Guide to Settling IRS Tax Debts

Your Complete Guide to Settling IRS Tax Debts

A person stresses over financial documents.
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You might be facing debt to the IRS for a number of reasons. Perhaps your income has declined and you couldn’t pay your tax bill as you expected. Perhaps your withholding or estimated tax payments just weren't enough to match what you owe the IRS.

Many taxpayers struggle to pay their tax bill, which is why the IRS offers several options to help them, from forgiveness programs to payment plans. Here, learn about all your options for settling IRS tax debts so you can decide the right solution for your needs.

Key Takeaways

  • The IRS offers a variety of payment options and tax forgiveness programs for people who can’t pay their tax bill in full by the due date.
  • Installment payment plans that allow you to pay off your debt over time with regular monthly payments.
  • An “offer in compromise'' solution allows you to settle the debt for less than the full amount you owe.
  • Consider consulting the assistance of a tax professional to help guide you through the solutions that may best fit your personal situation.

The Statute of Limitations on Tax Debt

Your annual tax payments are due on the Tax Day filing deadline, which is usually on or near April 15.

When the IRS has accepted your return and has effectively recorded the balance you owe, your tax debt has been “assessed.” The IRS then has up to three years after accepting your return to assess the tax owed. Under most circumstances, it has 10 years from the assessment date to try to collect from you.

Note

The IRS might suspend the 10-year period in some circumstances, but then the time of suspension would be added to the end of the 10-year term. That statute of limitations generally begins when you file a return for that year.

Options for Taxpayers With Debt

Taxpayers have several options for settling their debt with the IRS, each with different terms and consequences. For example, you might qualify for penalty relief, or a reduction in the penalty fees and related interest, if you made a concerted effort to comply with the law but you couldn’t meet your obligations.

Other options for settling debts include:

  • The IRS Fresh Start program: The IRS Fresh Start program includes several forgiveness and relief programs offered by the IRS.
  • IRS installment agreements: The IRS will let you enter into a short- and long-term installment agreement that will allow you to pay off your tax debt over time.
  • Offer in Compromise (OIC): The IRS will accept less than what you owe in some circumstances, so you’re off the hook for paying the entire balance.
  • Currently Not Collectible: The government recognizes that there’s very little chance it can collect from you—at least at this point in time—so it ceases and desists with collection efforts. But this option may not make your debt go away for all time.
  • Innocent Spouse Relief: The IRS will relieve you of responsibility for paying the resulting debt under some circumstances related to filing a joint tax return with your spouse.

Let’s learn about these debt settlement options in more detail.

The IRS Fresh Start Program

The federal government provides a number of solutions for resolving tax debt for individual taxpayers or small businesses that can’t pay in full but want to avoid tax liens. These options collectively are referred to as the IRS Fresh Start program, and include installment payment plans or a payment amount that is a compromise from what was originally owed.

The Fresh Start program aims to benefit both taxpayers—who can achieve a way to successfully settle their IRS debt—and the IRS, which can recoup the money it's owed, or at least a portion of it.

Note

Fresh Start programs are based on the taxpayer’s ability to pay, either now or in the future. Most involve requiring the taxpayer to pay at least a portion of the debt in some way, such as through installment payments.

IRS Installment Agreements

The IRS will allow you to pay your tax debt over time through regular payments via its installment agreements. Penalties and interest will continue to accrue on your tax balance until you pay your debt in full.

Taxpayers struggling to pay their tax bills can benefit from the terms and rates the IRS provides and avoid a tax lien, Chip Capelli, an accountant based in Provincetown, Massachusetts, told The Balance in an email. You must pay by direct debit from your bank account if you owe more than $25,000.

“I highly recommend [an IRS installment plan] as the interest rate is lower than any you would get from a bank or credit card,” Capelli said. “As long as you honor the schedule, you're fine.”

  • Short-term agreement: This agreement gives you 180 days (six months) to pay your tax debt. You don’t have to pay a user or application fee with this option. You can sign up for free.
  • Long-term agreement: A long-term agreement gives you up to 72 months to pay, and the duration is up to you. You can elect the time frame you want when you apply.

