An unpaid tax balance can become more difficult to manage as interest and applicable penalties accumulate. For taxpayers who cannot pay the full amount immediately, the Internal Revenue Service (IRS) offers several ways to address federal tax debt, including short-term payment plans, long-term installment agreements, offers in compromise, temporary collection delays, and certain forms of penalty relief.
Understanding these tax relief options can help taxpayers determine which approach may fit their financial situation. The right solution depends on factors such as the amount owed, income, assets, ability to make monthly payments, filing status, and whether paying the full balance would create financial hardship.
Why Addressing Tax Debt Promptly Matters
When a tax balance remains unpaid, interest and applicable penalties can continue to increase the amount owed. The IRS encourages taxpayers who cannot pay in full to pay as much as they can and explore available payment options rather than simply ignoring the balance.
Unresolved tax debt can also lead to collection activity. Depending on the circumstances, the IRS may pursue measures such as:
- Federal tax liens: A legal claim against property associated with unpaid federal taxes.
- Bank levies: Collection actions that can take funds from certain financial accounts.
- Wage levies: An enforced collection action involving wages.
- Refund offsets: Certain federal tax refunds can be applied toward outstanding tax debt.
Taking action early can provide access to formal payment arrangements and other collection alternatives.
IRS Payment Plans
For taxpayers who cannot pay their tax balance immediately but can eventually pay it in full, an IRS payment plan can provide a structured way to spread payments over time.
The IRS currently offers short-term and long-term payment arrangements, with eligibility depending on the taxpayer's circumstances and amount owed.
Short-Term Payment Plans
A short-term IRS payment plan can provide up to 180 days to pay the balance in full.
For individual taxpayers, the IRS states that taxpayers may qualify to apply online when they owe less than $100,000 in combined tax, penalties, and interest. Short-term plans generally have no setup fee, although interest and applicable penalties continue until the balance is paid.
This option can be relevant when someone expects to receive money soon but cannot immediately pay the entire tax bill.
Long-Term Installment Agreements
A long-term IRS installment agreement allows eligible taxpayers to make monthly payments toward their tax balance.
Individuals may generally qualify to apply online for a long-term plan when they owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns. Setup fees vary depending on the payment method and whether the taxpayer qualifies for low-income treatment.
Interest and applicable penalties generally continue to accrue while the balance is being paid.
Offer in Compromise
An Offer in Compromise (OIC) is a formal agreement that can allow an eligible taxpayer to settle federal tax debt for less than the full amount owed.
However, an OIC is not simply a discount program for anyone with tax debt. The IRS evaluates factors including:
- Ability to pay
- Income
- Expenses
- Asset equity
- Overall financial circumstances
The IRS generally considers whether the proposed settlement represents the most it can reasonably expect to collect within the applicable collection period.
Who May Qualify?
Before an OIC can generally be considered, taxpayers must have filed required tax returns and made required estimated payments. Taxpayers in an open bankruptcy proceeding generally are not eligible.
The IRS provides an Offer in Compromise Pre-Qualifier that taxpayers can use to evaluate whether they may qualify before submitting an application. Using the tool does not guarantee that an offer will be accepted.
Because OIC applications can involve detailed financial information, taxpayers with complicated finances may consider consulting a qualified tax professional.
Currently Not Collectible Status
Taxpayers experiencing significant financial hardship may be able to request that the IRS temporarily delay collection.
This status is commonly referred to as Currently Not Collectible (CNC).
The IRS may consider CNC status when paying the tax debt would prevent the taxpayer from meeting basic living expenses. The agency can request detailed financial information, including income, expenses, assets, and liabilities.
CNC status does not erase the tax debt. Interest and applicable penalties can continue to accrue, and the IRS may periodically review the taxpayer's financial circumstances.
A federal tax lien may also still be filed in certain circumstances.
Penalty Relief and Other Tax Debt Options
Payment plans and OICs are not the only forms of IRS tax debt relief.
The IRS also provides options that may apply in specific circumstances, including penalty relief. Eligibility depends on the taxpayer's situation and the particular penalty involved.
Other circumstances can also create specialized relief opportunities, including certain situations involving disaster areas, identity theft, military deployment, or issues involving a spouse's tax liability.
Taxpayers should review the specific IRS requirements rather than assuming a particular relief program applies.
How to Compare Tax Debt Solutions
The appropriate option depends largely on whether you can eventually pay the full balance and how much you can realistically afford.
1. Determine Your Total Tax Debt
Review your IRS notices and online tax account to determine:
- Tax owed
- Accrued penalties
- Accrued interest
- Tax years involved
- Existing payment arrangements
- Upcoming tax obligations
Knowing the exact balance is essential before comparing payment options.
2. Calculate Your Monthly Cash Flow
Review household income and essential expenses to determine how much you could realistically allocate toward tax debt.
A payment that looks manageable initially can become problematic if it leaves insufficient money for housing, food, utilities, insurance, and other necessary expenses.
3. Determine Whether You Can Pay in Full
If you can pay the balance within 180 days, a short-term payment plan may be relevant.
If you need substantially more time, a monthly IRS installment agreement may be appropriate if you qualify.
If paying the full balance would be unrealistic even over time, investigate whether an Offer in Compromise or temporary collection delay could apply.
4. Bring Tax Filings Up to Date
Unfiled returns can complicate eligibility for certain IRS payment arrangements.
Before applying for an Offer in Compromise or certain payment plans, verify that required tax returns have been filed and required current-year payments have been made.
5. Consider Professional Tax Debt Help When Appropriate
Straightforward payment plans can often be established directly through an IRS online account.
More complicated situations involving tax debt settlement, Offers in Compromise, federal tax liens, levies, multiple years of unpaid taxes, or significant business liabilities may require professional assistance.
Potential professionals include enrolled agents, certified public accountants, and tax attorneys. Consumers should verify credentials, fees, services, and the specific work a professional will perform before signing an agreement.
Tax Relief Comparison Checklist
Before choosing a strategy, review:
- Total tax balance
- Tax years involved
- Penalties and interest
- Short-term payment eligibility
- Long-term installment agreement eligibility
- Monthly payment amount
- Payment-plan setup fees
- Offer in Compromise eligibility
- Current financial hardship
- Currently Not Collectible status
- Potential penalty relief
- Existing liens or collection actions
- Filing compliance
- Professional tax-debt assistance
Tax debt does not necessarily have to be paid in one immediate payment. The IRS provides several mechanisms for taxpayers who cannot pay their balances in full, but each option has different eligibility requirements, costs, and consequences.
The most useful starting point is to establish the exact amount owed, bring required filings current, assess realistic cash flow, and then compare the available IRS payment plans, tax debt settlement options, penalty relief, and collection alternatives.
