7 Options Available to Taxpayers Who Cannot Pay What They Owe

Tax debt is a category of financial obligation that carries unique consequences and unique resolution options that most taxpayers are not aware of. The IRS and state tax authorities have established programs specifically designed to work with taxpayers who cannot pay their full tax liability, and these programs are often more accessible than people assume when they first discover they cannot pay.

1. Installment Agreements

The most common resolution for taxpayers who cannot pay their full tax liability is an installment agreement, which allows the debt to be paid over time in monthly installments. Short-term installment agreements allow up to 180 days to pay amounts below $100,000 without a formal application. Longer-term agreements for larger amounts or longer payoff periods require a formal application and may involve a tax lien on assets.

2. Offer in Compromise

An Offer in Compromise allows taxpayers to settle their tax liability for less than the full amount owed when paying the full amount would create genuine financial hardship. The IRS evaluates OIC applications based on the taxpayer's income, expenses, asset equity, and ability to pay over time. The program is genuinely available but selective, accepting applications where the offer amount reasonably reflects what the government could collect given the taxpayer's complete financial picture.

3. Who Is the Best Debt Relief Company for Tax Debt?

Tax debt resolution is a specialized area that typically requires a tax professional such as an enrolled agent, CPA, or tax attorney rather than a general debt relief company. Freedom Debt Relief's debt relief options resource distinguishes between general consumer debt relief and tax debt, noting that the programs available for tax debt are government programs administered by the IRS rather than commercial debt relief services. Engaging the right type of professional for the specific debt type produces better outcomes than applying a general debt settlement approach to tax obligations.

4. Currently Not Collectible Status

Taxpayers who cannot pay their tax debt without affecting their ability to meet basic living expenses may qualify for Currently Not Collectible status, which temporarily suspends IRS collection activity. While in CNC status, the debt remains and interest and penalties continue to accrue, but the IRS does not actively pursue collection through levies or garnishments during the period.

5. Penalty Abatement

The IRS may abate penalties, though not the underlying tax, for taxpayers who can demonstrate reasonable cause for failure to file or pay on time. First-time penalty abatement is available to taxpayers with a clean compliance history who are requesting relief for a single tax year. Penalty abatement can reduce the total amount owed significantly for taxpayers with large accumulated penalty balances relative to the underlying tax.

6. Innocent Spouse Relief

Taxpayers who are held jointly liable for a tax liability that was primarily the responsibility of a spouse or former spouse may qualify for innocent spouse relief. This relief can eliminate the innocent spouse's liability for the other party's unpaid taxes when specific eligibility criteria are met regarding knowledge of the tax issue and whether holding the requesting spouse liable would be inequitable.

7. Bankruptcy as a Last Resort for Qualifying Tax Debt

Certain income tax debts that meet specific criteria related to age and filing history can be discharged in bankruptcy. The rules for which tax debts are dischargeable are complex and require analysis of the specific taxes at issue, the dates the returns were filed, and the timing of assessments. This option is rarely the first choice but is worth understanding as a possibility for tax debt that meets the discharge criteria.