For the long-term agreement, it will cost you $31 to sign up as of 2022 if you apply online and enroll in automatic direct debits from your bank account; otherwise, the fee is $107. It’s $130 to set up online or $225 to do so by phone or U.S. mail if you don’t agree to direct debit.

Note

The IRS will waive or at least reduce your fees if you qualify as a low-income taxpayer. Your income must be at or below 250% of the federal poverty level to qualify.

How To Apply for an Installment Plan

You must owe $50,000 or less to qualify to apply online for the long-term plan, and $100,000 or less for short-term plans. This includes penalties and interest as well as your initial tax debt.

You can use the online form to apply or submit a paper Form 9465. You may have to provide a Form 433-F as well to detail your income and expenses, Capelli said.

The period of time during which your installment agreement application is pending will pause the statute of limitations for collection. That time will be tacked on to the end of that 10-year period.

An Offer in Compromise (OIC)

An offer in compromise is a way to settle your debt for less than the full amount you owe. It might be an option if you can’t make monthly installment payments to the IRS. With an offer in compromise, you’re effectively asking the IRS to let you pay less than what you owe and to write off the balance.

Note

You’ll probably need help from a tax professional to make an offer, and the IRS may not accept it.

You can determine whether you’re eligible for an offer in compromise with the IRS prequalifying tool. Answer a series of questions about your assets, income, and expenses, and the tool will tell you whether you are likely to be approved. (You’re not eligible if you’re in open bankruptcy proceedings.)

The IRS takes four factors into consideration when deciding whether to accept your offer:

  • The value of any assets you own
  • Your income
  • Your expenses
  • Your ability to pay your full balance based on these factors

How To Apply for an Offer in Compromise  

You can apply online using Form 433-A (OIC) or form 433-B (OIC) for businesses. You’ll also need form 656(s) for individual and business tax debt, as well as a $205 nonrefundable application fee. Finally, you’ll need to make an initial payment toward your debt.

The initial payment will vary depending on your offer and payment option. For a lump-sum cash payment, you’ll need to submit an initial payment of 20% of your total offer amount. For periodic payments, you’ll need to submit the first payment. These payments will be applied to your balance.

Note

The IRS will suspend most collection activities while it evaluates your situation, although it may still file a Notice of Federal Tax Lien to secure its rights to collect from you if your offer is denied. The lien will be released when you’ve paid off the agreed-upon amount.

Currently Not Collectible Status

The IRS will put you in currently not collectible (CNC) status if it determines there’s really no way it can collect anything from you at the present time. With this designation, the IRS won’t try to collect from you with wage garnishment or liens; however, penalties and interest will continue to accrue on what you owe.

The IRS will keep any tax refunds you might be owed during the time you’re in CNC status, and it will continue to bill you regularly for your tax debt. The IRS may resume collection activities if your financial situation improves.

How To Apply for CNC Qualification

Achieving currently not collectible status can be more difficult than securing an offer in compromise. You’ll almost certainly need the help of a professional. Consider visiting a taxpayer clinic if you can’t afford to pay for services.

Note

You’ll have to provide a complete and accurate picture of your current finances, as well as your assets, for CNC qualification. You’ll most likely have to establish that you could not qualify for a loan to pay your debt, and that you had no assets you could sell to come up with the money.

The IRS may require you complete and submit Form 433-F, the Collection Information Statement, detailing your financial picture.

Innocent Spouse Relief

The IRS might determine you’re not liable for the tax debt if your spouse—not you personally—improperly reported income on a joint married tax return that you filed together, or if they claimed deductions or tax credits to which you weren’t actually entitled to.

You could face an additional balance when these factors related to jointly filed return are corrected, and associated penalties and interest will most likely be added as well.

The IRS rule is that married partners are “jointly and severally liable” for a joint tax return and any tax that’s due resulting from that return. The innocent spouse relief is an option for an individual to be relieved of responsibility if their spouse or ex-spouse made a tax-reporting error.

“By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return,” Capelli said. 

How To Apply for Innocent Spouse Relief  

File Form 8857, the Request for Innocent Spouse Relief, with the IRS if you feel that—and can substantiate—trying to collect the debt from you would be unfair. “The IRS will figure the tax you're responsible for after you file Form 8857,” Capelli said.

