Quick overview

When you can’t pay a federal tax bill in full, the IRS offers three primary collection alternatives: an Offer in Compromise (OIC) to settle the debt for less than the full balance; an installment agreement to pay over time; and a temporary delay of collection (commonly called Currently Not Collectible or CNC). These options aim to balance the IRS’s duty to collect with the taxpayer’s ability to pay. In my 15 years advising clients, selecting the right path often depends on a clear financial picture and realistic documentation.

(Authoritative sources: IRS Offer in Compromise, IRS Online Payment Agreement, IRS guidance on temporary delays.)

How does each collection alternative work?

Offer in Compromise (OIC)

  • What it is: A legally binding agreement that lets the IRS accept less than the full tax balance if paying the full amount would create economic hardship or if there is doubt as to liability or collectibility.
  • How the IRS decides: The IRS calculates your Reasonably Collectible Amount (RCA) using current income, ordinary and necessary expenses, and realizable equity in assets (vehicles, real estate, bank accounts). If the RCA is less than your tax debt, an OIC may be approved.
  • What to submit: Form 656 (Offer in Compromise) plus a collection information statement (Form 433‑A, 433‑B or 433‑F depending on individual vs business). Proof of income, recent bank statements, and documentation of monthly expenses are required.
  • Timeline and costs: Processing time varies; expect several months (commonly 6–12 months). Fees or initial payments may be required depending on payment option chosen. Interest and penalties generally continue to accrue until and unless the IRS forgives part of the balance under the OIC (IRS: Offer in Compromise).
  • Real-world note from my practice: OICs are powerful but document‑intensive. I’ve seen reasonable offers approved when the financial picture clearly showed there was no realistic way to pay the full liability.

Installment Agreements

  • What it is: A plan to pay tax debt over time through monthly payments. Plans range from short-term pay‑in‑full arrangements to long-term streamlined plans and partial-payment installment agreements (PPIA).
  • How the IRS decides: For streamlined installment agreements, the IRS requires less documentation when the debt is below certain thresholds and you can pay within the allowed term. For PPIAs, expect a more detailed financial review (Form 433 series).
  • Practical points: Setting up automatic direct debit reduces default risk and may lower setup fees. Penalties and interest continue to accrue on the unpaid balance. The IRS offers an online application for many installment agreements (IRS: Online Payment Agreement Application).
  • When to use it: Ideal when you can afford a monthly payment that materially reduces the balance but cannot pay in full right away.

Temporary Delay in Collection (Currently Not Collectible — CNC)

  • What it is: If the IRS determines you have no ability to pay current living expenses after reasonable collection efforts, it may place your account in CNC status and temporarily stop active collection like levies or garnishments.
  • Important consequences: While CNC pauses collection action, penalties and interest typically continue to accrue and liens remain in place. The IRS may periodically review your financial situation and ask for updated documentation.
  • When to use it: Appropriate when hardship is temporary (job loss, medical emergency) or when income is insufficient to make any meaningful payment.

Eligibility: who will qualify for each alternative?

  • OIC: Generally for taxpayers who can show paying the full tax would cause financial hardship or where doubt exists about collectibility. The IRS evaluates income, necessary living expenses, and asset equity. Some debts (e.g., certain trust fund penalties) may be ineligible. (IRS: Offer in Compromise)
  • Installment agreements: Widely available; eligibility depends on debt size, taxpayer compliance (tax returns filed), and demonstrated ability to pay monthly. Online installment agreements have thresholds and requirements.
  • CNC: Requires substantiation that current income does not cover necessary living expenses and that collection would be futile in the short-term.

How to prepare: documents and steps that improve your odds

  1. Assemble documentation: pay stubs, bank statements (3–6 months), proof of regular expenses (rent/mortgage, utilities, insurance), medical bills, proof of unemployment or underemployment, and recent tax returns.
  2. Use the correct forms: Form 656 for OIC; Form 433‑A, 433‑B or 433‑F for financial statements; and the online payment agreement application for many installment plans where eligible. Check IRS pages for the latest forms and submission methods (IRS: Offer in Compromise; IRS: Online Payment Agreement Application).
  3. Run the numbers: Calculate your monthly disposable income after allowable living expenses. For OICs, estimate the RCA (the IRS’s notion of what it can reasonably collect). If the RCA is meaningfully lower than your balance, an OIC may be viable.
  4. Consider timing: Make sure you are current with filing requirements before applying. An outstanding unfiled return will usually make the IRS deny collection alternatives until you file.
  5. Keep records: Track all communications and receipts of payments or filings.

Pros and cons (quick comparison)

  • Offer in Compromise

  • Pros: Potentially large reduction in debt; clear finality if accepted.

  • Cons: Strict documentation, lengthy review, potential tax consequences for forgiven debt, and only available in certain situations.

  • Installment Agreement

  • Pros: Fast to set up in many cases (online), predictable monthly payment, keeps collection action limited if maintained.

  • Cons: Interest and penalties continue; default can lead to enforced collection.

  • Temporary Delay (CNC)

  • Pros: Immediate relief from levies and garnishments in many cases.

  • Cons: Accrual of interest and penalties, liens remain, and CNC is reviewed periodically.

Common mistakes and how to avoid them

  • Under‑documenting your financial picture: Submit complete bank statements and proof for claimed expenses.
  • Assuming an OIC is easy: Treat it as a formal negotiation—be precise and conservative with numbers.
  • Letting future taxes go unpaid: Falling behind on current year taxes can nullify existing agreements.
  • Ignoring collection notices: Respond promptly; silence hurts your credibility and options.

Practical negotiation tips from my practice

  • Be transparent and consistent: The IRS verifies items and will penalize misstatements.
  • Start by running conservative cash‑flow scenarios so you know what you can realistically offer monthly or as a lump sum.
  • If you lack confidence preparing the package, consider a tax professional. A practitioner who handles OIC calculations regularly can often avoid common mistakes and speed processing.
  • Use the IRS online tools when eligible — they are faster for many installment agreements. For more complex cases, plan for a written submission.

How collection alternatives affect liens, levies and credit

  • A lien generally remains until the debt is paid, discharged, or released under specific IRS procedures. An accepted OIC may result in lien release upon satisfaction of the offer; installment agreements do not automatically remove liens but can lead to releases in certain cases.
  • While the IRS does not report directly to credit bureaus, public tax liens (if recorded) can affect credit until released.

Helpful internal resources

Typical FAQs (short answers)

  • How long does an OIC take to process? Processing commonly takes 6–12 months but varies with complexity and IRS workload (IRS: Offer in Compromise).
  • Will interest stop if I enter an agreement? Interest and many penalties usually continue to accrue until the balance is paid or the IRS accepts an OIC that forgives part of the debt.
  • Can I apply for more than one option? You can explore multiple options, but pick the approach that best matches your situation — simultaneous filings can complicate review.

Next steps

  1. Gather the documents listed above.
  2. Use the IRS online tool if your debt and situation meet the streamlined installment requirements.
  3. If considering an OIC or CNC, prepare a complete Form 433 package and consult a professional if the numbers are complex.
  4. Stay current with filing and upcoming tax obligations to preserve eligibility for programs.

Disclaimer and closing

This article is educational and not personalized tax advice. Rules and procedures change; confirm current requirements directly with the IRS or a qualified tax professional. My recommendations are drawn from practice experience and public IRS guidance.

Authoritative sources