Background

When taxpayers fall behind, the IRS provides structured ways to resolve balances rather than forcing immediate full payment. In my 15+ years advising clients, I’ve seen these three tools—Installment Agreements (IAs), Offers in Compromise (OICs), and Currently Not Collectible (CNC) status—used to protect cash flow, settle debts in hardship cases, or pause collection while circumstances improve.

How each option works

  • Installment Agreements (IA)

  • What it is: A formal payment plan to pay the IRS over time. You remain responsible for the full tax, plus continuing interest and penalties until paid. The IRS offers online and streamlined options for many taxpayers (see IRS Online Payment Agreement).

  • When it’s best: You have steady income and can afford a monthly payment that covers at least part of the liability.

  • Key facts: Agreements can be short‑term or long‑term; defaulting can trigger enforced collection. The IRS may require direct debit for low‑cost setup and to reduce default risk.

  • Further reading: Streamlined Installment Agreements (requirements and limits).

  • Offers in Compromise (OIC)

  • What it is: A negotiated settlement where the IRS accepts less than the full amount owed when collection of the full liability is unlikely or when paying in full would create economic hardship. Approval is rare and based on financial ability, assets, and future income.

  • Grounds for acceptance: doubt as to liability, doubt as to collectibility (most common), or effective tax administration.

  • When it’s best: Your reasonable collection potential (RCP) — cash plus value of assets and future income — is significantly less than the tax owed.

  • Key facts: OICs require detailed financial statements and documentation; many applicants are rejected for incomplete or unrealistic offers. Processing often takes several months. (See IRS Offers in Compromise guidance.)

  • Further reading: Preparing a Strong Offer in Compromise: Financial Documents That Matter.

  • Currently Not Collectible (CNC)

  • What it is: The IRS temporarily suspends active collection (levies, garnishments) when a taxpayer’s income and assets are insufficient to meet basic living expenses and pay the debt.

  • When it’s best: Short‑term hardship (job loss, medical crisis) makes payments impossible.

  • Key facts: CNC does not make the debt go away — interest and penalties continue, liens remain in place, and the IRS can resume collection if your financial situation improves. The IRS reviews CNC periodically.

  • Further reading: If You Can’t Pay: Applying for Currently Not Collectible (CNC) Status.

Real-world examples (anonymized)

  • IA: A small‑business owner set up a long‑term IA to smooth fluctuating cash flow while keeping the business operating. Direct debit payments helped avoid future defaults.
  • OIC: A taxpayer with low assets and high medical bills qualified for an OIC after careful documentation showed the IRS could not reasonably collect the full balance.
  • CNC: An unemployed taxpayer obtained CNC status while searching for work; the IRS later re‑evaluated after new income appeared.

Eligibility and how the IRS evaluates cases

  • IAs: The IRS considers the total balance, ability to pay, filing compliance, and whether you’ve provided current financial information.
  • OICs: The IRS calculates reasonable collection potential (RCP) — the amount it expects to collect from your assets and future income — and compares it with your offer.
  • CNC: The IRS reviews income, allowable expenses (per IRS national and local standards), and assets to determine whether collection would cause undue hardship.

Practical steps to take

  1. File all required returns and stay current — unresolved returns block most relief options.
  2. Gather documentation: pay stubs, bank statements, bills, loan terms, and asset valuations.
  3. Talk to the IRS early — it’s better to request relief than to ignore notices. Keep written records of contacts.
  4. Consider professional help for complex OICs or when liens/levies are at stake. In my practice, good documentation and realistic offers materially improve outcomes.

Common mistakes and misconceptions

  • Mistake: Assuming a single option fits every case. Reality: income, assets, and long‑term plans determine the best path.
  • Mistake: Skipping documentation or submitting incomplete OIC paperwork — the most common reason for denial.
  • Misconception: CNC removes the debt or the lien. It only pauses collection; the liability and any lien remain.

Costs, timelines, and tax consequences

  • Interest and penalties generally continue to accrue until the account is fully paid or otherwise resolved.
  • IAs: Setup can be quick (online options available); long‑term plans can last years depending on balance and payment size.
  • OICs: Processing commonly takes several months; more complex cases can take longer. If accepted, the settlement amount is generally treated as satisfaction of the debt (some tax forgiveness can be taxable — check IRS rules or consult a tax pro).

When to consider bankruptcy or other alternatives

OICs and CNC are different from bankruptcy. In certain cases, filing bankruptcy can discharge some tax debts—depending on age of the tax, filing status, and whether returns were filed on time. Discuss this option with a bankruptcy attorney and tax professional.

FAQs

  • Can I change my Installment Agreement if my financial situation changes?
    Yes. You can request a modification; the IRS will review current income and expenses. Keep records and request the change promptly.

  • How long does an Offer in Compromise take to process?
    The IRS often takes several months to decide. Timelines vary with case complexity and documentation quality.

  • Does CNC stop a tax lien or statute of limitations?
    No. CNC typically stops active collection but does not remove a lien. The statute of limitations for collections (usually 10 years after assessment) continues to run.

Authoritative sources and tools

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Professional disclaimer

This article is educational and does not replace personalized tax advice. For decisions that affect your tax liabilities, consult a qualified tax professional, enrolled agent, or attorney who can review your full financial situation.