Overview
Unpaid federal taxes can trigger penalties, interest, liens, levies, and collection contacts. The IRS provides a range of relief tools to avoid or limit those outcomes. Two of the most-used options are installment agreements (structured payment plans) and offers in compromise (OICs), which can permanently reduce what you owe if you qualify. This article explains how each option works, how to decide between them, the application steps, common mistakes, and practical tips based on client experience.
How installment agreements work
Installment agreements let you pay an outstanding federal tax balance in monthly payments instead of one lump sum. Key points:
- Types: Short-term payment plans (usually up to 120 days) and long-term installment agreements (months to years). The IRS also offers partial-payment installment agreements in some situations.
- Typical process: You file all required returns, determine the balance due, apply online or by phone/mail, and set a monthly payment amount that the IRS accepts. The IRS may require a direct debit or collections information depending on the balance and your circumstances.
- Forms and tools: You can request an online payment agreement via the IRS Online Payment Agreement tool or submit Form 9465 (Installment Agreement Request). For some negotiated plans the IRS will ask for a financial statement such as Form 433-F (Collection Information Statement).
- Costs: Interest and penalties continue to accrue until the balance is fully paid, although entering a plan typically stops more severe enforced collection actions if you remain compliant. The IRS charges a user fee for some types of installment agreements; fee waivers can apply for low-income taxpayers.
When to consider an installment agreement
- You can afford a monthly payment that will eventually retire the balance.
- You need a fast solution to stop levies or garnishments and are current on filing.
- Your goal is to protect your credit and keep the account in good standing while you pay.
See our step-by-step guide to applying for an IRS payment plan for more details on eligibility and filing: How to Apply for an IRS Installment Agreement: Types and Eligibility (https://finhelp.io/glossary/how-to-apply-for-an-irs-installment-agreement-types-and-eligibility/).
How offers in compromise (OIC) work
An offer in compromise is an agreement between a taxpayer and the IRS that settles a tax liability for less than the full amount owed. It is intended for taxpayers who cannot pay the full liability or if doing so would create a financial hardship or be unfair under the law.
- Eligibility bases: The IRS evaluates OICs mainly under three grounds: doubt as to collectibility (you truly cannot pay the full amount), effective tax administration (full collection would create economic hardship or would be unfair), or doubt as to liability (the assessed amount is likely incorrect).
- Documentation: OIC applications require detailed financial disclosure, including income, assets, monthly living expenses, and sometimes supporting documents like bank statements and proof of household costs. You will generally complete Form 656 (Offer in Compromise) and a collection information form such as Form 433-A(OIC) or 433-B(OIC).
- Fees and payments: There is an application fee and initial payment requirements unless you qualify for a low-income waiver. The IRS will evaluate your reasonable collection potential (RCP)—the equity you can access from assets plus future income after allowable living expenses—to calculate the minimum acceptable offer.
- Timeline: OIC reviews typically take several months; the IRS may request additional documentation or reject the offer. If accepted, it settles the taxed years and stops most collection activity related to the accepted liabilities.
For a granular walkthrough, see: Filing an Offer in Compromise: Eligibility, Process, and Tips (https://finhelp.io/glossary/filing-an-offer-in-compromise-eligibility-process-and-tips/).
Comparing the two: pros and cons
- Installment agreement: Lower barrier to entry; quicker to set up; keeps the debt in place but can stop aggressive enforcement if you stay current. Downside: interest and penalties continue; the debt remains and may result in liens.
- Offer in compromise: Potential to reduce the total owed, giving immediate debt relief if accepted. Downside: lengthy process, stringent documentation, initial fees and payments, and many taxpayers who apply don’t qualify.
Use an installment agreement if you reasonably expect to pay off the debt over time. Consider an OIC when your assets and future income make full payment unrealistic, and you can demonstrate hardship.
Practical steps to decide and apply
- Gather records: tax returns, IRS notices, bank statements, pay stubs, bills, and asset records.
- Confirm filing compliance: The IRS will not grant relief if you have unfiled returns. File any missing returns before applying.
