Overview
Facing a six-figure tax bill is terrifying, but bankruptcy is not the only route. The IRS provides several formal alternatives that can stop aggressive collection, reduce what you owe, or stretch payments over time. In my 15 years advising clients, I’ve found that most taxpayers who act early and prepare complete financial documentation can find at least one practical option other than Chapter 7 or Chapter 13.
This article explains the most common alternatives, how they work, who qualifies, the documentation you’ll need, and tactical steps to improve success. Citations are to current IRS guidance (see IRS Offer in Compromise, IRS payment agreement info, and IRS collection policies) and respected resources. This is educational content only—not individualized tax advice. Consult a CPA, enrolled agent, or tax attorney for your specific situation.
Why consider alternatives before bankruptcy?
- Bankruptcy can be expensive, lengthy, and may not discharge many income tax liabilities unless strict timing and filing conditions are met (see IRS guidance on bankruptcy and taxes).
- Alternatives often preserve credit options, avoid court costs, and can lift immediate collection actions like levies and seizures more quickly.
- The IRS favors taxpayers who demonstrate compliance (filed returns and attempted payment) and provide complete financial disclosures.
Top alternatives explained
1) Installment Agreement (IA)
What it is: A formal payment plan that spreads an outstanding balance across monthly payments. The IRS offers streamlined and non-streamlined plans, including short-term and long-term options.
How it works: You apply for an Online Payment Agreement or submit Form 9465 (and sometimes a financial statement). The IRS will set monthly payments based on your ability to pay and your account balance. Simple streamlined plans are available for many taxpayers without a full financial statement if the balance is under certain thresholds.
Pros:
- Stops most collection actions when approved (but not always immediate for liens).
- Keeps you in control without court involvement.
Cons:
- Interest and penalties continue to accrue while on a plan.
- Long-term IAs can be restarted, and default can lead to enforced collection.
When to use it: When you can reasonably afford monthly payments and want to avoid the higher documentation threshold required for an OIC (see IRS payment agreement info).
Relevant resources: FinHelp article comparing installment agreements and offers in compromise (Choosing Between an Installment Agreement and an Offer in Compromise: https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-an-offer-in-compromise/).
2) Offer in Compromise (OIC)
What it is: A settlement that allows taxpayers to pay less than the full tax liability when full payment would create economic hardship or where there is doubt about liability.
How it works: You submit Form 656 (Offer in Compromise) together with a complete financial disclosure (Form 433-A, 433-B, or 433-F as applicable), an application fee, and initial payment depending on whether you propose a lump-sum or periodic payment plan. The IRS evaluates your Reasonable Collection Potential (RCP) — a calculation of what the IRS can expect to collect through enforced collection or future earnings.
Pros:
- Potential to materially reduce the total you owe.
- Can eliminate long-term financial burden if accepted.
Cons:
- Approval rates are low unless your financial picture clearly shows inability to pay; be fully prepared.
- The process is document- and time-intensive.
When to use it: When you can demonstrate that paying the full debt would create hardship and your RCP supports a reduced offer. For detailed filing steps and checklists see FinHelp’s OIC resources (Preparing an Offer in Compromise: Documentation Checklist: https://finhelp.io/glossary/preparing-an-offer-in-compromise-documentation-checklist/ and What Is an Offer in Compromise and How It Works: https://finhelp.io/glossary/what-is-an-offer-in-compromise-and-how-it-works/).
IRS guidance: Offer in Compromise (https://www.irs.gov/individuals/offer-in-compromise).
3) Currently Not Collectible (CNC) status
What it is: A temporary designation the IRS places on an account when collection would create financial hardship. While in CNC status, the IRS generally suspends collection actions like levies.
How it works: You provide a detailed financial statement showing that monthly income does not cover necessary living expenses and tax obligations. The IRS reviews and may place the account in CNC; however, penalties and interest usually continue to accrue and the IRS can re-evaluate your ability to pay periodically.
Pros:
- Immediate relief from enforced collection in many cases.
- Gives breathing room to improve income or seek alternate resolutions.
Cons:
- It is a temporary reprieve, not a debt forgiveness tool.
- A federal tax lien can remain in place, affecting credit and real property transactions.
IRS guidance: Collection Information for Taxpayers (https://www.irs.gov/businesses/small-businesses-self-employed/collection-information-for-taxpayers).
4) Partial Payment Installment Agreement (PPIA)
What it is: A payment plan that allows payments lower than the full amount owed for a defined period; often paired with periodic financial reviews.
How it works: The IRS accepts smaller monthly payments based on demonstrated inability to pay the full amount and may re-review in a few years. If your circumstances improve, the payment increases or a lump-sum payoff may be requested.
