How to Settle IRS Debt: A Complete Guide to Your Options
One in five businesses has unpaid taxes owed to the IRS. If you're among them, you're not alone—and more importantly, you have options. The IRS isn't an all-or-nothing creditor. From installment plans to settling for less than you owe, there are legitimate pathways to resolve your tax debt without draining your bank account or losing your business.
The key is understanding what options exist, which one fits your situation, and how to navigate the process before collection actions escalate. This guide breaks down every major IRS debt resolution strategy so you can make an informed decision and take control of your tax situation.
Understanding the IRS Collection Process
Before diving into settlement options, it helps to understand what happens when you don't pay. The IRS follows a predictable escalation timeline, which means you typically have warning before severe actions occur.
The Collection Timeline
When you file a return without paying the balance due, or the IRS assesses additional taxes after an audit, the collection clock starts ticking. Here's what to expect:
Initial notices (Weeks 1-8): The IRS sends a series of 3-4 notices explaining the amount due, including penalties and interest. These notices are your opportunity to act before things escalate.
Federal tax lien (After continued non-payment): If your debt exceeds $10,000 and remains unpaid, the IRS may file a federal tax lien. This is a public record that attaches to your property and can damage your credit score. Under the Fresh Start program, the threshold increased from $5,000 to $10,000.
Final Notice of Intent to Levy (30+ days before seizure): This notice is critical. It gives you 30 days to request a Collection Due Process hearing, which can halt collection actions while you explore alternatives.
Levy actions: After the 30-day window, the IRS can seize bank accounts, garnish wages, or take other property. More than 600,000 taxpayers face wage garnishments each year.
Collection statute expiration: The IRS has 10 years from the assessment date to collect the debt. After that, it expires—but waiting out the clock while dodging collection actions isn't a strategy; it's a gamble.
Option 1: Installment Agreements
If you can pay your full tax debt but just need more time, an installment agreement is your simplest path forward. The IRS offers several types depending on your balance and circumstances.
Short-Term Payment Plan
For balances under $100,000, you can request up to 180 days to pay in full. There's no setup fee for this option, and you can apply online if you owe less than $100,000.
Best for: Taxpayers who need a few months to gather funds but can pay the full amount.
Long-Term Installment Agreement
For balances up to $50,000, you can spread payments over up to 72 months (6 years). This option requires monthly payments, and interest and penalties continue to accrue, but it prevents more aggressive collection actions.
Streamlined processing: If you owe $50,000 or less, the IRS offers streamlined installment agreements that require minimal financial documentation. You won't need to submit detailed income and expense information.
Setup fees: Fees range from $31 (low-income) to $225, depending on your income level and whether you set up direct debit.
Non-Streamlined Installment Agreements
If you owe more than $50,000, you'll need to provide detailed financial information using Form 433-F or Form 433-A. The IRS will review your assets, income, and allowable living expenses to determine a payment amount.
Key benefit: Installment agreements prevent wage garnishments and bank levies as long as you stay current on payments.
Option 2: Offer in Compromise (OIC)
An Offer in Compromise allows you to settle your tax debt for less than the full amount owed. It's the most powerful tool for reducing IRS debt, but it's not for everyone.
When the IRS Accepts an OIC
The IRS accepts an OIC under three circumstances:
Doubt as to collectibility: Your assets and income are genuinely insufficient to pay the full debt within the collection period. This is the most common basis for accepted offers.
Doubt as to liability: There's a legitimate dispute about whether you actually owe the tax. This is rare but applicable in cases of IRS errors or identity theft.
Effective tax administration: Paying the full amount would create economic hardship or would be unfair due to exceptional circumstances, even if you technically could pay.
OIC Eligibility Requirements
Before applying, you must:
- File all required tax returns
- Have received a bill for at least one tax debt included in the offer
- Make all required estimated tax payments for the current year (if self-employed)
- Make all federal tax deposits for the current quarter and two preceding quarters (if you have employees)
- Not be in an open bankruptcy case
The Application Process
Application fee: $205, waived for low-income taxpayers (those at or below 250% of the federal poverty guidelines).
Initial payment: You must submit an initial payment with your application:
- Lump sum offer: 20% of your total offer amount upfront. If accepted, pay the balance within 5 payments.
- Periodic payment offer: First month's payment upfront, then continue monthly payments while the IRS reviews your offer (6-24 months).
Processing time: Expect 6-12 months for the IRS to review your offer. During this time, collection actions are generally suspended.
How the IRS Calculates Your Offer Amount
The IRS uses a formula called the Reasonable Collection Potential (RCP) to determine the minimum acceptable offer:
RCP = (Monthly disposable income × 12 or 24 months) + Quick sale value of assets
Under Fresh Start changes, the IRS now considers only 12-24 months of future income, down from 48-60 months previously. This makes offers more accessible.
Pro tip: Use the IRS Offer in Compromise Pre-Qualifier tool online to get a preliminary sense of whether you might qualify before investing time in the application.
