Overview

Owing a large amount of tax to the IRS or a state agency is stressful, but there are formal programs and practical steps you can use to protect your finances while resolving the debt. This guide breaks down the most common IRS options, explains who typically qualifies, gives a decision path for choosing among them, and lists the documents and timelines you’ll need.

(Author note: In my practice I’ve helped dozens of clients move from threat of levy to a workable repayment solution—often by choosing the right program early and presenting a complete financial package.)

Sources and further reading are linked throughout; primary IRS guidance remains the authoritative reference (see IRS pages on payment plans, Offers in Compromise, and collection procedures).

Quick decision checklist

  • Can you pay the full balance within a reasonable time by stretching payments? Consider an installment agreement (IA).
  • Can you prove that paying the full tax debt would create undue hardship after liquidating nonexempt assets? Consider an Offer in Compromise (OIC).
  • Are your income and essential living expenses so low that collection would create immediate hardship? Consider Currently Not Collectible (CNC) status.
  • Is bankruptcy on the table? Some older income tax liabilities may be dischargeable in bankruptcy—consult a bankruptcy attorney.

Use the short checklist above to focus your next action: request an IA immediately to stop aggressive collection, or prepare a full financial package if pursuing an OIC.

The main IRS options explained

1) Installment Agreement (IA)

What it is: A formal monthly payment plan that lets you pay over time while avoiding levies in many cases.
Who it’s best for: Taxpayers with steady income who can make regular monthly payments but cannot pay the full balance at once.
How to apply: Streamlined short-term or long-term installment agreements can be requested online or by submitting Form 9465 (Installment Agreement Request). For larger balances you may need to provide financial information (Form 433 series) or qualify under the IRS Fresh Start rules (IRS, payment plans page: https://www.irs.gov/payments).
Key points:

  • Fees and interest continue to accrue while the agreement is active, and penalties generally continue unless otherwise abated.
  • Streamlined installment agreements are available for many taxpayers with smaller balances; partial-payment installment agreements are also an option when full payment isn’t possible (IRS, Installment Agreements: Types, Costs, and Eligibility: https://finhelp.io/glossary/installment-agreements-explained-types-fees-and-eligibility/).

Practical tip: If a levy is imminent, request an automatic installment agreement immediately to buy time; follow up with full documentation as requested.

2) Offer in Compromise (OIC)

What it is: A settlement where the IRS agrees to accept less than the full amount owed when that amount is the most the IRS can expect to collect within a reasonable period.
Who it’s best for: Taxpayers who lack sufficient income and nonexempt assets to pay the full tax debt, and for whom an IA would not be effective.
How to apply: Submit Form 656 (Offer in Compromise) and the required financial statements (Form 433-A for individuals, 433-B for businesses) plus an application fee and initial payment under current rules. The IRS uses a formula based on disposable income and realizable asset equity to evaluate offers (IRS, Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise).
Key points:

  • OICs can take many months to process; acceptance is not guaranteed.
  • If your offer is rejected, you may be able to appeal or reapply; the IRS may continue collection while an offer is pending unless a proper Stay of Collection has been obtained.
  • Forgiven amounts may have tax consequences; check IRS guidance on canceled debt and Form 1099-C rules.

Interlink: For a deeper look at eligibility and process, see our page “What Is an Offer in Compromise? Eligibility, Process, and Alternatives.” (https://finhelp.io/glossary/what-is-an-offer-in-compromise-eligibility-process-and-alternatives/)

3) Currently Not Collectible (CNC) status

What it is: A temporary IRS determination that a taxpayer cannot pay anything toward their tax debt without experiencing severe financial hardship.
Who it’s best for: People with very low monthly disposable income or those in short-term job loss, medical crisis, or other hardships.
How it works: The IRS pauses active collection (levies, garnishments) while keeping the account open; interest and penalties generally continue to accrue. CNC is not a forgiveness—it is temporary and subject to periodic review. (IRS, Collection: Currently Not Collectible)

Practical tip: CNC is often a bridge solution. While in CNC, focus on rebuilding emergency savings and documenting any change in income so you can revisit repayment options when your situation improves.

Comparing the options — who wins?

  • Short-term cash flow problem: Installment Agreement.
  • Long-term inability to pay from income and assets: Offer in Compromise (if you qualify).
  • Temporary, severe hardship: Currently Not Collectible.
  • Lever or lien already filed: Installment Agreement or OIC may enable lien withdrawal under Fresh Start rules if certain conditions are met (see IRS lien procedures and our guide “Step-by-step Guide to Removing a Federal Tax Lien Under Fresh Start Rules” for details: https://finhelp.io/glossary/step-by-step-guide-to-removing-a-federal-tax-lien-under-fresh-start-rules/).