When to use it: When you cannot afford a standard IA but are not OIC-eligible.
5) Administrative relief and penalty abatements
Options include requesting penalty abatement for reasonable cause (e.g., serious illness, natural disasters), filing for innocent spouse relief when appropriate, or asking the IRS to abate collection due to a pending bankruptcy or other legal actions. Penalty abatements can materially lower the balance if granted.
How to choose between options
Step 1 — Get current on filing: File all unfiled returns and obtain transcripts if needed. The IRS will rarely accept relief for unfiled returns.
Step 2 — Gather documentation: Paystubs, bank statements, a detailed budget, proof of unavoidable expenses, and copies of IRS notices. Forms typically used include Form 433-F (Collection Information Statement), Form 9465 (Installment Agreement Request), and Form 656 (Offer in Compromise).
Step 3 — Run the numbers: Calculate net monthly income and allowable living expenses. If the gap between your RCP and tax balance is large, an OIC could be appropriate; if you can afford reasonable monthly payments, an IA or PPIA may be simpler.
Step 4 — Communicate early and often with the IRS: Use the IRS online payment portal to apply for IAs and monitor account notices. For complicated cases, you’ll likely need to speak to a revenue officer and provide financial disclosure.
Professional tips I use with clients
- Document everything: The IRS reviews verifiable facts. In my practice, thorough documentation shortens review times and improves outcomes.
- Start negotiations before a levy: Once wages are garnished or a levy is in place, options narrow. Apply for CNC or an IA immediately and ask the IRS to release a levy if you have hardship evidence.
- Consider a limited-scope professional: Hiring an enrolled agent or CPA to prepare a financial package (rather than full representation) can be a cost-effective way to present a credible case.
- Rebuild options after denial: If an OIC is denied, ask for a written explanation, consider appeal rights, or reapply with corrected numbers. See FinHelp’s guide on options after a denied OIC (Options After a Denied Offer in Compromise: https://finhelp.io/glossary/options-after-a-denied-offer-in-compromise/).
Common mistakes and how to avoid them
- Waiting too long: Delays lead to penalties and liens. Act as soon as you recognize a problem.
- Incomplete financial disclosure: Omitting assets or income will derail an OIC and damage credibility.
- Missing filings: The IRS expects all returns filed for the years you want considered. Missing returns often disqualify you from relief programs.
When bankruptcy still makes sense
Bankruptcy may be preferable when tax debts meet discharge conditions (e.g., certain older income tax liabilities that meet timing and return-filing tests) or when you need the broader relief bankruptcy provides for mixed debts. Bankruptcy is a legal process with specific timing rules; consult a bankruptcy attorney and the IRS guidance on tax issues in bankruptcy (https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy).
Checklist: First 30 days if you owe large tax debt
- File any unfiled tax returns immediately.
- Order IRS transcripts and review balances and assessments.
- Prepare a budget and collect proof of income/expenses.
- Apply for an installment agreement online if you can afford payments (https://www.irs.gov/payments/online-payment-agreement-application).
- If you can’t pay, assemble an OIC package or request CNC status; consider professional help.
Practical example (composite of real cases)
A client with $48,000 in unpaid taxes and limited monthly cash flow first applied for a PPIA. When that produced minimal relief, we submitted an OIC with a carefully prepared Form 433-F that documented non-waivable family expenses. The IRS accepted a $12,000 lump-sum offer after six months — a result that preserved the client’s home equity and allowed a fresh financial start.
Useful links and sources
- IRS — Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise
- IRS — Online Payment Agreement Application (Installment Agreements): https://www.irs.gov/payments/online-payment-agreement-application
- IRS — Collection Information for Taxpayers (CNC and collection practices): https://www.irs.gov/businesses/small-businesses-self-employed/collection-information-for-taxpayers
- FinHelp: Choosing Between an Installment Agreement and an Offer in Compromise: https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-an-offer-in-compromise/
- FinHelp: Preparing an Offer in Compromise: Documentation Checklist: https://finhelp.io/glossary/preparing-an-offer-in-compromise-documentation-checklist/
- FinHelp: Options After a Denied Offer in Compromise: https://finhelp.io/glossary/options-after-a-denied-offer-in-compromise/
Final notes and disclaimer
These IRS alternatives can provide meaningful relief — but the right path depends on timing, documentation, and a candid assessment of your finances. This article is educational and not a substitute for one-on-one tax advice. For help preparing forms or negotiating with the IRS, consult a qualified tax professional (CPA, enrolled agent, or tax attorney) and consider contacting the Taxpayer Advocate Service if you experience unreasonable delays. (Tax and program rules may change; verify specifics at the IRS website cited above.)
