Owe the IRS and Can’t Pay? Payment Plans, Offers in Compromise, and Your Other Options
An IRS balance does not go away by being ignored, but it also is not the emergency the collection letters make it sound like — provided you understand the sequence and the options. This article explains what the IRS does when a balance is unpaid, what your rights are at each stage, and the realistic ways to resolve a debt you cannot pay in full.
First, the balance has to be right
A surprising share of IRS debt is wrong. Common causes: an unfiled year for which the IRS prepared a “substitute return” using only the income reported to it, with no deductions, credits, or basis; a return that was amended or audited without the taxpayer responding; or liability for a spouse’s tax under a joint return. Before negotiating how to pay, confirm that the number is correct. Filing the missing return, responding to the audit, or requesting innocent spouse relief can eliminate a balance rather than schedule it. If the IRS proposed the tax and you still have time to petition, see the Notice of Deficiency and the 90-day rule.
The notice sequence, and the letter that matters
After a balance is assessed, the IRS sends a series of increasingly firm notices. Most are just reminders. The one that changes your rights is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing (typically Letter 1058 or LT11). From the date of that letter you have 30 days to request a Collection Due Process hearing. Doing so generally stops levy action while the hearing is pending, gives you a forum to propose an installment agreement or offer, and — critically — if you disagree with the outcome, gives you the right to have the United States Tax Court review the IRS’s decision. A similar right attaches to a Notice of Federal Tax Lien. Miss the 30 days and an “equivalent hearing” may still be available, but without the Tax Court review.
Levies reach wages, bank accounts, and accounts receivable; Social Security benefits can be partially levied; and a lien attaches to everything you own, including a home. Larger balances that become “seriously delinquent” (a threshold currently in the $60,000s, indexed annually) can also result in the State Department denying or revoking a passport.
The 10-year clock
The IRS generally has ten years from the date a tax is assessed to collect it. After that, the balance is written off. Certain events pause the clock — a pending offer in compromise, a bankruptcy, a CDP hearing request, time spent outside the country — so the exact expiration date has to be computed, and it should be, because it shapes every option below. An old balance with only a couple of years left is a very different problem from a fresh one.
Option one: a payment plan
An installment agreement is an agreement to pay the balance over time. For individuals who owe $50,000 or less in assessed tax, penalties, and interest, the IRS offers a simplified plan that can generally be set up online without financial disclosure, with monthly payments spread over the remaining collection period. Larger balances require a financial statement (Form 433 series) showing income, expenses, and assets, and the IRS applies its own allowable-expense standards rather than your actual budget. Interest and the failure-to-pay penalty continue to run during a plan, although the penalty rate is reduced while an agreement is in effect. The agreement defaults if a payment is missed or a new year is filed with a balance, so future compliance is part of the deal.
A partial-payment installment agreement is available when the numbers show you cannot pay the full balance before the collection period expires; you pay what the financial analysis shows you can afford, and the remainder expires with the statute.
Option two: an offer in compromise
An offer in compromise settles the debt for less than the full amount. The IRS accepts one when the offered amount equals or exceeds what it calculates it could collect — your “reasonable collection potential,” built from the equity in your assets plus a multiple of your monthly disposable income under the IRS expense standards. It is a formula, not a negotiation over how much you would like to pay, and it is why offers are accepted for people with little income and few assets and rejected for people who could pay over time. An offer requires all returns filed, a down payment and application fee (waived for low-income applicants), and full financial disclosure; the IRS has up to two years to decide; and acceptance requires five years of perfect compliance afterward. Be cautious of advertising promising to settle for “pennies on the dollar” without ever having seen your finances.
Option three: currently not collectible status
If paying anything would leave you unable to meet basic living expenses, the IRS can place the account in currently not collectible (hardship) status. Collection stops, the balance remains, interest continues, and the 10-year clock keeps running. The IRS revisits the account periodically, and a refund in a later year is applied to the balance. For an older debt held by someone on a fixed income, this status frequently resolves the matter in practice.
Penalty relief
Penalties often make up a third or more of a balance. The IRS will generally remove a failure-to-file or failure-to-pay penalty for a single year under its first-time abatement policy if the prior three years were clean, and will consider reasonable cause — serious illness, a death in the family, reliance on bad professional advice, records destroyed in a disaster — for other years. Interest is rarely abated, but interest on an abated penalty comes off with it.
Bankruptcy, briefly
Income taxes can be discharged in bankruptcy under specific conditions, principally that the return was due more than three years before filing, was actually filed more than two years before, and was assessed more than 240 days before. Recent taxes, trust fund taxes, and taxes from unfiled or fraudulent returns generally are not. It is a real option for the right facts and should be evaluated by counsel who handles both areas.
What to do this week
- Get your IRS account transcripts for every year at issue; they show the balance, the assessment date, and what the collection deadline is.
- File every missing return. Nothing else is available until you do.
- Calendar the 30-day date on any final notice or lien notice.
- Do not let a levy notice sit. The options narrow once money is already being taken.
Received a levy notice or want the balance reviewed before you agree to pay it? Ask a legal question.