Overview

Owing taxes you can’t pay in full is common. The IRS expects taxpayers to file returns on time, but it also recognizes that many people face real financial constraints. If you’re short on funds, you don’t have to ignore the bill — doing so usually makes the problem worse because interest and penalties continue to accrue and the IRS can escalate collection actions (liens, levies, wage garnishments). The IRS publishes options for taxpayers who can’t pay, including installment agreements, offers in compromise (OIC), and Currently Not Collectible (CNC) status (IRS: Payment Plans and Options).

In my practice as a CPA and tax advisor with 15 years’ experience helping clients through tax debt, I’ve seen the right preparation and choice of program prevent levies, reduce monthly strain, and — in rare but important cases — substantially reduce the total balance.

Key IRS Options and how they work

1) Installment Agreements (Pay Over Time)

What it is: A formal payment plan that lets you pay your tax debt in monthly installments. The IRS offers different types, including streamlined agreements for smaller balances and partial-payment installment agreements for taxpayers with limited ability to pay.

How to get it: Many taxpayers can apply online through the IRS Online Payment Agreement tool or by submitting Form 9465. The IRS will evaluate your balance, your requested monthly payment, and whether you’ve filed required returns (IRS: Online Payment Agreement).

Important notes:

  • Filing your tax return on time is critical even if you can’t pay; failure-to-file penalties are separate and can be larger than failure-to-pay penalties.
  • You’ll still accrue interest and usually some penalties while on a plan, though the burden of collection actions is reduced once a plan is in place.
  • Most installment agreements require you to stay compliant with future filings and payments.

Further reading on types and enrollment: see our internal guide to Streamlined Installment Agreements and Setting Up an IRS Installment Agreement.

2) Offer in Compromise (Settle for Less)

What it is: An OIC lets you propose to settle your tax debt for less than the full amount owed when the IRS determines that full collection would create an economic hardship or be impractical.

How it works: The IRS evaluates your reasonable collection potential (RCP) — a calculation based on income, necessary living expenses, and asset equity. If your offer reflects what the IRS believes it can reasonably collect over time, the OIC may be accepted. Apply using Form 656 and a complete financial package; the IRS also offers a pre‑qualifier tool to estimate eligibility (IRS: Offer in Compromise).

Practical points:

  • OIC approval is less common than installment agreements; many applications fail because financial documentation is incomplete or the offer is too low relative to RCP.
  • If accepted, an OIC usually requires you to stay current on future tax obligations for a period after acceptance.

Read more: our internal article What Is an Offer in Compromise? Eligibility, Process, and Alternatives.

3) Currently Not Collectible (CNC) Status (Temporary Relief)

What it is: CNC status means the IRS temporarily suspends active collection efforts because collecting would cause significant financial hardship. It does not erase the debt; interest and penalties continue to accrue and the debt remains legally due.

How to request: CNC is determined after the IRS reviews your financial information (often via Form 433‑F or a similar collection form). If approved, the IRS will stop levies and most enforcement for a period, but may review your situation periodically and can reinstate collection if your financial condition improves (IRS Collection Process).

When it makes sense: CNC is appropriate when your monthly income minus necessary living expenses leaves no realistic surplus to pay taxes. It’s a temporary tool — useful to avoid immediate levies while you stabilize income or expenses.

How to choose between options

  • If you can afford a reasonable monthly payment: apply for an installment agreement. It’s the most straightforward and widely approved path.
  • If your RCP is clearly less than the tax owed and your financial hardship is long‑term or severe: consider an OIC, but understand the documentation burden and relatively low acceptance rate.
  • If you can’t pay anything now and need immediate relief from collection actions: CNC may buy time while you recover.

Often the right strategy after a careful financial inventory will combine tactics: start with an installment plan while you assemble documents for an OIC, or seek CNC status until a stable income returns.

Step-by-step action plan (what to do now)

  1. File on time. Even if you can’t pay, file the return to avoid failure-to-file penalties.
  2. Pay as much as you can now electronically (IRS Direct Pay or debit/credit) — paying reduces interest and penalties.
  3. Gather documentation: recent pay stubs, bank statements, monthly bills, asset balances, and a realistic budget.
  4. Use the IRS online pre‑qualifier tools and payment portals: Online Payment Agreement and OIC pre‑qualifier (IRS payments page).
  5. Contact the IRS early — phone lines or written correspondence — or work with a tax professional. Be ready to explain your situation and present your financial package.
  6. Keep records of all communications and any agreements in writing.

What to expect (penalties, liens, levies)

  • Penalties and interest: Unpaid taxes accrue interest and penalties until paid or resolved. The accrual continues on reduced balances as well.
  • Liens: If you don’t resolve the debt, the IRS may file a Notice of Federal Tax Lien to protect its interest in your property.
  • Levies: For unresolved debts, the IRS can levy bank accounts, seize assets, or garnish wages. Negotiating a plan or obtaining CNC status early can prevent levies.

The IRS collection process and timelines vary. For details, see the IRS collection overview and consult our internal guide on Responding to IRS Collection Notices.

Professional tips I use in practice

  • Be conservative in budgeting. Many offers fail because taxpayers understate realistic living expenses or fail to include irregular costs (car repairs, medical bills).
  • Offer evidence, not emotion. Compile statements, bills, and third‑party records to substantiate hardship claims.
  • If you receive a levy notice, act immediately. A quick installment agreement, OIC submission, or proof of hardship can stop a levy in many cases.
  • Consider alternatives before an OIC: bankruptcy can discharge certain tax debts in limited circumstances; consult a bankruptcy attorney and tax advisor.

Common FAQs

  • Will the IRS forgive interest if I enter a plan? No — interest generally continues to accrue, though in rare cases penalties may be abated for reasonable cause. See the IRS penalty relief guidance.
  • Can I negotiate privately with the IRS? Individuals can negotiate directly or via an authorized representative (power of attorney using Form 2848).
  • Will an agreement affect my credit? An IRS tax lien, if filed, can affect credit indirectly. Installment agreements by themselves do not show up on your consumer credit report, but a filed lien may.

Resources and authoritative references

Internal links for deeper guidance:

Disclaimer

This article is educational and informational only. It does not replace personalized tax, legal, or financial advice. Tax rules change; consult the IRS website and a qualified tax professional about your specific situation before acting.