Options When You Can’t Afford an IRS Lump-Sum Payment

Quick reality check

Owing taxes you can’t pay in full is common. The IRS expects payment when taxes are due, but it also provides formal pathways to collect over time or reduce what you must pay now. Acting quickly protects you from enforced collection (levies, liens) and reduces surprise interest and penalties.

Primary IRS options (what they do and when they make sense)

1) Installment Agreement

• What it is: A formal payment plan that spreads your tax debt into monthly payments accepted by the IRS. You remain responsible for interest and penalties until the balance is paid in full.
• When it makes sense: You have predictable monthly cash flow and expect to fully repay the debt.
• Key steps: Apply online using the IRS Online Payment Agreement tool or file Form 9465 if you prefer mail. You’ll need basic account and income information.
• Important considerations: The IRS charges setup/user fees and may require direct debit for lower fees; interest and late‑payment penalties continue while the balance is outstanding. If you default, the IRS can revert to collection actions. For guidance on small balances and streamlined options, see our article on streamlined installment agreements.
• Internal link: streamlined installment agreements — https://finhelp.io/glossary/how-streamlined-installment-agreements-work-for-small-balances/
• IRS reference: IRS Online Payment Agreement (irs.gov/payments).

2) Offer in Compromise (OIC)

• What it is: A negotiated settlement that lets you pay less than the full tax liability when full payment would be unfair or impossible based on your assets and income.
• When it makes sense: Your reasonable collection potential (what the IRS thinks you could pay) is less than the tax owed, and you can document that paying full tax would create financial hardship.
• Key steps: Complete Form 656 (Offer in Compromise) and the required financial disclosure (Form 433‑A for individuals). You must submit supporting documents and a nonrefundable application fee unless you qualify for a low‑income waiver.
• Important considerations: OICs have strict eligibility and documentation requirements; many applications are rejected. If your offer is accepted, there are ongoing compliance rules (filing returns and paying taxes on time for several years). For help building a financial package, see our guide to preparing a strong Offer in Compromise.
• Internal link: preparing a strong Offer in Compromise financial package — https://finhelp.io/glossary/preparing-a-strong-financial-package-for-an-offer-in-compromise/
• IRS reference: Offer in Compromise (irs.gov/offer‑in‑compromise).

3) Currently Not Collectible (CNC) Status

• What it is: The IRS temporarily pauses aggressive collection when you can’t pay basic living expenses. Your account remains open and interest and penalties continue to accrue, but the IRS suspends levies and most collection actions.
• When it makes sense: You have little to no disposable income after necessary living expenses or a short‑term crisis (job loss, medical emergency).
• How to request it: You (or your authorized representative) can ask the IRS to place the account in CNC by providing a complete financial statement (Form 433‑A/433‑F) and documentation of hardship.
• Important considerations: CNC is a temporary reprieve, not forgiveness. The IRS may periodically review your status and resume collection if your situation improves. For help deciding between CNC and an installment agreement, see our comparison article.
• Internal link: choosing between an installment agreement and CNC — https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-currently-not-collectible-status/
• IRS reference: Temporary delay in collection (irs.gov/collections).

Short‑term and alternative tactics (use with caution)

• Pay what you can now: Even a partial payment reduces future interest and penalties. Use Direct Pay, IRS Direct Debit, or EFTPS for secure payments (irs.gov/payments).
• Borrowing to avoid tax penalties: Some people use a low‑interest personal loan, a home equity line of credit, or a 0% credit card promotion to pay the IRS. This can make sense when the loan’s interest rate is lower than IRS interest/penalties, but it increases personal borrowing and may have other costs. The Consumer Financial Protection Bureau and other consumer sites outline pros and cons of loans vs. tax repayment.
• Tap retirement accounts only with caution: A 401(k) loan or early 401(k)/IRA withdrawal has immediate tax and potential penalty consequences and can damage retirement security. Consider as last resort and consult a tax advisor.

How to choose the right path — a practical process I use with clients

1. Calculate total tax owed, current penalties, and estimated ongoing interest (use the IRS calculator or ask a tax pro).
2. Build a one‑page cash‑flow snapshot: monthly take‑home pay, non‑discretionary expenses, and available assets (bank accounts, vehicles, real property).
3. Compare options:

• If you can pay something monthly and expect future income, an installment agreement is usually the fastest, simplest fix.
• If you truly cannot pay the full tax based on your reasonable collection potential, prepare an OIC packet — but expect rigorous review.
• If your current income is insufficient to meet basic living expenses, CNC may temporarily stop collection while you recover.

