Quick overview
When money is tight, unpaid federal or state tax bills can trigger liens, levies, and wage garnishments. The IRS offers formal pathways to manage tax debt during hardship. The most commonly used are: installment agreements (pay over time), Offer in Compromise (settle for less than owed), and Currently Not Collectible (temporarily pause collection). Each has eligibility rules, trade-offs, and documentation requirements. The goal is to stop escalation and create a sustainable plan.
How do these options work in practice?
Below is a practical, step-by-step look at the three primary options, plus additional relief and tactical moves you can use while you recover financially.
1) Installment agreements — pay over time
What it is: A formal payment plan with the IRS that lets you divide the balance into monthly installments.
How to apply: Use the IRS Online Payment Agreement tool or submit Form 9465 where applicable. See the IRS page on payment plans for the latest online options and thresholds (IRS: Payment Plans) [https://www.irs.gov/payments].
Key facts:
- Most taxpayers with a reasonable ability to pay qualify, including streamlined plans for smaller balances.
- Penalties and interest generally continue to accrue while you pay; longer terms mean more interest paid overall.
- Missing payments or new tax filings can default the agreement and reopen collection.
Pros: - Fast to set up in many cases; keeps collections at bay.
- Predictable monthly payment.
Cons: - Interest and penalties continue.
- The IRS may file a Notice of Federal Tax Lien for larger unpaid balances if it believes collection is at risk.
Typical timeframe: Streamlined plans can be set up in days; more complex agreements take several weeks.
Further reading: For help deciding between payment plans and other solutions, see When an Installment Agreement Is Better Than an Offer in Compromise (FinHelp) — a practical comparison: https://finhelp.io/glossary/when-an-installment-agreement-is-better-than-an-offer-in-compromise/
2) Offer in Compromise (OIC) — settle for less than you owe
What it is: An OIC is an agreement to settle a tax liability for less than the total owed when full payment would create economic hardship or there is doubt as to the liability.
How to apply: File Form 656 (Offer in Compromise) with a complete financial disclosure (Form 433-A, 433-F, or 433-B as required) and the application fee where applicable. The IRS details eligibility and the application process on its Offer in Compromise page (IRS: Offer in Compromise) [https://www.irs.gov/individuals/offer-in-compromise].
Key facts:
- The IRS computes your Reasonable Collection Potential (RCP) — the amount it believes you can pay — using assets, monthly income, and allowed living expenses.
- Approval is uncommon but appropriate when documented inability to pay exists.
- If accepted, you generally must stay current with future tax filings and payments for a period after the agreement.
Pros: - Potentially large reduction in total owed.
- Ends collection actions when accepted and paid.
Cons: - Application is document-heavy and can take months to process.
- Offers can be rejected; you may have to appeal or try other options.
Typical timeframe: Several months to over a year depending on backlog and complexity.
For a step-by-step guide to preparing the financial package and eligibility rules, see Filing an Offer in Compromise: Eligibility, Process, and Tips (FinHelp): https://finhelp.io/glossary/filing-an-offer-in-compromise-eligibility-process-and-tips/
3) Currently Not Collectible (CNC) — temporary relief from collection
What it is: CNC status temporarily suspends active IRS collection because paying would create significant financial hardship.
How to apply: Provide a complete financial snapshot to the IRS (Forms 433-A, 433-F or 433-B, plus supporting documents). The IRS may place your account in CNC after review if your monthly income is insufficient to cover reasonable living expenses and tax obligations.
Key facts:
- CNC pauses levies and garnishments but does not erase the debt; penalties and interest continue to accrue.
- The IRS will periodically review your ability to pay and can remove CNC status if your financial condition improves.
Pros: - Immediate relief from aggressive collection actions.
- Time to stabilize income or rebuild savings.
Cons: - Debt grows with interest and penalties; CNC is not permanent relief.
- The IRS can and will check back and pursue collection if circumstances change.
Typical timeframe: CNC can take weeks to establish; reviews happen periodically.
Authoritative source: See the IRS guidance on collection alternatives and temporary delay in collection for more details (IRS: Collection Alternatives) [https://www.irs.gov/businesses/small-businesses-self-employed/temporary-delay-in-collection].
Other options and tactical moves
- Penalty abatement: If you have a reasonable cause (serious illness, natural disaster, death in family, etc.), the IRS may abate penalties. Interest is rarely abated except in limited cases. (IRS: First-time penalty abatement policy.)
- Short-term borrowing: If you can obtain low-cost financing (home equity, personal loan) that costs less than accrued interest and penalties, it may save money versus a long installment plan.