The Five-Year Compliance Requirement
If your OIC is accepted, you must remain in full tax compliance for five years. This means filing all returns on time and paying all taxes in full. Violate this requirement, and the IRS can void your agreement and reinstate your original debt.
Option 3: Currently Not Collectible Status (CNC)
If you genuinely cannot pay anything—not even a minimal monthly payment—you may qualify for Currently Not Collectible status. The IRS temporarily suspends collection actions, including wage garnishments and bank levies.
How CNC Works
When the IRS places your account in CNC status:
- Active collection stops
- You're not required to make payments
- Interest and penalties continue to accrue
- Your debt remains on the books
Important: CNC doesn't reduce your debt. It's a pause, not a solution. The IRS reviews your financial situation every 1-2 years to determine if your ability to pay has improved.
Who Qualifies
You must demonstrate that your monthly income minus allowable living expenses leaves nothing for tax payments. The IRS uses its own expense standards (national and local) to determine what's "allowable"—not necessarily what you actually spend.
Best for: Taxpayers in severe financial hardship who need breathing room while they stabilize their situation.
Option 4: Penalty Abatement
Penalties can add 25% or more to your original tax debt. If you can get them removed, you'll significantly reduce your balance.
First-Time Penalty Abatement (FTA)
Starting in 2026, the IRS began offering automatic first-time penalty abatement for eligible taxpayers. If you've been compliant for the past three years—meaning you filed all required returns and didn't have penalties during that period—you may qualify.
Penalties covered: Failure-to-file, failure-to-pay, and failure-to-deposit (for employment taxes).
How to request: Call the IRS at the number on your notice. Many FTA requests can be approved over the phone. If not, submit Form 843.
Repeat eligibility: You can use FTA again, but only once every four years.
Reasonable Cause Relief
If you don't qualify for FTA or have penalties spanning multiple years, you can request relief based on reasonable cause. You'll need to demonstrate that circumstances beyond your control prevented compliance—such as serious illness, natural disaster, death of a family member, or reliance on a tax professional who gave bad advice.
How it works: If you request reasonable cause relief but qualify for FTA, the IRS will apply FTA first. This preserves reasonable cause arguments for other penalties if needed.
The Fresh Start Program: What It Really Means
You've probably heard about the IRS Fresh Start program. It's not a single program or form—it's a collection of policy changes that made existing relief options more accessible.
Key Fresh Start Changes
Higher lien threshold: Tax liens aren't filed until you owe more than $10,000 (up from $5,000).
Easier lien withdrawal: Once you've paid off your debt or entered an installment agreement, requesting lien withdrawal is simpler.
Streamlined installment agreements: The threshold for streamlined processing increased to $50,000 (up from $25,000).
More realistic OIC calculations: Future income multiplier reduced from 48-60 months to 12-24 months, and allowable living expense standards expanded.
Choosing the Right Option
Your best path depends on your specific circumstances:
| Situation | Best Option |
|---|---|
| Can pay in full within 6 months | Short-term payment plan |
| Can make monthly payments over 1-6 years | Installment agreement |
| Cannot pay full amount within 10 years | Offer in Compromise |
| Cannot afford any payments | Currently Not Collectible |
| Clean compliance history, penalties applied | First-Time Penalty Abatement |
| Extenuating circumstances caused non-compliance | Reasonable Cause Relief |
Common Mistakes to Avoid
Ignoring IRS notices: Every notice is an opportunity to resolve the issue before it escalates. Ignoring them only accelerates collection actions.
Believing you can't afford professional help: Tax resolution professionals can often save you more than they cost through better negotiated outcomes. Many offer free consultations.
Submitting an unrealistic OIC: The IRS rejects offers that don't meet their RCP formula. Lowballing wastes your application fee and time.
Stopping payments on an installment agreement: Missing payments can default your agreement and restart aggressive collection.
Not staying current on new taxes: Even if you're in an installment plan or OIC, you must stay current on new tax obligations. Falling behind voids most agreements.
How to Get Started
Step 1: Gather your notices and understand exactly what you owe. You can create an IRS online account to see your balance and transcripts.
Step 2: Assess your financial situation honestly. Can you pay the full amount over time? Or is your debt truly more than you can handle?
Step 3: Use the IRS pre-qualifier tools (available on IRS.gov) to see if you might qualify for an OIC.
Step 4: Consider consulting a tax professional—especially for OICs or complex situations. Enrolled agents, CPAs, and tax attorneys can represent you before the IRS.
Step 5: Act before collection actions escalate. The earlier you engage with the IRS, the more options you have.
Keep Your Finances Organized from Day One
Dealing with IRS debt often reveals gaps in financial tracking—unfiled returns, missing documentation, or unclear income records. As you resolve your current situation, establishing clear bookkeeping practices prevents future problems. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data, making it easier to stay compliant and catch issues before they become IRS problems. Get started for free and build a financial system that keeps you out of trouble with the taxman.
