Tax debt settlement: 5 ways to get relief for your IRS debt

Consider your options like bankruptcy, installment plans, and offers in compromise to the IRS for tax debt settlement. Learn the pros, cons, eligibility, and how to apply.
By Justin Estes
•
17 October 2023
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5 ways to get relief your IRS debt

Tax season often brings anxiety and a wave of hard-to-shake nerves when filing your tax returns. And when it comes to settling tax debt, your annual tax check-in can add a whole new level of stress.

If you're wondering how to settle a debt with the IRS, this article is for you.

Unpaid taxes can snowball over time because interest, penalties, and fees continue accumulating. And harsh collection actions like wage garnishment, bank levies, and property liens may kick in.

But the good news is you can settle tax debts for less than you owe through repayment plans, debt relief programs, or bankruptcy.

Read on to learn about your options to settle IRS debt.

Enroll in currently not collectible status

The IRS may grant you Currently Not Collectible (CNC) status if you cannot pay living expenses and taxes, even the minimum monthly amounts.

This pauses IRS collection efforts temporarily, but they can review the status annually and restart collections if your situation improves.

Pros
  • Immediately halts wage/bank garnishment and property liens
  • Buys time to improve finances and begin paying again
Cons
  • Interest and penalties keep accruing
  • Temporary fix only; the IRS will return later
  • Must re-verify financial hardship annually

To request CNC status, call the IRS at 800-829-1040. Be prepared to document income, expenses, debts, assets, and inability to pay.

Request an installment agreement

IRS installment plans let you pay off tax debt in smaller chunks over time.

You typically have three to six years to pay in full. You must have filed all returns and submitted current estimated taxes. It's easy to qualify for and extends the repayment timeline significantly.

Pros
  • Spreads payments out over months/years
  • Available for most taxpayers who filed returns
  • Various monthly payment amounts available
Cons
  • Interest and penalties continue growing
  • Debt not reduced, just spaced out
  • Possible setup fees up to $225

If you owe under $50,000, apply for installments online at IRS.gov. For larger debts up to $100,000, file Form 9465 by mail.

Leverage a partial payment installment plan

The IRS may approve reduced installment payments through a Partial Payment Plan if you prove financial hardship.

Payments are based on your proven financial situation and current ability to pay. The IRS can review and adjust payment amounts as your finances change.

Pros
  • Monthly payments are based on what you can afford
  • Prevents bank levies, wage garnishment, and liens while enrolled
  • More flexible than OIC, but takes much longer to repay debts
Cons
  • Interest and penalties continue accruing
  • Any assets may need to be leveraged first
  • The IRS can re-evaluate and raise payments later

To apply, file Form 9465 with extensive documentation of your income, assets, debts, expenses, and inability to pay more.

Request an offer in compromise

The Offer in Compromise (OIC) program provides the best opportunity to settle IRS tax debts below the total you owe. But approval hinges on rigid requirements.

You must prove paying your full liability creates an economic hardship or falls outside legal parameters defining your reasonable collection potential. The IRS will not accept compromises based solely on public policy or equity grounds.

Pros
  • Potentially resolves tax debt for pennies on the dollar
  • Permanently halts IRS collection action
  • Average settlements are around $5,240
Cons
  • Strict eligibility requirements and upfront payments
  • Typically, you must pay a lump sum within two years
  • IRS rejects over 60% of requests

You must file Form 656 with detailed financial disclosures to apply. Hiring a tax relief firm boosts your chances of success.

The IRS won't budge on the requirements, even if you have a sympathetic situation. Eligibility basics for an OIC include:

  • Filed all past tax returns and made required estimated tax payments for the current year
  • Not involved in any open bankruptcy proceedings
  • Have tax debt below $50,000 if you are a business owner or self-employed. Payroll taxes cannot be settled through an OIC
  • Provide extensive financial disclosures, including a recent Collection Information Statement (Form 433-A or 433-F)
  • Lack of sufficient assets and equity to pay in full
  • Establishing that paying your full liability would render you unable to pay basic living expenses
  • Have not had an OIC rejected within the past two years
  • Can fully pay the compromise amount within five months or make payments over 6-24 months

File for bankruptcy as a last resort

Filing Chapter 7 or Chapter 13 bankruptcy can legally discharge some types of tax debt.

To qualify, the income taxes must be at least three years old, though there are exceptions. Keep in mind that this option comes with a high cost, including damage to your credit standing for around 7-10 years.

Pros
  • Completely eliminates discharged tax debts
  • Stops IRS collection efforts like levies and garnishment
Cons
  • Badly damages your credit for up to 10 years
  • Not all tax debt qualifies, for example recent taxes or secured debts
  • Filing involves legal and court costs (between $1,500 to $3,500)

You'll need to submit your bankruptcy petition through the court system, so consider speaking to an attorney who can help navigate the complex process of bankruptcy.

Which option is best to settle tax debt?

Settling tax debt depends on your specific financial situation and debt details.

Bankruptcy makes sense for overwhelming IRS and other debts if you have no other way to pay them off. Just be prepared for 10 years of credit damage.

Installment plans work if you can handle smaller monthly payments. But keep in mind that interest and penalties keep growing until the debt is satisfied.

Partial payment plans or currently not collectible status provide temporary relief if you're facing financial hardship but expect to pay later.

Finally, Offers in Compromise are ideal if your situation clearly prevents ever paying the full amount owed. But approval hinges on meticulous financial documentation.