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Owing money to the IRS is stressful. But the IRS offers several ways to pay off tax debt that most people do not know about. This guide covers every option, from simple payment plans to settlement programs, so you can find the right path for your situation.
Step 1: Know What You Owe
Before you can deal with IRS debt, you need to know the exact amount. Log in to your account at IRS.gov and check your balance. Your IRS transcript shows your tax debt, including penalties and interest that have accrued.
Do not rely on a notice you got months ago. Interest and penalties keep growing. Get the current balance before you decide on a plan.
IRS Installment Agreements: The Most Common Option
An installment agreement lets you pay your tax debt in monthly payments over time. This is the most common way people handle IRS debt.
Short-Term Payment Plan
- Available if you owe under $100,000 (including penalties and interest)
- Gives you up to 180 days to pay in full
- No setup fee
- Interest and some penalties continue to accrue
Long-Term Payment Plan (Installment Agreement)
- Available if you owe under $50,000 (individuals) or $25,000 (businesses)
- You set a monthly payment based on what you can afford
- Setup fee: $31 online (direct debit) or $130 by mail/phone
- Interest and late payment penalties continue to accrue
You can set up a payment plan directly on IRS.gov without calling the IRS or paying a third party. This is the fastest, cheapest option for most people.
Offer in Compromise: Settle for Less
An Offer in Compromise (OIC) lets you settle your IRS debt for less than the full amount. The IRS accepts OICs when paying in full would cause financial hardship.
Does the IRS Accept OICs?
The IRS accepts about 40% of OIC applications. But many people who apply do not qualify because they have enough assets or income to pay the debt in full. The IRS calculates your Reasonable Collection Potential (RCP) and only accepts an OIC if your offer meets or exceeds that amount.
How to Apply for an OIC
- Use the IRS OIC pre-qualifier tool at IRS.gov to check if you might qualify
- File IRS Form 656 (Offer in Compromise)
- Pay a $205 application fee (waived for low-income applicants)
- Provide detailed financial information
The process takes 6 to 12 months. During that time, the IRS cannot collect from you.
Currently Not Collectible (CNC) Status
If you have no money and no assets, you can request Currently Not Collectible status. The IRS temporarily stops collection efforts.
CNC does not eliminate your debt or stop interest from growing. The IRS reviews your case periodically. If your financial situation improves, they will restart collection.
CNC makes sense if you truly cannot pay anything right now and need immediate relief from IRS enforcement.
Penalty Abatement: Get Penalties Reduced or Removed
The IRS can remove or reduce penalties in certain situations. There are two main types:
First-Time Penalty Abatement
If you have a clean penalty history (no penalties in the prior 3 tax years), you can request first-time penalty abatement. You must have filed all required returns and paid or arranged to pay the tax. Penalties can be significant — getting them removed can save hundreds or thousands of dollars.
Reasonable Cause Abatement
If you have a legitimate reason for not paying on time (serious illness, natural disaster, death of a family member), the IRS may remove penalties. You must explain the situation in writing and provide documentation.
Should You Use a Tax Debt Relief Company?
Tax debt relief companies advertise heavily on TV and radio. They promise to settle your debt for pennies on the dollar. Be very careful with these companies.
What to Watch For
- Upfront fees: Many companies charge $3,000 to $10,000 upfront before they do any work
- Unrealistic promises: Guaranteeing a settlement for a fraction of your debt is almost always false advertising
- Delays: Some companies collect fees, do little work, and leave you in worse shape
- Unregulated operators: Many are not CPAs, tax attorneys, or enrolled agents
When Professional Help Makes Sense
If you owe more than $50,000, are facing an IRS audit, need to file multiple unfiled returns, or are considering an OIC, hire a licensed professional. Look for a CPA or tax attorney, not an unregulated “relief” company.
Using a Personal Loan to Pay IRS Debt
In some cases, taking a personal loan to pay off IRS debt makes sense. IRS interest rates are lower than credit card rates but can still be 7% to 10% or higher when you add penalties. If you can qualify for a personal loan at a lower rate, you can pay the IRS in full and owe one monthly payment to your lender instead.
See our list of the best debt consolidation loans to compare personal loan rates.
To check if a personal loan makes sense for your situation, see our debt-to-income ratio calculator.
Frequently Asked Questions
- What happens if you ignore IRS tax debt?
- If you ignore IRS debt, the IRS can garnish your wages, seize your bank account, put a lien on your property, or take your tax refunds. Ignoring it makes it worse, not better.
- What is an IRS installment agreement?
- An installment agreement lets you pay off your tax debt in monthly payments. The IRS charges interest and a setup fee, but this is much better than ignoring the debt or paying a tax relief company thousands of dollars to set it up for you.
- What is an Offer in Compromise?
- An Offer in Compromise (OIC) lets you settle your tax debt for less than the full amount owed. The IRS accepts OICs when full payment would cause financial hardship. Only a small percentage of applications are accepted.
- Can the IRS forgive tax debt?
- The IRS does not simply forgive tax debt, but it can reduce or settle it through programs like Offer in Compromise, Currently Not Collectible status, or penalty abatement. These require you to meet specific criteria.
- Should I use a tax debt relief company?
- Most people do not need a tax relief company. You can set up a payment plan directly on IRS.gov for free. If your situation is complex (large debt, IRS audit, OIC), consider a licensed CPA or tax attorney instead of an unregulated relief company.
Bottom Line
If you owe IRS tax debt, do not ignore it. The IRS has collection tools that can hurt you badly. But it also has programs to help you pay in a way you can manage. Start with a payment plan you set up yourself on IRS.gov. If your situation is complex, hire a licensed CPA or tax attorney. Avoid tax relief companies with big promises and upfront fees.