Quick answer
If you can’t pay your federal tax bill in full, file your return on time. Then work with the IRS to reduce harm: request an installment agreement, consider an Offer in Compromise (OIC) if you truly can’t pay, or ask for Currently Not Collectible (CNC) status. Acting quickly limits failure-to-file penalties and gives you options to manage payments and stop collection actions.
Why filing (even if you can’t pay) matters
Failing to file a tax return is usually costlier than failing to pay. The IRS charges a failure-to-file penalty that grows rapidly and stacks on interest and the failure-to-pay penalty. Filing by the deadline preserves your legal protections and keeps statute-of-limitations clocks running. The IRS’s official guidance emphasizes filing returns on time even if you cannot pay the balance in full (IRS: Filing and payment options).
In my practice as a CPA and CFP®, I’ve seen taxpayers reduce penalties simply by filing on time and immediately arranging a payment plan. That prompt action also improves your negotiating position if you later pursue an OIC or CNC status.
Sources: IRS – Payment Plans, Installment Agreements; IRS – Offer in Compromise; IRS – Currently Not Collectible.
Primary options the IRS offers
Below are the most common, practical paths when you can’t pay the full balance:
1) Installment Agreement (IA)
- What it is: A plan to pay your tax debt in monthly payments. The IRS offers streamlined options for smaller balances and longer plans for larger debts.
- Why choose it: It’s the most accessible solution for most taxpayers who can make recurring monthly payments. Interest and penalties continue to accrue, but an IA prevents many collection enforcement actions while active.
- Variants you may encounter: short-term agreements, Direct Debit Installment Agreements (DDIA) that lower default risk, and Partial Payment Installment Agreements (PPIA) for taxpayers who can only pay limited amounts.
- Where to learn more: FinHelp’s guide on setting up an IRS installment agreement explains the steps and documentation I typically request from clients when preparing an application (FinHelp: Setting Up an IRS Installment Agreement).
2) Offer in Compromise (OIC)
- What it is: A negotiated settlement that allows taxpayers to pay less than the full amount if they can prove paying the full liability would cause economic hardship or if the IRS doubts collectibility.
- When it fits: Serious, documented inability to pay the full amount even through installment plans. OIC decisions consider assets, income, and reasonable collection potential.
- Process notes: The OIC has strict documentation requirements and can take months. There is an application process (Form 656) and supporting financial statements (Forms 433-A/OIC or 433-B/OIC). In practice, OICs are appropriate in a minority of cases but can be the right solution for people whose assets are mostly non-liquid and whose disposable income is very low.
- For a comparison with installment plans, see FinHelp’s breakdown: Installment Agreements vs. Offers in Compromise (FinHelp: Installment Agreements vs. Offers in Compromise).
3) Currently Not Collectible (CNC) status
- What it is: A temporary classification when the IRS determines you can’t pay anything without causing undue hardship.
- What it does: The IRS generally suspends collection activity such as levies and garnishments while in CNC. Penalties and interest continue to accrue, and the IRS reviews CNC status periodically.
- Typical candidates: People with minimal or negative monthly disposable income after essential expenses.
4) Short-term delay or extension
- What it is: If you can pay within a short time (usually 120 days), the IRS may grant a short-term extension to pay without entering a long-term agreement.
- When to use: If you expect a near-term liquidity event (sale of assets, upcoming paycheck, tax refund) that will cover the balance.
5) Third-party options and alternatives
- Credit card or personal loan: These can be quick but expensive. Consider interest rates and tax-deductibility (most personal interest is not deductible).
- Borrow from family or a home-equity source: This moves debt off the IRS ledger but creates private obligations.
- Bankruptcy: Some tax debts may be dischargeable in bankruptcy under narrow rules; consult a bankruptcy attorney.
Practical steps to take now (action checklist)
- File the return by the due date. If you truly can’t file, request an extension—but remember extension is extension to file, not to pay.
- Pay as much as you can with the return to reduce interest and penalties.