- Run the math: For an OIC, calculate your reasonable collection potential (available assets + future disposable income). The IRS provides a pre-qualifier tool and worksheets—use them to estimate whether an OIC is realistic.
- Apply online for installment agreements when possible—speed is often in your favor. For OICs, complete Form 656 and the appropriate 433-series form and submit with the fee or waiver request.
- Keep communication open: respond quickly to IRS requests for documentation. Timely responses shorten review times and improve outcomes.
What happens to liens, levies, and refunds?
- Installment agreement: Entering most installment agreements generally prevents new levies while the agreement is in effect; existing liens may remain until the debt is paid and can complicate asset sales. Note that the IRS can still file a Notice of Federal Tax Lien in many cases.
- Offer in compromise: If accepted and paid according to the agreement, the IRS will release liens and cease collection for settled tax periods. Until acceptance, collection actions may continue.
Common mistakes and how to avoid them
- Ignoring filing obligations: Never assume relief options will be available if you haven’t filed required returns.
- Under-documenting expenses: For OICs, incomplete documentation is a leading cause of delay or rejection.
- Overestimating qualification chances: OICs are designed for taxpayers with real inability to pay. If you can make a reasonable payment, the IRS may prefer an installment agreement.
- Falling for scams: Be cautious of companies promising guaranteed reductions. Always verify credentials—look for an enrolled agent, CPA, or tax attorney, and confirm practitioner PTINs/credentials.
Real-world examples (anonymized)
- Installment agreement: A self-employed taxpayer with a $12,000 balance could afford $300/month. By setting up a direct-debit long-term agreement and staying current with estimated taxes, the taxpayer avoided levies and finished payments in just over three years.
- Offer in compromise: A client with limited cash flow and minimal non-exempt assets documented unavoidable medical expenses and low future disposable income. After submitting Form 656 with full disclosures and negotiating allowable living expenses, the IRS accepted an offer that reduced the balance to a lump-sum the client could realistically pay.
Alternatives to consider
- Currently Not Collectible (CNC) status: If you can’t pay anything reasonable, the IRS might temporarily delay collection.
- Innocent spouse relief, penalty abatements, or audit reconsiderations can address underlying issues.
- Bankruptcy: In limited circumstances, certain tax debts may be dischargeable in bankruptcy—consult a bankruptcy attorney.
Working with a professional
In my experience working with clients, the most common value from hiring a tax pro is accurate financial disclosure and faster, clearer communication with the IRS. A credentialed tax professional (CPA, EA, or tax attorney) can help calculate realistic offers, prepare documentation, and spot alternatives you may have missed. Always ask about experience with Offers in Compromise and request references.
Frequently asked questions
- Will penalties and interest stop if I enter an installment agreement? No. Interest and most penalties continue until the balance is paid, though the agreement can prevent enforced collection if you remain compliant. (See IRS, Installment Agreements: https://www.irs.gov/payments/installment-agreements)
- Can I apply for an OIC if I already have an installment agreement? Yes, but you must remain current on filings and the terms of the installment plan while the OIC is under review.
- How long does an OIC take? It can take several months; the IRS may ask for additional documents and perform asset and income verification.
Final tips
- File missing returns before contacting the IRS.
- Use the IRS online tools when eligible to speed an installment agreement.
- Keep a careful record of all communications with the IRS.
- Consider a low-cost consultation with a tax professional before submitting an OIC—small improvements to your application can materially affect the outcome.
Sources and further reading
- IRS — Installment Agreements: https://www.irs.gov/payments/installment-agreements
- IRS — Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise
- FinHelp — How to Apply for an IRS Installment Agreement: Types and Eligibility: https://finhelp.io/glossary/how-to-apply-for-an-irs-installment-agreement-types-and-eligibility/
- FinHelp — Filing an Offer in Compromise: Eligibility, Process, and Tips: https://finhelp.io/glossary/filing-an-offer-in-compromise-eligibility-process-and-tips/
Professional disclaimer: This article is educational and does not replace personalized tax advice. Rules and forms can change; consult a qualified tax professional or the IRS for guidance tailored to your situation.
