The IRS has three main paths to resolve tax debt: pay in full, set up a payment plan, or request a settlement for less than you owe

You cannot make tax debt disappear on its own. The IRS will pursue collection through wage garnishment, bank levies, and liens on your property until the debt is paid, settled, or legally discharged in bankruptcy. Your fastest route depends on how much you owe, whether you can pay anything now, and whether the IRS will accept a reduced settlement based on your financial situation.

The IRS does not forgive tax debt casually, but it does have formal programs for people who cannot pay the full amount. These programs have specific income limits, documentation requirements, and approval timelines. Most people who resolve tax debt do so through a payment plan rather than a settlement, because payment plans are easier to obtain and do not require proving financial hardship.

Key Takeaways

  • Payment plans let you pay what you owe over time; the IRS charges interest and penalties on top of the original debt, and approval is usually automatic if you owe under $50,000.
  • An Offer in Compromise (settlement for less than you owe) requires detailed financial paperwork and is only approved if the IRS believes you cannot pay the full amount even over time.
  • Currently Not Collectible status pauses collection action for up to two years at a time, but interest and penalties keep accruing, and the debt remains on your record.
  • The IRS can garnish wages, levy bank accounts, and place liens on property; these actions continue until the debt is resolved, so setting up a payment plan or settlement stops them.
  • You do not need a tax professional to set up a payment plan, but an Offer in Compromise or dispute of the debt usually requires one because the paperwork is complex and mistakes can cost you.

Payment Plans: How they work and what they cost

A payment plan (called an Installment Agreement by the IRS) lets you pay your tax debt in monthly installments. The IRS charges a setup fee (currently $31 to $225 depending on the method you choose) and interest on the unpaid balance. Interest accrues daily at a rate set quarterly by the IRS; as of 2024, the rate is around 8 percent per year, though this changes. You also continue to owe penalties on top of the original tax debt.

If you owe $50,000 or less in combined taxes, penalties, and interest, you can request a payment plan directly through the IRS website, by phone, or by mail. The IRS will usually approve you automatically if you have filed all required tax returns and do not have an existing payment plan in default. If you owe more than $50,000, you must provide detailed financial information and the IRS will review whether you can afford the monthly payment you propose.

Monthly payments vary widely depending on how much you owe and how long you want to pay. A person owing $5,000 might pay $100 to $200 per month over two to five years. Someone owing $30,000 might pay $300 to $600 per month. The longer the plan, the more interest you pay overall. You can change your payment amount later if your income changes, but you must request the change in writing.

If you miss a payment on a payment plan, the IRS can terminate the agreement and resume collection action (wage garnishment, bank levy, or lien). Missing one payment does not automatically end the plan, but the IRS will send a notice giving you a deadline to catch up or request a modification.

Offer in Compromise: Settling for less than you owe

An Offer in Compromise is a formal settlement in which you pay a lump sum (or a series of payments) that is less than the full tax debt, and the IRS forgives the remainder. The IRS only approves an Offer in Compromise if it believes you cannot pay the full amount even over a long payment plan, and if the amount you offer is close to what the IRS could collect from you through wage garnishment or asset seizure.

To request an Offer in Compromise, you must file Form 656 with the IRS and include detailed financial statements: your income, expenses, assets, and liabilities. The IRS uses this information to calculate your "reasonable collection potential" — the amount they believe they could collect from you over time. Your offer must be at least close to that amount, or it will be rejected. The IRS charges a $225 application fee, which is not refunded if your offer is rejected.

The approval process takes three to six months on average, sometimes longer. While your offer is under review, the IRS pauses most collection action, but interest and penalties continue to accrue on the unpaid balance. If the IRS rejects your offer, you can appeal within 30 days, but most rejections are final unless your financial situation has changed significantly.

An Offer in Compromise is rarely approved for someone with stable income and assets. It is most commonly approved for people who are retired, disabled, or facing a permanent reduction in income. If you have a job and own a home, the IRS will likely calculate that you can pay more than you are offering, and will reject the settlement.

Currently Not Collectible status: Pausing collection temporarily

Currently Not Collectible status is a temporary pause in IRS collection action. When you are placed in Currently Not Collectible status, the IRS stops pursuing wage garnishment, bank levies, and liens for up to two years. After two years, the IRS will review your case and either extend the status, resume collection, or work with you on a payment plan or settlement.

You request Currently Not Collectible status by submitting Form 433-F (a short financial statement) to the IRS, usually by mail or through a payment plan request. You do not need to prove you are destitute; you need to show that your basic living expenses (rent, food, utilities, transportation, medical care) leave you with little or no money after each month. The IRS uses federal poverty guidelines and national expense standards to evaluate your claim.

Currently Not Collectible status does not reduce your debt. Interest and penalties continue to accrue at the same rate as if you were making no payments. The debt remains on your IRS record and can be reported to credit agencies. If your financial situation improves, the IRS will resume collection action. If you receive a tax refund while in Currently Not Collectible status, the IRS will apply it to your debt automatically.

Currently Not Collectible status is useful if you are facing a temporary hardship (job loss, medical emergency, divorce) and expect your income to improve within a few years. It is not a permanent solution and should not be confused with debt forgiveness.

Disputing the debt or requesting penalty relief

Before you commit to a payment plan or settlement, you can request that the IRS review whether the tax debt is correct. If the IRS made an error in calculating your tax liability, or if you believe you have a legitimate reason to dispute the amount owed, you can file a formal protest or request a collection due process hearing.