How to choose — a simple decision pathway

  1. Calculate realistic monthly disposable income after essential expenses (use the IRS Collection Financial Standards as a baseline).
  2. Inventory assets that could be sold (nonexempt equity in vehicles, investment accounts, second homes, etc.).
  3. If disposable income can cover a monthly payment that pays the tax off within a reasonable term, apply for an IA.
  4. If you cannot reasonably pay and liquidation of assets still leaves a gap, prepare an OIC financial package.
  5. If current income is below necessary living expenses, apply for CNC while documenting ongoing hardship.

Document everything: pay stubs, bank statements, proof of rent or mortgage, medical bills, and a month of everyday expenses. The IRS will expect credible documentation.

Timelines and consequences

  • Installment Agreements: Enrollment can be immediate once approved; defaulting can result in enforced collection actions and reinstatement of levies.
  • Offers in Compromise: Processing often takes several months; complicated offers can take 12–24 months in some cases.
  • CNC: Usually immediate if evidence supports current inability to pay; the IRS may review every 6–12 months.

Consequences to watch for:

  • Interest and penalties continue to accrue until the principal is paid or legally forgiven.
  • A Notice of Federal Tax Lien can harm credit and borrowing; lien withdrawals are possible under Fresh Start rules if you meet program requirements (IRS and FinHelp guide: https://finhelp.io/glossary/how-tax-liens-affect-credit-and-ways-to-remove-them/).
  • Forgiven debt may be taxable; consult IRS guidance on canceled debt and insolvency exceptions.

Documentation checklist (what to prepare now)

  • Most recent federal tax returns and notices from the IRS.
  • Last 3 months of pay stubs and 6–12 months of bank statements.
  • Proof of monthly living expenses: rent/mortgage, utilities, childcare, insurance.
  • Statements for vehicles, retirement accounts, brokerage accounts, and other assets.
  • Medical bills, unemployment records, or other proof of hardship.
  • Completed IRS forms, as appropriate: Form 9465 (Installment Agreement), Form 656 (OIC), Form 433-A/433-B (Collection Information Statements). (Forms: https://www.irs.gov/forms-pubs)

Professional tips from practice

  • Don’t ignore notices. Even filing a basic IA request can stop imminent levies.
  • Be conservative in expense reporting: use IRS collection standards where possible; overstating expenses reduces credibility.
  • If you expect a one-time windfall (inheritance, sale of property), that will affect OIC and IA calculations—disclose it.
  • Communicate in writing and keep copies of all correspondence.
  • If you owe payroll taxes or trust fund taxes, penalties and criminal exposure differ; consult a tax attorney.

When to hire a professional

  • The IRS has denied an OIC previously, or your financial situation is complicated (multiple businesses, high net worth).
  • You are facing an immediate levy or seizure and need urgent representation.
  • You are uncertain how bankruptcy may interact with your tax debts.

Use enrolled agents, CPAs, or tax attorneys who are experienced in IRS collections; they can file power-of-attorney (Form 2848) and negotiate on your behalf.

Common mistakes to avoid

  • Waiting until a levy is already in place without trying a payment plan.
  • Providing incomplete financial documentation when applying for an OIC.
  • Assuming CNC is permanent—maintain records and watch for IRS review.
  • Not considering collateral consequences (lien on property, impact on business lending).

Frequently asked questions

Q: Will an IA stop an IRS levy?
A: Often yes if the IA is approved before the levy is executed; if a levy has already occurred, you must request a release and arrange payments or appeal.

Q: Does an OIC affect my credit?
A: The offer itself won’t be listed on consumer credit reports, but an existing Notice of Federal Tax Lien can harm credit until it’s withdrawn or released (see our guide: https://finhelp.io/glossary/how-tax-liens-affect-credit-and-ways-to-remove-them/).

Q: Is forgiven tax debt taxable?
A: Sometimes. The IRS treats canceled debt as income in many cases (Form 1099-C), but exceptions exist (bankruptcy, insolvency). Review IRS canceled debt rules.

Resources

Related FinHelp articles:

Professional disclaimer: This article is educational and does not constitute legal or tax advice. For advice tailored to your circumstances, consult a qualified tax professional, enrolled agent, CPA, or tax attorney.

(Authority: IRS guidance and CFPB resources reviewed as of 2025.)