Offer in Compromise vs Installment Agreement vs Currently Not Collectible

If you owe the IRS more than you can pay at once, there are three main options. An installment agreement spreads the full balance over monthly payments. An offer in compromise settles the debt for less than you owe, but only if the IRS agrees you cannot realistically pay in full. Currently not collectible status pauses collection while paying would leave you unable to cover basic living expenses.

The IRS decides which option you qualify for. A tax relief company can help you apply, but it cannot change the rules, and you can apply for all three yourself.

The three options at a glance

Installment agreement

An installment agreement is a payment plan for your full balance. It is the most common outcome for people who owe the IRS, including many who first hoped for a settlement.

How it works. The IRS offers short-term plans for balances you can pay off within a limited number of days and long-term plans with monthly payments. Many individuals can apply online through the IRS's Online Payment Agreement tool without speaking to anyone. Larger balances or business debts may need more financial information.

Costs. There can be a setup fee, which varies depending on how you apply and how you pay. Applying online and paying by direct debit usually costs less, and low-income taxpayers may qualify for a reduced or waived fee. Check the current fees on IRS.gov.

Things to know.

• Interest and penalties generally continue until you pay in full, though the failure-to-pay penalty is reduced while the plan is in effect for returns filed on time.
• The IRS generally does not levy your wages or bank account while a plan is in place and you keep to it.
• You must file and pay future taxes on time. Missing payments or new balances can put the agreement into default.
• The IRS may still file a federal tax lien in some cases.

Best for: anyone who can afford a monthly payment. If that is you, you may not need a tax relief company at all.

Offer in compromise

An offer in compromise (OIC) asks the IRS to accept less than the full amount you owe. The IRS looks at your income, expenses, asset equity and future earning potential to work out what it could realistically collect. If your offer is at least that amount, it may accept. If it thinks you can pay in full over time, it will usually say no.

How it works. You file Form 656 with detailed financial statements on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, plus documents that back up your numbers. You can offer a lump sum or a periodic payment, and each comes with its own payment rules when you apply. There is an application fee and an initial payment, which are generally not refundable, unless you meet the IRS's low-income certification guidelines. Check the current amounts on IRS.gov.

Eligibility basics. You generally must have filed all required tax returns, made any required estimated payments for the current year and not be in an open bankruptcy proceeding. The IRS's pre-qualifier tool on IRS.gov gives a quick, free indication of whether an offer might be worth pursuing.

While it is pending. The IRS generally holds off on levies while it reviews your offer, but it may file a lien, and it keeps any tax refunds due to you. The time the IRS has to collect is also extended while the offer is pending.

If it is accepted. You must pay the agreed amount and stay compliant, filing and paying on time, for the period the agreement requires, usually five years. Breaking those terms can bring the original debt back.

Best for: people whose income and assets are genuinely too low to pay the debt in full. Be skeptical of any company that says you qualify before it has reviewed your finances.

Currently not collectible status

Currently not collectible (CNC) status is an IRS decision that you cannot pay anything right now without being unable to meet basic living expenses. It is a pause, not forgiveness.

How it works. You or your representative contact the IRS and provide financial information that shows your income does not cover allowable living expenses. If the IRS agrees, it stops active collection such as levies and wage garnishments.

Things to know.

• The debt remains, and interest and penalties generally keep accruing.
• The IRS can keep your tax refunds and apply them to the debt.
• The IRS may still file a lien.
• The IRS reviews your income from time to time and can resume collection if your situation improves.
• The time the IRS has to collect, generally ten years from when the tax was assessed, keeps running. If your situation never improves, some debt may expire when that period ends.

Best for: people in real financial hardship, for example living on a small fixed income, who need collection to stop now.

How to choose

Ask yourself three questions:

1. Can I pay the full balance over time? If yes, an installment agreement is the likely answer.
2. Can I pay basic living expenses? If not, CNC status may fit while you recover.
3. Will I realistically never be able to pay in full? Only then is an offer in compromise worth the paperwork and fees.

Penalty abatement can sit alongside any of these. If you have a clean history, ask the IRS about first-time penalty abatement, which can remove certain penalties and reduce what you owe.

Getting help

You can apply for every option above directly with the IRS at no cost. If your case is complicated, involves a business or several unfiled years, or the IRS has already levied your wages or bank account, a professional can help. Our guide on how tax relief companies work and what they charge explains what to expect, and our guide on when to hire an enrolled agent, CPA or tax attorney helps you pick the right professional.

If you decide to hire a firm, our tax relief company rankings compare seven firms on fee clarity, licensed representation and honest messaging. Firms such as Anthem Tax Services explain each of these options on their own sites, but remember that the IRS, not the firm, makes the decision.