When an Installment Agreement Falls Short

An IRS installment agreement (a standard monthly payment plan) is often the first option for taxpayers who can’t pay a balance in full. But installments can be impractical or unaffordable when your debt is large, income is volatile, or you’re facing immediate collection actions such as bank levies or wage garnishments. In my practice as a CPA and tax adviser, I’ve seen installment plans fail when they stretched a taxpayer’s cash flow to the breaking point or when they continued to leave the taxpayer unable to pay current living expenses.

If a standard installment plan won’t work, there are four primary pathways to consider: Offer in Compromise (OIC), Currently Not Collectible (CNC) status, Partial Payment Installment Agreements (PPIAs), and bankruptcy. Below I explain each alternative, who typically qualifies, what to expect, and practical steps you can take.

Offer in Compromise (OIC): Settle for Less

What it is: An Offer in Compromise allows the IRS to accept a lesser amount than the full tax liability when the taxpayer’s ability to pay, income, assets, and expenses indicate full payment is unlikely (IRS, Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise).

When to consider it: Use an OIC when your reasonable collection potential (RCP) — the IRS’s snapshot of what you could pay now and over time — is less than the tax owed. OICs are most realistic when you can show long-term inability to pay, significant unavoidable expenses, or non-collectible equity in assets.

Pros:

  • Can eliminate a large portion of tax debt if accepted.
  • Stops most collection activity while a properly filed application is pending.

Cons:

  • High documentation burden: you must submit a Collection Information Statement (Form 433-A/433-F or 433-B for businesses) and supporting documents.
  • The IRS may require payment while your Offer is evaluated (application fees and initial payments vary by offer type).
  • Many Offers are denied; the process can take months.

Practical tips:

Real-world note: I had a client with substantial medical expenses and limited home equity who achieved an OIC reducing a $45,000 liability to roughly $18,000 after a well-documented submission.

Currently Not Collectible (CNC): Pause Collections

What it is: CNC status means the IRS determines you have no ability to pay now and temporarily suspends collection activity (IRS guidance on inability to pay: https://www.irs.gov/individuals/what-if-i-can-t-pay-my-taxes).

When to consider it: CNC is appropriate when you can demonstrate that paying the tax would prevent you from meeting basic living expenses (rent, utilities, food, medical care). It’s usually a temporary status, revisited if your income or assets change.

Pros:

  • Immediate relief from levies, garnishments, and enforced collection while CNC is in place.
  • No formal settlement required; you keep funds flowing to living necessities.

Cons:

  • Interest and penalties continue to accrue on the unpaid balance.
  • CNC does not make the liability disappear — the IRS can re-open collection later if finances improve.

How to apply: Provide the IRS with a current financial statement (Form 433-A or 433-F) showing income, necessary expenses, and assets. For step-by-step guidance see our article “When to Consider Currently Not Collectible Status and How to Apply” (FinHelp guide: https://finhelp.io/glossary/when-to-consider-currently-not-collectible-status-and-how-to-apply/).

Practice tip: CNC is a useful bridge — combine it with planning to reduce future tax exposure (adjust withholding, set up tax-advantaged savings, or restructure deductible expenses).

Partial Payment Installment Agreement (PPIA): Pay Less Over Time

What it is: A PPIA lets taxpayers make reduced monthly payments that the IRS accepts as the best collection result given the taxpayer’s financial picture. PPIAs are sometimes used when an OIC is not viable but full monthly payments are unaffordable.

When to consider it: When you can make a recurring reduced payment but cannot meet the standard installment amount the IRS calculates from your RCP.

Pros:

  • Structured, predictable payment plan accepted by the IRS.
  • May avoid immediate enforcement actions if approved.

Cons:

  • Interest and penalties continue to accrue.
  • The balance may still be eligible for collection enforcement later if your situation changes and you stop paying.

Process: You must provide financial statements similar to those used for an OIC. The IRS evaluates whether a PPIA is the most they can collect now and in a reasonable future timeframe.

Bankruptcy: When It May Eliminate Tax Debt

What it is: Bankruptcy can discharge certain tax debts in limited situations (primarily in Chapter 7 or Chapter 13), but eligibility depends on the type of tax, tax assessment dates, and whether returns were filed on time.

When to consider it: Bankruptcy might be appropriate when tax debts are part of broader, otherwise overwhelming unsecured debt and when the tax debt meets bankruptcy discharge criteria (older income taxes often qualify; recent assessments and fraud-related taxes usually do not).

Pros:

  • Potential full discharge of qualifying tax liabilities.
  • Broad protection from other creditors and a structured repayment plan if Chapter 13 is used.

Cons:

  • Complex rules determine dischargeability; many tax debts survive bankruptcy.
  • Bankruptcy has long-term credit and legal consequences.

What to do: Consult a bankruptcy attorney familiar with tax issues. Our glossary includes guidance on how bankruptcy interacts with tax liabilities.

How to Decide: A Practical Framework

  1. Triage the urgency: Is a levy or garnishment imminent? Immediate collection threats change the priority.
  2. Document everything: Prepare recent pay stubs, bank statements, bills, and a realistic budget.
  3. Evaluate long-term ability to pay: The IRS looks at both current cash flow and collectible equity in assets.
  4. Start with cheaper, faster relief: Request CNC or a PPIA if cash flow is the problem and you need breathing room.
  5. Consider an OIC if you can prove inability to pay in full and have little collectible equity.
  6. Use bankruptcy only after discussing dischargeability and long-term consequences with counsel.

In my practice, I often begin by assembling a one-page cash-flow summary that shows — in plain terms — whether the taxpayer can make even a modest monthly payment without sacrificing housing, utilities, or essential medical care. That simple exercise frequently reveals which path is realistic.

Documents You’ll Commonly Need

  • Recent pay stubs and proof of other income (Social Security, unemployment, rental, etc.)
  • Bank and investment account statements
  • Recent mortgage statements and vehicle loan details
  • Itemized monthly living expenses (rent/mortgage, utilities, food, medical, transportation)
  • Tax returns for the relevant years
  • Documentation of extraordinary expenses (medical bills, job loss, divorce records)

Common Mistakes to Avoid

  • Waiting until a levy or garnishment arrives — early communication with the IRS often prevents worst-case collection.
  • Submitting incomplete or optimistic budgets — the IRS expects accuracy and may deny relief based on unreasonable figures.
  • Relying on informal promises from IRS agents — only documented, approved agreements protect you from enforcement.
  • Ignoring future tax compliance — being in good standing for current and future filings is often a condition of relief.

Next Steps — A Short Action Checklist

  • Gather two months of bank statements and three months of pay stubs.
  • Run a basic monthly budget: income minus necessary expenses.
  • Contact a qualified tax professional (CPA, EA, or tax attorney) if the tax balance is large or if you’ve received enforcement notices.
  • If you need immediate relief from levies, request CNC or inquire about a short-term hold while you prepare paperwork.
  • If you believe settlement is your best option, prepare the OIC package and review our Offer in Compromise checklist (FinHelp guide: https://finhelp.io/glossary/offer-in-compromise-application-checklist-documents-and-common-pitfalls/).

Sources and Further Reading

Professional disclaimer: This article is educational and does not replace personalized advice. Tax rules change and outcomes depend on facts; consult a qualified tax professional before making decisions about offers, CNC requests, installment plans, or bankruptcy.

If you’d like, a qualified tax professional can review your documents and help choose the best path for your situation.