What is an installment agreement?

An installment agreement is defined as an arrangement with the IRS that allows a taxpayer to pay their tax debt over time in smaller, manageable payments rather than in a lump sum. This option is particularly beneficial for individuals who may not have the full amount due available at once but still want to resolve their tax obligations. By entering into this agreement, taxpayers can avoid more severe collection actions by the IRS and alleviate the financial burden of paying a significant tax bill in one payment.

The other choices illustrate concepts that do not accurately represent what an installment agreement entails. A one-time tax payment refers to a singular transaction and does not incorporate the element of structured payments over time. A monthly payment plan for tax credits would suggest a system for managing tax credits rather than tax debts, which is not relevant to the concept of installment agreements with the IRS. Deferring tax payments pertains to delaying the payment of taxes entirely, which is fundamentally different from setting up a structured payment plan to address existing tax debt. Thus, the correct definition underscores the purpose and functionality of an installment agreement within the context of managing tax liabilities.