You must meet four conditions to qualify for innocent spouse relief:

  • You must have filed a joint return with your spouse or your ex, and the tax debt resulting from that return is greater after discrepancies, oversights, and misstatements have been taken into consideration.
  • You didn’t know and had no reason to suspect that the information was incorrect at the time you signed the tax return.
  • You and your spouse have not transferred property or assets to each other. This can be taken as intent to defraud the IRS.
  • It would be unfair to hold you responsible for paying this tax under these circumstances.

In determining if you have no reason to have suspected inaccuracies with a joint return, the IRS will take into account whether a “reasonable person” in your same position could have been expected to have knowledge of the misrepresentations contained in the return.

Note

The IRS will also consider factors such as whether you and your spouse have separated or divorced since the tax return was filed, and whether you gained anything from the inaccurate tax return.

Wage Garnishments

The IRS will almost certainly file a federal tax lien or a levy action against you if you take no steps to resolve your tax debt. You should not ignore the situation, because the IRS will eventually move to collect, and the method it uses might be far more costly than making installment agreement payments.

With a wage garnishment, the IRS will direct your employer to forward a portion of your paychecks to the agency rather than give that money to you. Your wages will be garnished until you make another arrangement to pay your debt or the entire balance you owe is paid off.

The IRS won’t take your entire paycheck. You’re entitled to keep an exempt amount that’s based in part on the number of dependents you must support. Your employer should give you a Statement of Dependents and Filing Status to fill out, and it will use this information to determine how much of your pay is exempt from garnishment. You have three days to complete it. Your exemption will be $0 if you don’t meet the deadline. This is the equivalent of being a married taxpayer who files a separate return and has no dependents.

Capelli said wage garnishment can take time. “If you get a letter threatening a wage garnishment, it could take from three to six months to happen,” Capelli said. “I recommend engaging in an installment plan before that happens.”

Is Bankruptcy a Solution?

You may have to resort to bankruptcy if your tax debt is really substantial and none of these debt-settling options will work for you. However, tax debts are not easily discharged in bankruptcy, so this debt might remain even after bankruptcy.

Note

The most common type of bankruptcy is Chapter 13. With it, you must have filed your tax returns for the past four years to receive a dismissal or a discharge of your tax obligations. During your bankruptcy, you’ll need to continue to file returns or get extensions for them.

Filing for bankruptcy has a significant impact on your credit score and credit history. You would not be eligible for an offer in compromise if you have open bankruptcy proceedings.

Work With a Tax Professional

Consider all the pros and cons of your options for settling your debt, such as installment payment plans or an offer in compromise. A tax professional can guide you in choosing the right solution for you based on your personal situation.

Frequently Asked Questions

Does settling IRS debt hurt my credit?

Settling IRS debt does not hurt your credit, and, in fact, may help it. The IRS does not report overdue taxes to the credit bureaus, but it may place a lien on your assets, which is public information. Your debt can appear to lenders and affect your ability to get new credit. The IRS will release and remove that lien after the debt is paid.

What is the minimum payment the IRS will accept for an installment plan?

A long-term installment agreement can last for 72 months, so the minimum payment is your tax debt divided by 72. You would take the full term to pay your debt off rather than do so in two or three years, making your payments as small as possible.

What is a tax forgiveness program?

With a tax forgiveness program, the IRS will forgive tax debt and may forgo collecting on it—either wholly or in part—through some of its debt-settlement solutions such as the Currently Not Collectible status, which functions as a clean slate. The forgiveness program is the collective basket of these options.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “2022 Tax Filing Season Begins Jan. 24.”

  2. IRS. “Overview of Statute of Limitations on the Assessment of Tax.”

  3. IRS. “Currently Not Collectible - Taxpayer Advocate Service.”

  4. IRS. “Penalty Relief.”

  5. IRS. “The Fresh Start Program.”

  6. IRS. “Payment Plans Installment Agreements.”

  7. IRS. “Form 9465 (Rev. September 2020).”

  8. IRS. “Offer in Compromise.”

  9. IRS. “Innocent Spouse Relief.”

  10. IRS. “Topic No. 205 Innocent Spouse Relief.”

  11. IRS. “Information About Wage Levies.”

  12. IRS. “Bankruptcy.”

  13. IRS. “Topic No. 201 The Collection Process.”

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