The average American carries over $90,000 in debt. Yet, among all the types of debt you might face, tax debt can feel worse because it involves the IRS.
But life happens. Big medical bills, losing your job, or other money problems can make it hard to pay your full tax bill on time. When that happens, IRS tax debt settlement options are available. You just need to know what they are and how to get them.
In this article, you’ll learn:
- What IRS tax debt settlement is
- How offer in compromise works and who qualifies
- When installment agreements make sense
- What Currently Not Collectible status means
- How penalty abatement can reduce what you owe
- When innocent spouse relief applies
What Is IRS Tax Debt Settlement?
IRS tax debt settlement refers to ways to deal with your IRS debt. Sometimes, you can pay less than the full amount. Other times, you can set up a payment plan.
The most well-known option is the offer in compromise (OIC). When approved, an OIC lowers your total tax debt.
But tax debt settlement extends beyond paying less. Installment agreements let you pay your full debt over time in monthly payments that fit your budget.
Other options include:
- Penalty abatement (which reduces penalties but not the underlying tax)
- Innocent spouse relief (for tax debt caused by a spouse’s actions)
- Currently Not Collectible status (which stops the IRS from collecting for now)
Offer in Compromise (OIC)
The offer in compromise (OIC) program is a very useful lifeline. It’s a deal with the IRS to settle your tax debt for less than what you owe.
If the IRS says yes, you pay the agreed amount. You must also follow strict rules. That means filing all future tax returns on time and paying your taxes in full for at least five years. If you break the rules, the IRS can cancel the deal and go after the full debt again.
An OIC is attractive because it actually reduces what you owe. But the application process is hard, and not everyone gets approved.
Who Qualifies for an Offer in Compromise
Not everyone is eligible. Before the IRS will even look at your offer, you must:
- Have filed all your tax returns
- Not be in bankruptcy
- Have a bill for at least one tax debt included in your offer
Beyond these basic requirements, the IRS will only say yes if you meet one of three conditions:
- You might not owe the tax (doubt as to liability)
- You can’t pay it all (doubt as to collectability)
- Paying it would be very unfair or cause hardship (effective tax administration)
How the IRS Evaluates Your Offer
The IRS calculates something called reasonable collection potential (RCP). That means what they think they can collect from you. They look at your money, stuff you own, and what you might earn later.
They won’t take an offer that’s less than your RCP. If they think you can pay the full amount, they’ll say no. That’s why many offers get denied.
The Application Process
To apply for an OIC, fill out Form 656. You also need to pay a non-refundable fee and submit either Form 433-A (for individuals) or Form 433-B (for businesses) along with your financial information.
After reviewing your financial records, the IRS may accept or reject your offer, or ask for more information. Many taxpayers work with tax professionals to send applications.
Currently Not Collectible Status
If paying your tax debt means you can’t afford basics like food or rent, you can ask for Currently Not Collectible (CNC) status. It’s not forever, but it stops the IRS from collecting for now.
To request CNC status, contact the IRS personally or through a professional and complete Form 433-F. You’ll need to prove that you can’t afford both your taxes and still cover your needs like housing, food, and medical care.
The IRS may periodically review your finances to see if your situation has improved. During CNC status, interest and penalties continue to accrue, but collection actions such as wage garnishments and bank levies are suspended.
If your money situation gets better, the IRS will expect you to start paying again.
Installment Agreements
Can’t pay your full tax bill now? An installment agreement lets you pay in monthly chunks.
Short-term payment plans (up to 180 days) work for smaller debts. They have no setup fee. Long-term plans can span several years but come with a setup fee and ongoing interest and penalties.
Most taxpayers who owe money and have filed all required returns can qualify for an installment agreement. You can often set one up online through the IRS website.
You’ll still pay interest and penalties, but less than if you had no agreement at all.
Penalty Abatement
Penalty abatement doesn’t reduce the tax you owe, but it can reduce (or even eliminate) penalties. This can still save you a good amount of tax money.
If you’ve had a clean record for the past three years, the IRS may waive failure-to-file, failure-to-pay, or failure-to-deposit penalties for a single tax period. No big explanation required.
You can also ask for abatement if you had a good reason for missing your taxes. This could be illness, a death in the family, or a disaster.
Innocent Spouse Relief
If you filed a joint tax return and your spouse (or ex) made a mistake you did know about, you might not have to pay their part of the debt.
To qualify, you must show:
- You didn’t know—and had no reason to know—about the tax error when you signed the return
- That it would be unfair to make you pay
As you can probably guess, this option is not the most available one. Still, it’s handy if your tax debt stems from a spouse’s actions or fraud.
In Short
Owing money to the IRS is serious, but IRS tax debt settlement options can help you deal with it.
- You can reduce your overall tax debt through an offer in compromise.
- You can spread tax payments over months through an installment agreement.
- You can pause collections with CNC status.
If you’re putting things off in the hopes that the IRS won’t come, perhaps now is a good time to remember what they say about death and taxes.
The longer you wait, the more you owe, which is precisely the opposite of settling your tax debt. Better to act now and take control.