- Use the IRS Online Payment Agreement tool for many IAs. If you prefer paper, Form 9465 is still available for installment requests.
- Gather documentation: recent pay stubs, bank statements, monthly living expenses, proof of assets, and any documentation of unexpected hardship (medical bills, unemployment records).
- If you receive IRS notices, respond promptly and keep copies of all correspondence.
Links you may find helpful:
- How to request an installment agreement online: FinHelp’s step-by-step guide (FinHelp: How to Request an Installment Agreement Online).
- Comparing options: Installment Agreements vs. Offers in Compromise (FinHelp: Installment Agreements vs. Offers in Compromise).
What the IRS looks for when deciding
- Installment Agreements: Your ability to pay monthly and whether you’ve filed all required returns.
- OIC: Whether the offer represents the most the IRS can expect to collect within a reasonable period. The IRS checks assets, income, and allowable expenses.
- CNC: Whether your income and assets leave you with no practical ability to pay.
My experience: clear, organized documentation speeds approvals and avoids delays. Using direct debit and setting up automatic payments reduces default risk and helps preserve favorable IA terms.
Common mistakes and how to avoid them
- Mistake: Not filing the return. Fix: File on time—even if you can’t pay—and set up a plan.
- Mistake: Ignoring IRS notices. Fix: Respond or engage a tax professional; ignoring leads to liens, levies, and wage garnishments.
- Mistake: Assuming OIC is a quick fix. Fix: Prepare for a lengthy, documentation-heavy process and manage expectations.
Frequently asked practical questions
Q: Will penalties stop if I enter an installment agreement?
A: No. Penalties and interest generally continue. However, an IA prevents many collection actions while you stick to the terms.
Q: Can the IRS seize my property if I request an IA?
A: The IRS typically won’t levy while an IA is active and you are current on payments. If you ignore the agreement, collection actions can resume.
Q: How long does an OIC take?
A: OIC processing varies; expect several months. Complex cases can take longer. Complete documentation shortens processing time.
Tips from a CPA/CFP® who’s negotiated with the IRS
- Be proactive: early contact improves outcomes.
- Use the IRS Online Payment Agreement where possible; it’s faster and reduces errors.
- If you have fluctuating income (self-employed), document seasonality and lean on allowances for reasonable business expenses when negotiating.
- Consider a Direct Debit IA—automatic payments reduce default risk and sometimes lower user fees.
When to get professional help
Call a CPA, enrolled agent, or tax attorney if:
- You received a levy or wage garnishment notice.
- You’re considering an OIC and have significant assets or complex income.
- You don’t have the time or capacity to manage IRS correspondence.
Professional representation can improve communication with the IRS and spot options you might miss.
Sources and where to read more
- IRS — Payment Plans, Installment Agreements: https://www.irs.gov/payments/payment-plans-installment-agreements
- IRS — Offer in Compromise: https://www.irs.gov/taxtopics/tc703 (IRS OIC guidance and forms)
- IRS — Currently Not Collectible guidance: https://www.irs.gov/businesses/small-businesses-self-employed/how-to-settle-your-tax-debt-with-a-closure
- Consumer Financial Protection Bureau — dealing with debt: https://www.consumerfinance.gov/
Helpful FinHelp links:
- Setting Up an IRS Installment Agreement: https://finhelp.io/glossary/setting-up-an-irs-installment-agreement/
- How to Request an Installment Agreement Online: https://finhelp.io/glossary/how-to-request-an-installment-agreement-online/
- Installment Agreements vs. Offers in Compromise: https://finhelp.io/glossary/installment-agreements-vs-offers-in-compromise-which-is-right-for-you/
Professional disclaimer: This article is educational and does not substitute for personalized tax or legal advice. For recommendations specific to your situation, consult a qualified tax professional or attorney.
If you want, I can also draft a sample letter to the IRS to request an installment agreement or outline the financial documents commonly requested for an Offer in Compromise.