct debit far simpler.
• Filing on time matters more than paying on time.

What is an IRS payment plan?

An agreement to settle a tax debt over time instead of in one payment. According to IRS guidance, the arrangements fall into short term plans lasting up to 180 days and longer instalment agreements paid monthly.

Approval is largely mechanical below certain thresholds. The system checks that you have filed everything due and that the balance sits within the limits, then grants it.

Nobody assesses your character. It is a collection arrangement rather than a favour.

What are the thresholds?

For an individual, a balance under $50,000 including penalties and interest usually qualifies for a long term plan without financial disclosure. Under $100,000 can qualify for a short term plan on the same basis.

Above those figures the process becomes a negotiation. You supply a full financial statement and the IRS decides what it considers affordable.

Most expat balances sit well under the limits, because British rates exceed American ones and credits absorb much of the liability.

A worked example

The figures below are illustrative. They use round numbers so you can follow each step and substitute your own.

David lives in Glasgow and completes a catch-up filing covering three years. Credits cover most of the tax, but a gain on a rental property leaves him owing $9,000.

He cannot pay it at once. He requests a 36 month instalment agreement, which puts the monthly figure at around $250 before interest.

Approval is automatic because he has filed everything and owes under $50,000. The plan starts within weeks.

Interest continues at the current rate and the late payment penalty runs at a reduced rate while the plan holds. The total cost is higher than paying today and far lower than ignoring it.

The options compared

The table sets out the main routes. The first two cover almost everybody.

Does interest keep running?

Yes, right through. A payment plan halts enforcement and cuts one penalty, but nothing freezes the interest clock. It compounds daily on whatever remains unpaid, at a rate the IRS resets each quarter.

The IRS resets the rate quarterly, and it has sat well above zero in recent years. On a multi-year plan the interest becomes a real component of the total.

Pay more than the minimum where you can. Nothing prevents you clearing it early.

What happens to the penalties?

The failure to pay penalty normally runs at 0.5% of the unpaid balance each month. Once an instalment agreement is in place it drops to 0.25% a month for an individual who filed on time.

That halving is a concrete reason to set the plan up rather than simply paying what you can each month informally. Informal payments earn you nothing.

The failure to file penalty hits ten times harder at 5% a month, which is why filing always comes first.

Why does filing matter more than paying?

Because the two penalties differ wildly in size. Failing to file costs 5% a month up to a cap. Failing to pay costs 0.5% a month. That is a tenfold gap between the two mistakes.

So a return filed on time with nothing paid is far cheaper than a return never filed at all. The gap is a factor of ten.

File even when you cannot pay. It is the single most valuable thing you can do in this situation.

Can you apply without a US bank account?

You can, though direct debit is much simpler and attracts a lower setup fee where one applies. Without an American account the options narrow to card payments and international wires.

Card payments carry a processing fee charged by the provider rather than the IRS, typically a small percentage of each payment. Over 72 months that adds up.

Many expats keep one American account open for exactly this reason. It is worth doing before you need it.

What if you cannot pay anything at all?

A hardship status exists where the IRS pauses collection because paying would leave you unable to meet basic living costs. It demands full financial disclosure, and the IRS revisits it periodically.

Interest and penalties continue during that pause, so the debt grows. It buys time rather than relief.

An offer in compromise settles for less than the full amount, but acceptance rates are low and the process is long.

Does currency affect the payment?

The debt sits in dollars and you settle it in dollars, so a weak pound makes the same balance cost more in your own money. The exchange rate on each payment date decides the cost.

Over a 72 month plan that exposure is real. Somebody paying $250 a month sees the sterling cost move with the rate every time.

Our guide to currency gains on UK bank accounts covers the related tax issue on conversions.

Can the plan be cancelled?

Yes, if you miss payments, fail to file a later return or run up a fresh balance. Default drops you back to the start and makes a second payment plan application noticeably harder to win.

Keeping current with new years is the condition people most often break. A plan for old debt collapses when the next return goes unpaid.

Set the monthly figure at a level you can sustain rather than the fastest you can imagine.

Does it affect a passport?

It can protect one. A seriously delinquent tax debt can trigger passport restrictions, and an approved payment plan generally lifts you out of that category before anything reaches the State Department.

The threshold for that certification is high and indexed annually, sitting well above most expat balances. It still matters to anybody in the upper range.

