Settlement Options

There is no 'one size fits all' approach to settling a tax debt. The settlement options available depend on a variety of factors including income, potential income, living costs, age and your history of compliance with filing and paying current taxes.

Installment Agreements

Monthly payment plans are generally the easiest way to set up an arrangement to pay off any taxes owed to the Internal Revenue Service. There are four different types of installment agreements offered by the IRS. It is important to know which type of installment agreement you qualify for, so that you or your tax advisor is able to let the IRS know which type of installment agreement you intend to set up.

Please Note: You should take immediate steps to avoid facing a similar issue for the next filing year. You should adjust the amount of witholdings, if you are a wage owner. If you are self-employed, you should increase your quarterly estimated tax payments to correspond to your income.

Guaranteed Installment Agreements

The IRS is required to agree to an installment plan if your balance due is $10,000 or less and you meet all of the following criteria:

    For the previous five years you haven't filed late or paid late. All your tax returns are filed.
    Your monthly installment payments will pay off your balance in 36 months or less.
    You've had no installment agreement in the previous five years.
    You agree to file on time and pay on time for future tax years.
The minimum monthly payment the IRS will accept is the grand total of your balance due (including penalties and interest) divided by thirty.

Streamlined Installment Agreements

Taxpayers can qualify for a streamlined installment agreement if the balance owing to the IRS is $50,000 or less, and the taxpayer agrees to pay off the balance in 72 months or less. This streamlined installment agreement criteria is part of the IRS's "Fresh Start Program." Prior to Fresh Start, the IRS would approve streamlined installment agreements only if the balance was $25,000 or less and the person agreed to pay in full within 60 months. As with all other installment agreements, the IRS requires you to file all your tax returns (if any are late), and you agree to file your tax returns on time and pay your taxes on time in the future. The main benefit of a streamlined installment agreement is that the IRS will not file a federal tax lien. Furthermore, the IRS will not ask you to fill out a financial statement (Form 433-F) in an effort to analyze your current financial situation.

Partial Payment Installment Agreements

If the minimum payments for either the guaranteed or streamlined installment agreements do not fit into your budget, you may be better off considering a partial payment installment agreement. This is a type of payment plan where the monthly payment is based on what you can actually afford after taking into consideration your essential living expenses. Unlike guaranteed or streamlined agreements, a partial payment plan can be set up to cover a longer repayment term, and the IRS may file a federal tax lien to protect its interests in collecting the debts. The IRS will ask you to fill out a financial statement (Form 433-F) to report your average income and living expenses for the past three months, plus provide paystubs and bank statements as supporting documentation. Unlike other types of installment agreements, the IRS routinely re-evaluates the terms of partial installment agreements every two years to see if you might be able to pay more.

Non-Streamlined Installment Agreement

You will need to negotiate your own installment agreement with the IRS if your balance due is over $50,000, or you need a repayment term longer than five years, or if you don't meet any of the criteria for a streamlined or guaranteed installment plan.

Such an agreement will be negotiated directly with an IRS agent, and will then be routed to a manager at the IRS for review and approval. The IRS will likely file a federal tax lien (if they haven't already). This type of agreement is often referred to as a "non-streamlined" agreement as it falls outside the IRS's guidelines for automatic approval of the agreement. The IRS will ask that you provide them with a financial statement (Form 433-F) so they can analyze what's the most you can afford to pay each month towards your balance. The IRS will likely ask that you attempt to sell off any assets or take out a bank loan, or get a home equity loan so you can pay off the IRS without needing to get an installment agreement.

As with any tax problem, taxpayers should seek the advice of a federally authorized tax professional, such as an enrolled agent. Such tax professionals can talk to the IRS on your behalf, and can help you manage the process so that it's not so overwhelming. They can also help analyze your current financial situation and tax issues to help you decide which program will best suit your needs.

Before contacting the IRS, we strongly recommend you contact an enrolled agent, or a CPA, who is a tax specialist. The IRS uses national standards to determine the allowable expenses they will consider in any type of payment arrangement. Your tax expert can guide you in the proper strategy to pursue, based on your financial situation, as well as your financial objectives.

Currently Not Collectible

If you do not have the means to pay taxes owed, have little assets that the IRS can levy, no income above the minimum need to cover necessary living expenses, you would most likely be able to be considered “currently not uncollectible (CNC)” to the IRS. Being considered “uncollectible” to the IRS means that they can temporarily pause collections against you under the IRS hardship rule.

If you qualify for this, you still owe the IRS money and interest will continue to accrue. Moreover, a Federal tax lien will be placed for all tax years showing an outstanding balance. However, all collection activities must be temporarily suspended against you. The IRS will then continue to monitor your financial situation to see if it improves to a point where they can demand payment. This review happens normally once a year. You will be required to send an updated financial statement every year for them the IRS to review. These statements must be accurate because they will compare it to filed tax returns to make sure everything matches. One important thing to understand is that someone who receives this status can lose it if the taxpayer create new unpaid tax liabilities in the future or misses a tax filing.

One important thing to note about being considered uncollectible is that the IRS statute of limitations is still running for those back taxes owed. The statute of limitations lasts 10 years on IRS taxes due, if they are not collected in this period, they can no longer collect on these amounts (with some exceptions). Many people have been declared uncollectible for a period of years and have ended up owing no tax once that statute of limitations for those years owed expire. Generally, if a taxpayer has unfiled tax returns, a CNC is not an option. In certain cases, if a tax levy is present, the taxpayer may get a CNC approved.

Offer In Compromise

An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. The IRS considers your unique set of facts and circumstances:

    Ability to pay
    Income
    Expenses ... and
    Asset equity
The IRS will generally approve an offer in compromise when the amount offered represents the most the Service can expect to collect within a reasonable period of time. The Offer In Compromise is a last-ditch option ... not a first-option IRS debt reduction approach. The Offer in Compromise program is not for everyone. You should never consider an Offer In Compromise on your own. You need to understand the affect it will have on your Stature of Limitation on your IRS debt; the amount of disclosure required to file an offer; the amount of payments required while the offer is under consideration; and the length of time required for processing.