A Collection Due Process hearing is your right to have an independent IRS officer review the debt before collection action proceeds. You must request the hearing within 30 days of receiving a Notice of Intent to Levy. The hearing officer can review whether the IRS calculated your tax correctly, whether you owe the penalties that were added, and whether the IRS followed proper procedures. If the hearing officer agrees with you, the debt may be reduced or eliminated.

You can also request penalty relief if you believe the penalties added to your tax debt were unfair. The IRS adds penalties for late payment, late filing, and underpayment of estimated taxes. If you have a reasonable cause (illness, death in the family, reliance on a tax professional's bad advice), you can request that the IRS remove or reduce the penalties. This does not eliminate the tax itself, but it can significantly reduce what you owe.

Disputing the debt or requesting penalty relief requires detailed documentation and often requires a tax professional to present your case effectively. If you attempt it on your own, keep copies of all correspondence and submit everything in writing so you have a record.

Bankruptcy and tax debt: When it may help

Tax debt can be discharged (eliminated) in bankruptcy under specific conditions. In Chapter 7 bankruptcy, income tax debt that is more than three years old, was filed on time or more than two years ago, and was assessed more than 240 days ago can be eliminated. Penalties and interest may also be discharged. In Chapter 13 bankruptcy, you can include tax debt in a three- to five-year repayment plan, and any remaining balance is forgiven at the end.

Bankruptcy is a serious step with long-term consequences for your credit and financial life. It should only be considered if your total debt (tax and non-tax) is very large and you have no realistic way to pay it. Bankruptcy does not eliminate payroll taxes you owe as an employer, and it does not eliminate tax debt that is recent or was filed late.

If you are considering bankruptcy, consult with a bankruptcy attorney who can review your specific situation. Many bankruptcy attorneys offer free initial consultations. Legal aid organizations in your area may provide free or low-cost bankruptcy help if your income is below a certain threshold.

How to request a payment plan or settlement

The fastest way to set up a payment plan is through the IRS website at irs.gov. You can request a plan online if you owe $50,000 or less, have filed all required returns, and do not have an existing plan in default. The online process takes about 15 minutes and you will receive approval or denial immediately.

You can also request a payment plan by calling the IRS at 1-800-829-1040 (individual taxes) or 1-800-829-4933 (business taxes). Have your Social Security number, the tax year(s) you owe for, and an estimate of how much you can pay each month ready when you call. Wait times are often long, especially during tax season.

To request an Offer in Compromise or Currently Not Collectible status, you must submit Form 656 or Form 433-F by mail to the IRS address listed in your tax notice. You cannot request these through the website. Include all required financial documents and keep copies for your records. The IRS will send you a confirmation letter with a case number; use this number for all future correspondence.

If the IRS has already begun collection action (wage garnishment or bank levy), you can request a Collection Due Process hearing by responding to the Notice of Intent to Levy within 30 days. The notice will include instructions for requesting the hearing. If you miss the 30-day deadline, you lose your right to the hearing and collection action will proceed.

Working with a tax professional

You do not need a tax professional to set up a payment plan. The process is straightforward and the IRS will work with you directly. However, a tax professional (CPA, enrolled agent, or tax attorney) can be helpful if you are requesting an Offer in Compromise, disputing the debt, or if your situation is complex (self-employment income, multiple years of unpaid taxes, existing liens or levies).

A tax professional can review your financial situation, determine which resolution option is most likely to succeed, prepare and submit the required forms, and represent you in correspondence with the IRS. This reduces the risk of mistakes that could delay approval or result in rejection. Tax professionals typically charge $500 to $3,000 for an Offer in Compromise case, depending on complexity.

If you cannot afford a tax professional, the IRS maintains a list of Low Income Taxpayer Clinics (LITCs) that provide free or low-cost help to people with limited income. You can find a clinic near you at irs.gov/litc. Legal aid organizations and nonprofit credit counseling agencies may also offer free tax debt guidance.

Frequently Asked Questions

Will the IRS forgive my tax debt if I cannot pay?

The IRS does not forgive tax debt based on hardship alone. However, it may accept a settlement for less than you owe (Offer in Compromise) if you can demonstrate that you cannot pay the full amount even over time. More commonly, the IRS will set up a payment plan or place your account in Currently Not Collectible status while you work toward payment.

What happens if I ignore my tax debt?

The IRS will pursue collection through wage garnishment (taking a portion of your paycheck), bank levies (seizing money from your account), and liens (claiming a legal interest in your property). The debt will grow as interest and penalties accrue. After 10 years, the debt expires and the IRS can no longer collect it, but this is a long time to live with collection action.

Can I get my tax refund if I owe back taxes?

No. If you owe federal tax debt, the IRS will apply any refund you are due to that debt automatically. This applies even if you are in a payment plan. If you owe state taxes as well, your state may also intercept your federal refund.

How long does it take to resolve tax debt through a payment plan?

A payment plan can last anywhere from a few months to six years, depending on how much you owe and what monthly payment you can afford. Approval usually takes one to two weeks if you request online or by phone. Once approved, you begin making payments the following month.

Can I have a tax lien removed if I set up a payment plan?

A tax lien is not automatically removed when you set up a payment plan. However, if you make consistent payments and stay current on your plan, you can request that the IRS withdraw the lien after you have paid a certain percentage of the debt (usually 25 percent). You must request this in writing; the IRS does not do it automatically.