If you hold only an American passport, this is a reason to get the arrangement in place promptly.

What about state tax debts?

They sit entirely apart. A federal payment plan does nothing about money owed to a state, and each state runs its own collection process under its own rules and its own timetable.

California and New York in particular pursue former residents. A federal plan gives no protection from either.

Our guide to US state tax for expats covers the state position.

How long does approval take?

Minutes online for a balance inside the automatic thresholds, provided every return is filed and the system can verify it. A paper application instead takes several weeks to work through.

Applications above the thresholds take months, because a person reviews the financial statement and may ask questions.

Apply online where you qualify. The difference in speed is substantial.

Is there a setup fee?

Usually, and it varies by route. Applying online for a long term agreement with direct debit carries the lowest charge, while a paper application without direct debit carries the highest.

A short term extension of up to 180 days carries no setup fee at all, which makes it the cheapest option where you can clear the balance inside six months.

Low income applicants can have the fee waived or reimbursed on application.

Can you change the monthly amount later?

You can, and it is straightforward where the new figure still clears the balance inside the permitted term. A revision carries a small charge, and the IRS would far rather revise a payment plan than chase a broken one.

Asking to reduce a payment is far better than simply missing one. A missed payment starts the default process, while a revision keeps the payment plan alive.

Contact them before the payment date rather than after it.

Does it affect your UK tax position?

Not directly at all. HMRC takes no interest in how you settle an American liability, and a payment plan abroad changes nothing about your British return, your rates here or your residence position.

The indirect effect is on your foreign tax credit timing. Credit follows tax paid, so spreading payments can move relief into later years.

Our guide to Form 1116 income baskets covers how credits are tracked.

What if the debt is from a joint return?

Both spouses are liable for the whole amount rather than half each. The IRS can pursue either of you for the full balance, whoever earned the income and whatever a divorce settlement says about it.

Relief exists for a spouse who did not know about an understatement, though it is narrow and has strict time limits. It is worth exploring where a marriage has ended.

A payment plan can be set up in joint names or by one spouse alone.

Does the collection period ever expire?

Yes. The IRS generally has ten years from assessment to collect a debt, after which it falls away. That clock pauses in certain circumstances, including while an application is pending.

Waiting it out is not a strategy. Interest compounds throughout, enforcement continues, and the pauses often extend the period well beyond ten years.

A plan that clears the balance is almost always cheaper than running the clock.

What does it cost in total?

More than paying today, considerably less than ignoring it. On a $9,000 balance over 36 months in 2025, interest and the reduced penalty typically add somewhere between 15% and 20% to the original figure.

Against that, the unreduced failure to pay penalty alone runs at 0.5% a month without a plan. The arrangement pays for itself quickly.

Overpaying each month shortens the term and cuts the total.

What records should you keep?

The approval notice, a record of every payment with its date and exchange rate, and copies of each return filed while the plan runs. Those three answer any question about compliance.

A wire payment can go astray or land against the wrong year. Keeping the reference makes tracing one straightforward.

Check the balance annually rather than assuming it is reducing as expected.

How to set one up

1. File every outstanding return before applying for anything.
2. Work out the total owed including penalties and interest.
3. Check whether the balance sits under the automatic threshold.
4. Decide between a short term extension and a monthly agreement.
5. Choose a monthly figure you can sustain for the full term.
6. Apply online where the thresholds allow it.
7. Set up direct debit from a US account if you have one.
8. Keep filing and paying each new year on time.

Mistakes and penalties we see with an IRS payment plan

The first is not filing because the money is not there. Failing to file costs ten times more than failing to pay, so the return always goes in.

The second is paying informally without an agreement. You get no reduction in the penalty rate and no protection from enforcement.

The third is setting the monthly figure too high and defaulting. A failed plan is worse than a slower one that holds.

The fourth is letting a later year go unpaid. That single act cancels the arrangement covering everything before it.

How US UK Tax Accountants helps

We work out what you genuinely owe before anybody asks for time, because credits often cut the figure substantially. Then we set the arrangement up at a level that will survive the full term.

Where the balance came from a catch-up filing, we deal with both together. Our streamlined filing service covers the returns behind the debt.

If a demand has arrived and the amount looks impossible, get in touch. The number is often wrong, and the terms usually bend.

Last reviewed 13 October 2026. This article is general information and not personal tax advice. Every case turns on its own facts, so take advice on yours before applying.