What Are Your Options for Paying a Large Tax Bill Without Filing for Bankruptcy?
Facing a large tax bill can trigger real stress, but bankruptcy is not the only path. The IRS and other creditors offer several non‑bankruptcy solutions that let you pay over time, reduce what you owe in limited circumstances, temporarily suspend collection activity, or use credit strategically to bridge a gap. Below I explain the practical options, eligibility considerations, application steps, and tradeoffs so you can make an informed decision. (For IRS program details, see IRS Payments and Offer in Compromise pages.)
Quick overview of the main options
- Installment agreement (pay over time to the IRS)
- Partial payment installment agreement (pay less than full amount over time)
- Offer in Compromise (settle for less than full balance if you can’t pay)
- Currently Not Collectible (temporary suspension of collection for hardship)
- Penalty abatement or reasonable cause relief
- Borrowing options (home equity line of credit, personal loan, credit card) — use cautiously
- Short-term filing fixes (amendments, abatement requests) when the bill is incorrect
How these options differ (high-level)
- Installment agreements keep you compliant but interest and penalties continue accruing until paid in full. They preserve your assets and let you spread payments monthly.
- Offers in Compromise (OIC) may reduce the total owed but have strict eligibility and documentation requirements and take time to process.
- Currently Not Collectible (CNC) can stop collection actions temporarily but interest and penalties still accrue, and liens remain unless otherwise removed.
- Borrowing converts tax debt into consumer or secured debt — often faster but may increase total cost and can put assets at risk.
Installment agreements: how to set one up and what to expect
If you can pay your tax debt over time, an IRS installment agreement is often the first and most practical tool. You can request an agreement online, by mail, or by phone. The IRS accepts online requests for many taxpayers and offers several varieties of installment plans, including full‑balance and partial payment options. (See the FinHelp guide on Setting Up an IRS Installment Agreement for step‑by‑step help.)
Key points:
- Apply as soon as you know you can’t pay in full—delaying increases penalties and interest.
- The IRS typically requires you to stay current with future tax filings and payments while on a plan.
- Interest and failure‑to‑pay penalties generally continue to accrue until the balance is paid.
- Defaulting on the agreement can re‑accelerate the full balance and reinstate collection actions.
Practical tips from my practice: when a client has predictable monthly cash flow, I usually recommend a direct debit installment agreement. Direct debit reduces default risk and often carries lower setup fees. If cash flow is uneven, a shorter term with higher monthly payments may be preferable to limit interest costs.
Internal resources: see this FinHelp article for details on Setting Up an IRS Installment Agreement: https://finhelp.io/glossary/setting-up-an-irs-installment-agreement/.
Partial Payment Installment Agreements (PPIA)
A PPIA lets you make monthly payments that the IRS determines you can afford while they keep the account open. The balance remains until the Collection Statute Expiration Date (CSED) unless you pay more or qualify for an OIC. PPIAs require submission of financial information (IRS Form 433‑F or equivalent documentation).
Offers in Compromise: settle for less than you owe (rare but sometimes best)
An Offer in Compromise (OIC) lets you propose a lump sum or periodic payment that the IRS may accept if it’s unlikely the agency can collect the full amount. OICs are intended for taxpayers whose income, expenses, and asset equity show true inability to pay (doubt as to collectibility) or when there is doubt as to liability.
Important realities:
- OICs are documentation‑intensive; expect to provide bank statements, pay stubs, property valuations, and Form 433‑A/433‑F depending on whether you’re an individual or business. (See IRS Form 656 for the application and instructions.)
- Acceptance rates are relatively low; many proposals are rejected or returned for more information.
- An accepted OIC becomes final only after you meet payment terms and remain compliant for a specified period.
If you’re considering an OIC, read FinHelp’s Offer in Compromise overview: https://finhelp.io/glossary/offer-in-compromise-oic/ and compare options at https://finhelp.io/glossary/installment-agreements-vs-offers-in-compromise-which-is-right-for-you/.
Currently Not Collectible (CNC): pause collections when payments aren’t possible
If you can show the IRS you have no reasonable ability to pay (basic living expenses exceed income), the IRS may place your account in Currently Not Collectible status. This halts most collection activity temporarily, including levies, but does not erase the debt. Interest and penalties generally keep accruing and tax liens may remain attached to property.