- Bankruptcy: Some tax debts may be dischargeable in bankruptcy under narrow conditions. Consult a bankruptcy attorney; this is a complex path with significant consequences.
- Innocent spouse relief and other reliefs: If tax liability stems from a spouse’s actions, relief may be available.
Documentation checklist (what the IRS will typically ask for)
- Most recent tax returns and W-2/1099s.
- Recent pay stubs and bank statements (3–6 months).
- Monthly living expense breakdown (rent/mortgage, utilities, food, medical, transportation).
- Asset statements (vehicles, real estate, retirement accounts, investment accounts).
- Proof of special circumstances (medical bills, unemployment records, death certificates).
Eligibility examples and realistic outcomes
- Example 1: Installment agreement — A self-employed taxpayer with variable monthly income sets a partial-payment plan to avoid a levy, paying $250/month. Collections stop, but interest reduced future payments are still necessary.
- Example 2: Offer in Compromise — A long-term disabled taxpayer with little non-exempt assets submitted a complete financial package and had an OIC accepted for 40% of the liability after months of documentation and negotiation.
- Example 3: CNC — A taxpayer with no disposable income due to essential expenses (rent, food, medications) is placed in CNC, stopping wage garnishment while they seek disability benefits.
Common mistakes to avoid
- Ignoring notices: Do not ignore IRS correspondence — missed deadlines limit your options.
- Under-documenting: Sloppy or incomplete financial packages delay or doom OICs and CNC reviews.
- Assuming interest stops: Interest and penalties usually continue unless specifically abated.
- Signing the wrong agreement without professional review: Complex cases benefit from a CPA, enrolled agent, or tax attorney.
How long will relief last and what are the costs?
- Installment agreements: Costs include interest and a user fee for formal agreements (fee amounts and thresholds change; check the IRS payment plan page). Defaulting can add penalties and enforcement costs.
- OIC: There’s an application fee (waivers exist for low-income applicants) and the cost of compiling documentation; if accepted, your total payment is reduced but you may pay administrative costs.
- CNC: No fee, but interest accrues; the IRS periodically reevaluates status.
Practical timeline and decision matrix
- Review your current notices and total balance due. If you can pay within 120 days, ask about a short-term extension or direct payment to avoid fees.
- If cashflow is limited but predictable, apply for an installment agreement.
- If you cannot pay now or in the foreseeable future, document your finances and consider CNC or an OIC.
- If the situation is complex (business closure, bankruptcy, mixed liabilities), consult a qualified tax professional.
FAQs (short answers)
- Can the IRS garnish my wages immediately? Not usually — the IRS first issues notices and demand for payment; garnishment typically follows failure to respond or multiple defaults. Always respond promptly to avoid escalated enforcement. (IRS: Collection Process.)
- Will an OIC destroy my credit? OIC acceptance itself is not a direct credit event, but liens and levies can be public and affect credit indirectly. Always check state requirements about public notice.
- Can I negotiate an offer directly with the IRS? Yes — taxpayers or authorized representatives can negotiate, but proper documentation is essential.
Next steps (practical checklist)
- Open every IRS notice and read due dates.
- Gather 3–6 months of bank statements, pay stubs, and proof of expenses.
- Use the IRS online tools to explore payment plan options first: https://www.irs.gov/payments.
- If considering an OIC, prepare a full financial package and consider professional help: https://finhelp.io/glossary/filing-an-offer-in-compromise-eligibility-process-and-tips/.
- Keep a written log of all IRS contacts and copies of everything you send.
When to get professional help
In my practice, complex tax debts (mixed individual and business liabilities, potential bankruptcy, or large asset exposure) almost always benefit from a licensed professional — CPA, enrolled agent, or tax attorney. Professionals help ensure forms are complete, allowable living expenses are properly calculated, and appeals are timely.
Authoritative sources and further reading
- IRS — Payment Plans: https://www.irs.gov/payments (payment plan options, fees, and online setup).
- IRS — Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise (eligibility, Form 656, and process).
- IRS — Collection Alternatives and Temporary Delay in Collection: https://www.irs.gov/businesses/small-businesses-self-employed/temporary-delay-in-collection.
- Taxpayer Advocate Service: https://www.taxpayeradvocate.irs.gov (independent help when normal IRS procedures fail).
- FinHelp related articles: When an Installment Agreement Is Better Than an Offer in Compromise — https://finhelp.io/glossary/when-an-installment-agreement-is-better-than-an-offer-in-compromise/; 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 constitute individualized tax advice. Rules and thresholds change; consult a qualified tax professional licensed in your state for advice tailored to your situation.
