Managing tax debt to the IRS can be challenging, but the IRS offers two primary solutions to help taxpayers find relief: Installment Agreements (IAs) and Offers in Compromise (OICs). Each has distinct features, eligibility requirements, and benefits depending on your financial situation. Understanding their differences can help you select the right path to resolving your tax liability efficiently.
What is an Installment Agreement?
An Installment Agreement is a payment plan that allows taxpayers to pay off their full tax liability over time, typically up to 72 months (6 years). This plan is designed for those who cannot pay their tax debt in a lump sum but can manage fixed monthly payments.
To qualify for a streamlined installment agreement, you must owe $50,000 or less in combined tax, penalties, and interest, have filed all required tax returns, and be able to pay the amount in full within the term of the agreement. Applications can be submitted online, by phone, or via IRS Form 9465, “Installment Agreement Request”.
Once approved, you make monthly payments until your tax balance is paid off. However, interest and penalties continue to accrue on the unpaid balance throughout the duration.
Benefits of an Installment Agreement
- Manageable monthly payments: Breaks a large debt into smaller, consistent payments.
- Avoids immediate collection actions: Helps prevent levies, liens, or wage garnishments.
- Simpler application process: Faster processing compared to other IRS tax debt solutions.
Drawbacks of an Installment Agreement
- No reduction in total debt: You pay the full amount owed plus interest and penalties.
- Accruing interest and penalties: The overall cost of your debt increases over time.
- Risk of termination: Missing payments or failing to stay compliant can lead to reinstated collection efforts.
For detailed guidance on installment agreements, visit our article: Installment Agreement.
What is an Offer in Compromise?
An Offer in Compromise allows you to settle your tax debt for less than the full amount owed when paying in full would cause significant financial hardship. The IRS reviews your ability to pay, income, expenses, asset equity, and overall financial condition.
There are three primary grounds for OIC submission:
- Doubt as to Liability: Disputing the correctness of the tax amount owed.
- Doubt as to Collectibility: Demonstrating you cannot pay the full amount.
- Effective Tax Administration: Paying the full liability would create an unfair economic hardship.
You apply using IRS Form 656, providing detailed financial disclosure. The IRS calculates your “Reasonable Collection Potential” (RCP) — an estimate of what they believe they can reasonably collect.
Benefits of an Offer in Compromise
- Debt reduction: Potentially settle for less than what you owe.
- Fresh financial start: Tax liability resolved upon acceptance and completion.
Drawbacks of an Offer in Compromise
- Stringent eligibility and documentation requirements: Many taxpayers do not qualify.
- Lengthy processing time: Can take months to over a year.
- Initial payment required: Non-refundable deposit usually required with application.
- Compliance obligations: Must stay current on future taxes and comply with IRS rules for five years after acceptance.
For a deeper dive, see our Offer in Compromise (OIC) article.
Comparing Installment Agreements and Offers in Compromise
| Feature | Installment Agreement | Offer in Compromise |
|---|---|---|
| Goal | Pay full tax debt over time | Settle tax debt for less than full amount owed |
| Payment Structure | Monthly payments up to 72 months | Lump sum or short-term payments |
| Debt Reduction? | No | Potentially yes |
| Eligibility | Tax owing ≤ $50,000, filed returns, can pay monthly | Significant financial hardship, inability to pay full debt |
| Application Process | Simpler, faster | Complex, requires detailed financial info |
| Interest & Penalties | Continue accruing | May be reduced or waived on settled amount |
| Approval Likelihood | High for eligible taxpayers | Lower, stringent IRS evaluation |
| Processing Time | Weeks to months | Several months to over a year |
Who Should Consider an Installment Agreement?
If you can pay your tax bill over time and owe $50,000 or less, an installment agreement is a suitable option. It offers a straightforward way to avoid immediate IRS collection while spreading payments to fit your budget.
Who Should Consider an Offer in Compromise?
If your financial situation makes paying your full tax debt or an installment agreement impossible, and you can prove hardship, an OIC might help reduce your liability. This path requires strong documentation and patience through the IRS review process.
Tips for Selecting the Right Option
- Assess your overall financial situation, including income, expenses, and assets.
- Understand your total tax debt, including penalties and interest.
- Calculate whether affordable monthly payments over time are realistic.
- Consider long-term costs associated with interest and penalties.
- Use IRS resources such as the Online Payment Agreement tool to check eligibility.
- Consider consulting a qualified tax professional to guide your decision.
Common Misconceptions
- “I automatically qualify for an OIC if I owe taxes.” The IRS requires strict proof of inability to pay.
- “My tax debt will disappear if I ignore it.” IRS debts continue to grow and may lead to collection actions.
- “I don’t need to file future tax returns once in an agreement.” Compliance is mandatory to maintain agreements.
- “OIC terms don’t require ongoing compliance.” You must stay current with tax filings and payments for five years after acceptance.
Frequently Asked Questions
Q: Can I apply for both simultaneously?
A: Generally, no. The IRS usually suspends collection during an OIC review. If rejected, you may apply for an installment agreement.
Q: What if I miss payments on an installment agreement?
A: Contact the IRS promptly. Failure to comply can end the agreement and restart collections.
Q: Is there an upfront cost for an OIC?
A: Yes, a non-refundable initial payment is required with your offer application.
Q: How long does installment agreement approval take?
A: Streamlined agreements can be approved quickly online, often within days.
Q: What if my financial status improves after an OIC?
A: The IRS may reassess and potentially reinstate the debt if circumstances change during the 5-year compliance period.
For authoritative information, review the IRS pages on Installment Agreements and Offers in Compromise.
By choosing the right solution based on your circumstances, you can regain control over your IRS tax debt with a manageable plan or a potential debt reduction.