In my experience CNC is most helpful as a short‑term breathing room while you reorganize finances or pursue other solutions (e.g., an OIC or arranging a loan). Always document your expenses carefully (rent/mortgage, utilities, medical costs) to support a CNC request.
Penalty relief and reasonable cause
If penalties are a major portion of the bill, you may qualify for abatement if you have a reasonable cause (serious illness, natural disaster, incorrect advice from an IRS employee, etc.). The IRS considers penalty relief on a case‑by‑case basis (see IRS Penalty Relief). If accepted, abatement lowers your balance faster than long amortization.
Using credit or loans to pay tax debt (pros/cons)
Some taxpayers borrow to avoid escalating interest and penalties on tax debts. Options include a home equity line of credit (HELOC), personal loan, or 0% intro credit card (if the balance is small and can be paid during the promotional period).
Pros:
- Potentially lower interest cost than IRS penalties and interest
- Faster resolution, may remove tax liens or stop levies sooner
Cons:
- Converts tax debt into secured or consumer debt, risking collateral
- Can worsen long‑term finances if you don’t change the cash flow problems that caused the tax debt
In practice I only recommend borrowing when:
- The interest and fees on the loan are demonstrably lower than the IRS interest plus penalties, and
- The borrower has a realistic repayment plan and emergency buffer.
What to document and prepare before you act
- Recent tax returns and IRS notices
- Pay stubs and bank statements (3–6 months)
- Monthly budget (rent, utilities, medical, food, transportation)
- Asset statements (home equity, retirement balances, vehicle values)
- Relevant legal or medical documentation that supports reasonable cause
Using a complete packet reduces processing time and improves outcomes for OIC or installment negotiations.
Common mistakes and how to avoid them
- Waiting until the IRS takes enforcement action—apply early for an installment plan.
- Failing to file past returns—you must file to qualify for most IRS programs.
- Underestimating paperwork—OICs and PPAs require detailed, accurate documentation.
- Using retirement funds carelessly—withdrawals may trigger taxes, penalties, and reduced future security.
How the IRS treats liens and levies
The IRS can file a Notice of Federal Tax Lien to protect its claim on your property. A lien doesn’t take property but can make selling or refinancing difficult. Levies (seizing assets, bank accounts, or wages) are more severe. An approved installment agreement or OIC can limit or remove immediate levy risk, but you must maintain compliance.
Practical timeline and next steps
- Read the IRS notice carefully—note the date and balance due.
- File any unfiled returns immediately; you generally can’t enter many payment programs without current filings.
- Calculate a realistic monthly budget and decide whether you can pay the balance over time.
- Explore an installment agreement online first (fastest for many taxpayers). See FinHelp’s guide on requesting an installment agreement online: https://finhelp.io/glossary/how-to-request-an-installment-agreement-online/.
- If you truly can’t pay in full, evaluate OIC eligibility — consider using the IRS OIC pre‑qualifier and consult a tax professional before submitting Form 656.
FAQs (short)
Q: Will interest and penalties stop while I’m on a payment plan?
A: No. Interest and most penalties continue to accrue until the balance is paid in full, although some penalty abatements are available (IRS Penalty Relief).
Q: If I enter an installment plan, can the IRS still file a tax lien?
A: Yes. The IRS may file a Notice of Federal Tax Lien while the debt is outstanding. Some installment plans request lien withdrawal only after full payment or specific conditions are met.
Q: Should I file bankruptcy to remove tax debt?
A: Some tax debts can be discharged in bankruptcy under strict conditions, but bankruptcy has long‑term credit and legal consequences. Discuss bankruptcy with a bankruptcy attorney — it’s not a routine fix for most recent tax liabilities.
Final professional tips
- Act quickly. Small actions early (contacting the IRS, setting up an agreement) prevent enforcement escalation.
- Be truthful and thorough; inconsistent documentation harms credibility.
- Use direct debit for installment agreements when possible to reduce default risk.
- If considering an OIC, get professional help — many submissions fail for avoidable documentation errors.
Professional disclaimer: This article is for educational purposes and reflects general guidance based on professional experience. It is not individualized legal, tax, or financial advice. For decisions about your specific situation, consult a licensed tax professional or attorney.
Authoritative sources and further reading: IRS Payments (https://www.irs.gov/payments), IRS Offer in Compromise (https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise), Consumer Financial Protection Bureau (https://www.consumerfinance.gov).