Quick summary

If you owe more tax than you can pay immediately, don’t ignore notices. The IRS offers multiple pathways to manage or reduce tax debt, including structured payment plans, negotiated settlements, and temporary suspension of collection activity. Choosing the right option depends on your income, assets, expected changes in finances, and compliance history.

Why this matters

Unpaid federal tax can trigger penalties, interest, liens, levies, and even enforced collection such as wage garnishment. The IRS typically has 10 years from assessment to collect most tax debts (the Collection Statute Expiration Date), so unresolved balances can affect your finances for years. Acting proactively preserves options and often lowers total long-term cost (IRS: Payments; IRS: Offer in Compromise).

Main options explained

Below are the commonly used solutions, how they work, and when to consider each.

1) Installment Agreement (Monthly Payment Plan)

  • What it is: A formal arrangement to pay your balance in monthly installments over time while staying in compliance.
  • Who it fits: Taxpayers with steady but insufficient cash flow who can commit to monthly payments.
  • Variations: Short-term plans (for balances you can pay within a few months) and long-term plans. The IRS also offers streamlined options for smaller balances and direct-debit agreements that reduce default risk.
  • How to get it: Apply online or by phone; the IRS has an online payment agreement application and local IRS offices can help (IRS: Payment Plans).
  • Key trade-offs: Interest and penalties continue to accrue until the balance is paid. Direct debit reduces the chance of default and sometimes lowers fees.

Practical note from my experience: many clients who miss a single quarterly tax payment find a short-term installment plan the fastest way to stop collection activity while they stabilize cash flow. For details on qualifying and setup, see our guide on how to qualify for a streamlined installment agreement.

(Internal link: How to Qualify for a Streamlined Installment Agreement — https://finhelp.io/glossary/how-to-qualify-for-a-streamlined-installment-agreement/)

2) Offer in Compromise (OIC)

  • What it is: A negotiated settlement in which the IRS accepts less than the full amount owed if it determines the offered amount is the most it can reasonably collect.
  • Who it fits: Taxpayers with a demonstrated inability to pay in full, usually because their income and assets leave little or no ability to pay over the collection period.
  • How it works: You submit a financial package and application. The IRS evaluates income, necessary living expenses, and collectible equity in assets to compute a reasonable offer.
  • Timeline and cost: OIC reviews often take months; applicants supply detailed documentation. There is an application fee and payment terms; low-income taxpayers may qualify for fee waivers (IRS: Offer in Compromise).

In my practice, I see OICs approved most often when the taxpayer’s future earning power is clearly limited and their financial worksheet shows little realistic ability to pay. For guidance on applying and common pitfalls, see our detailed OIC article.

(Internal link: Offer in Compromise: Qualifying, Applying, and Pitfalls — https://finhelp.io/glossary/offer-in-compromise-qualifying-applying-and-pitfalls/)

3) Currently Not Collectible (CNC) Status

  • What it is: A temporary classification the IRS may grant when you can’t pay anything without causing significant financial hardship.
  • Who it fits: Taxpayers whose required living expenses leave no disposable income to apply toward tax debt.
  • What it does: Collections pauses (no levies or garnishments while CNC is in effect), though penalties and interest continue to accrue, and the IRS can review your financial status periodically.
  • Risks: The IRS can file a tax lien or still take enforced action if your financial situation improves.

4) Short-Term Solutions and Other Options

  • Short-term payment plans: If you can pay within a few months, a short-term plan may have limited or no setup fees.
  • Partial payment installment agreements: For taxpayers who can pay something but not the full amount before the statute expires, partial-payment plans spread payments and may reduce immediate levies.
  • Bankruptcy and tax debt: In some cases, taxes can be discharged in bankruptcy, but the rules are complex and depend on the type of tax, filing history, and time periods. Consult a bankruptcy attorney.
  • Private financing: Home equity lines, personal loans, or credit can bridge a short-term gap — but compare interest and fees before borrowing to avoid exchanging tax debt for higher-cost consumer debt.

For practical alternatives to an OIC, read our piece on alternative strategies when an OIC is unlikely.

(Internal link: Alternatives to an Offer in Compromise: When to Consider Other Options — https://finhelp.io/glossary/alternatives-to-an-offer-in-compromise-when-to-consider-other-options/)

Immediate steps to take (action checklist)

  1. Read IRS notices carefully — they explain amounts, deadlines, and the right local contact. Missing a deadline can reduce your options. (Do not ignore mail from the IRS.)
  2. Confirm that tax returns are filed. The IRS generally won’t approve a payment plan or OIC if required returns are unfiled.
  3. Gather documentation: pay stubs, bank statements, monthly bills, mortgage statements, proof of income, and documentation for dependents or unusual expenses.
  4. Estimate a realistic monthly payment you can keep. Under-promising and defaulting makes future options harder and can increase total cost.
  5. Explore an online payment agreement or call the IRS to request help. If you’re unsure, consult a qualified CPA, enrolled agent, or tax attorney.

Pro tip from my practice: prepare a simple budget before you call the IRS. Showing a clear plan and evidence that you can meet proposed payments improves approval odds and reduces negotiation friction.

What the IRS can do if you don’t act

  • Penalties and interest will continue to grow. – The IRS can file a Notice of Federal Tax Lien to protect its claim to your property. – The IRS can levy bank accounts, real estate, or garnish wages. – Collection actions can affect credit indirectly through liens and difficulty obtaining loans.

These enforcement steps are why early contact and a realistic plan often preserve more options and reduce long-term cost.

Documents and evidence you’ll commonly need

  • Recent pay stubs or proof of income
  • Bank and investment statements
  • Mortgage, rent, and utility bills
  • Medical bills and proof of extraordinary expenses
  • Proof of dependents and household size
  • Copies of federal tax returns for the years involved

Submit clear, organized documentation: a neat package reduces IRS follow-up requests and speeds resolution.

Common mistakes to avoid

  • Ignoring IRS notices — a costly error. – Failing to file required tax returns — many relief options require current filing. – Overstating monthly payment ability — defaulting can lead to levy. – Paying a questionable private firm for guaranteed relief — scams are common. The IRS won’t contact you by phone with immediate threats without giving prior written notice.

How long will resolution take?

  • Short-term plans: days to weeks to set up. – Long-term installment agreements: typically weeks to several months for approval. – OICs and appeals: often many months, sometimes longer. – CNC determinations: can be a matter of weeks but may be re-evaluated later.

Plan for lead time. If you expect a refund or a one-time cash event (bonus, sale of asset), a short-term plan can bridge to that date and minimize fees.

When to get professional help

Contact a CPA, enrolled agent, or tax attorney if: you owe a large balance, face lien or levy threats, are considering an OIC or bankruptcy, or if a prior application has been denied. A qualified practitioner can help assemble the financial package, negotiate with the IRS, and identify the most cost-effective path based on current IRS criteria.

In my 15 years helping clients, well-documented, realistic proposals win more approvals than quick, poorly supported requests.

Sources and further reading

Professional disclaimer

This article is educational and does not constitute tax, legal, or financial advice. Your situation may require personalized guidance. Consult a licensed tax professional before making decisions that affect your tax liabilities.

If you’re ready to move forward, gather your financial documents, prioritize filing any missing returns, and consider whether a short-term plan, installment agreement, OIC, or CNC status is most appropriate for your situation. Acting now preserves options and reduces avoidable penalties.