1. Consider short‑term borrowing only if its cost (interest + fees) is lower than expected IRS costs and you can repay the loan.
2. Document everything and keep current with tax filings — missing returns or future tax payments can jeopardize installment plans and OICs.

In my practice of helping over 500 clients with tax collections, most clients benefit from the predictability of an installment agreement; OICs are powerful but require thorough preparation and realistic expectations.

Common mistakes and how to avoid them

• Ignoring IRS notices: Silence leads to penalties and escalated collection (liens, levies). Always respond promptly.
• Assuming the IRS will forgive interest/penalties automatically: Interest accrues until full payment or settlement. Requesting abatement is a separate process and requires proof of reasonable cause (irs.gov/forms‑instructions).
• Under‑documenting an OIC: Incomplete financial pack‑ ets are the main reason offers are denied. If you file an OIC, attach bank statements, pay stubs, medical bills, and proof of household expenses.
• Using high‑cost credit to “buy time” without a repayment plan: Rolling tax debt onto high‑interest credit cards can worsen your financial position.

Practical application timelines and what to expect

• Installment Agreement: Approval can be immediate online for many taxpayers; manual review can take a few weeks. Defaulting risks collection actions.
• Offer in Compromise: The IRS takes months to review OICs; don’t expect a quick fix. If the IRS rejects the offer, you can appeal within 30 days using Form 13711 (Request for Appeal of Offer in Compromise).
• CNC: The IRS may grant a temporary delay quickly if your financial disclosures clearly show hardship; periodic reviews can follow.

Paperwork and documentation checklist

• Most recent tax return(s) and proof you filed required returns.
• Pay stubs and statements of other income.
• Bank and investment account statements.
• Monthly bills and living expense records (rent/mortgage, utilities, insurance, medical).
• If seeking an OIC: completed Form 656 and Form 433‑A (or 433‑F) and supporting docs; application fee or low‑income waiver documentation.

How the IRS collects if you do nothing

• The IRS continues to assess interest and late‑payment penalties, issues Notices and demands, and can file a Notice of Federal Tax Lien or levy bank accounts and wages. Promptly engaging the IRS to select one of the options above typically reduces escalation.
• Authoritative reference: IRS collections overview (irs.gov/collections) — review that page for current procedures.

When to bring in a professional and the Taxpayer Advocate

• Bring a CPA, enrolled agent, or tax attorney when: you’re considering an OIC, facing a lien or levy, have a complex asset situation, or need to negotiate terms. In my experience, a prepared financial package raises OIC approval odds and reduces rework.
• If you’re experiencing significant hardship and the IRS isn’t responding appropriately, the Taxpayer Advocate Service is an independent resource that can help (irs.gov/advocate).

Final checklist — immediate actions you can take today

• Don’t ignore the notice. Read it carefully and note deadlines.
• Make a partial payment if possible to reduce interest.
• Visit the IRS Payment Options page and decide whether to apply for an installment agreement, OIC, or CNC (irs.gov/payments).
• Pull together income and expense documentation.
• If unsure, contact a qualified tax pro or the Taxpayer Advocate Service.

Professional disclaimer

This article is educational only and does not constitute personalized tax, legal, or financial advice. Rules and forms change; always confirm current procedures on IRS.gov and consult a tax professional about your specific situation.

Authoritative resources and further reading

• IRS — Payment Options, Online Payment Agreement, Offer in Compromise pages (irs.gov).
• Taxpayer Advocate Service — help for unresolved tax problems (irs.gov/advocate).
• Consumer Financial Protection Bureau — resources on borrowing and managing debt (consumerfinance.gov).

Internal articles you may find helpful:

• How Streamlined Installment Agreements Work for Small Balances — https://finhelp.io/glossary/how-streamlined-installment-agreements-work-for-small-balances/
• Preparing a Strong Financial Package for an Offer in Compromise — https://finhelp.io/glossary/preparing-a-strong-financial-package-for-an-offer-in-compromise/
• Choosing Between an Installment Agreement and Currently Not Collectible Status — https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-currently-not-collectible-status/

If you want, I can convert this guidance into a personalized checklist tailored to your income range, assets, and monthly budget—just provide basic non‑sensitive numbers and I’ll outline the most likely best path.