If you have a tax debt with the IRS, you probably dread checking your mail, constantly fearing a lien or levy notice. However, there are tax relief options available. Two of the most popular options are installment agreements and offers in compromise, but how are these different, and why might you choose one over the other?
The short answer is that an offer in compromise allows you to settle your tax debt for less than the full amount. In contrast, an installment agreement requires you to pay off your entire tax balance, but over an extended period of time.
The offer in compromise is “better” for your bottom line. Yet it has a more complicated and lengthy application process that you’re less likely to qualify for compared to an installment agreement. This blog post provides greater details on how these programs work, when to consider each one, and what other options may be available if neither is right for you. Read on to learn more or contact Seattle Legal Services, PLLC online or by calling 206-536-3152.
Key Takeaways
- Both installment agreements and offers in compromise offer relief for tax debt.
- Installment agreements involve payment in full over time.
- Offers in compromise settle your debt for less than the full amount.
- It’s much harder to qualify for an offer in compromise than an installment agreement.
- Working with a tax professional can help find the best payment option for you.
Installment Agreements vs. Offers in Compromise
These IRS tax relief options are among the most well-known, but they’re very different. The best way to explain their differences is to describe how they work.
Installment Agreements
The term “installment agreement” is often used interchangeably with other terms, such as payment plan, installment plan, or payment agreement, to refer to the various pay-over-time options offered by the IRS. That being said, “payment plan” typically refers to a shorter-term payment option, while an “installment agreement” is for taxpayers needing more time to pay.
A short-term payment plan (sometimes just referred to as a “payment plan”) requires payment in full within 180 days, and the outstanding balance must be less than $100,000 in combined unpaid taxes, penalties, and interest. An installment agreement provides up to 10 years to pay off the tax debt.
For most taxpayers, installment agreements and payment plans are easy to set up, as most taxpayers who owe less than $50,000 can apply for a Simple Payment Plan and get approved without ever having to talk to anyone. This relief option is well-suited to taxpayers who can afford minimum monthly payments and don’t qualify for an offer in compromise settlement.
Offers in Compromise
An offer in compromise is a way to settle your tax debt for less than you owe. Most people apply for an offer in compromise based on doubt as to collectibility (DATC). This basically means that the IRS will be unable to collect the full amount due to the limited income and assets of the taxpayer.
The application process can be extensive and grueling, requiring Form 656 and additional forms for a full financial disclosure to show economic hardship. However, an offer in compromise may be ideal for taxpayers who have limited income and assets relative to the amount of money they owe. An offer in compromise is also available based on other grounds, including doubt as to liability and effective tax administration, but these are less common.
| Category | Installment Agreement | Offer in Compromise (DATC) |
|---|---|---|
| Goal | Pay full balance over time. | Settle for less than owed. |
| Eligibility | Most taxpayers qualify; may have to prove ability to pay if debt amount is high. | Few taxpayers qualify; must prove inability to pay through extensive financial disclosure. |
| Duration | Lasts up to ten years from the date of tax assessment. | Can pay in a lump sum or with up to 24 monthly payments until the OIC amount is completely paid. |
| Amount of Tax Debt Paid | Full tax, plus interest and penalties. | A portion of what the taxpayer owes, based on what the IRS can reasonably expect to collect. |
| IRS Review | Limited or nonexistent for most taxpayers; required for high debt amounts. | Very intensive; taxpayers must provide information on income sources, assets, equity, debts, monthly expenses, and other potential payment sources. |
| Application Success Rate | High, as long as the taxpayer is compliant with other tax obligations. | Low; while acceptance rates vary each year, they are generally below 40% (in 2024, the acceptance rate was barely 20%). |
| Risk | If payments are missed, the taxpayer will be in default, at which point full payment is due. | If rejected, the fees and initial payment(s) are nonrefundable, although the initial payments can be applied toward the tax debt. |
When To Use an Installment Agreement
An installment agreement makes more sense if you have disposable income, just not enough to cover your tax debt in full right away. This makes spreading your debt out across monthly payments a natural choice.
If you’ve looked into an offer in compromise but do not qualify due to your income or assets, an installment agreement may still give you some room in your budget each month. This option is also suitable for those who want immediate protection from liens, levies, and other aggressive collection actions, as the IRS typically stops all collection efforts as long as a taxpayer is compliant with the terms of the installment agreement.
This option is also well-suited for those who don’t want to go through the rigorous financial disclosure required for an offer in compromise. The offer in compromise application process is intense, and some taxpayers value their privacy and time over the ability to settle their debt for less.
When To Choose an Offer in Compromise
If your tax debt is so high that you can’t ever reasonably pay it (even with monthly installment agreement payments), consider this option. To estimate your monthly installment agreement payment, take the amount of debt you have and divide it by the number of months left until the Collection Statute Expiration Date (ten years from the date of assessment). If that amount is so high that you couldn’t make the monthly payments, an offer in compromise may be ideal for you.
Taxpayers with limited income or who live paycheck to paycheck often go this route. To qualify, you must also have limited assets—if you have equity in real estate or other valuable assets, the IRS will expect you to exhaust those options before asking for a settlement.
Other Payment Alternatives
The offer in compromise and payment plan are some of the IRS’s most well-known options, but they’re not the only ones. Other alternatives you may look into include:
- Partial Payment Installment Agreement (PPIA): This payment option combines features of both installment agreements and offers in compromise. With a PPIA, you make monthly payments until your Collection Statute Expiration Date (CSED), much like a payment plan. After the CSED, any remaining balance no longer has to be paid.
- Currently Not Collectible (CNC) status: The IRS offers temporary protection from collection actions for taxpayers who genuinely can’t afford to pay anything toward their tax debt. You’ll need to go through a financial disclosure for this option, and the IRS will review your financial situation every so often to see if it can resume collection efforts.
- Penalty abatement: While this doesn’t pay off your debt, it may reduce it. Penalty abatement can decrease or eliminate penalties, either due to previous compliance or reasonable cause.
- Innocent spouse relief: If your tax debt is the result of your spouse’s actions that you didn’t know about, you might not be responsible for paying all of it.
- Bankruptcy: Bankruptcy doesn’t eliminate all forms of tax debt in all situations. And its impact on your credit makes it an option that isn’t well-suited to everyone. But in some cases, it is a valid option that can provide financial relief.
Avoid Choosing the Wrong Tax Relief Program
Some taxpayers opt for an installment agreement, assuming they won’t qualify for an offer in compromise. This can be a mistake for taxpayers who have limited income and assets. They may find themselves stretching their budget every single month, even skipping bills and food, to make their installment agreement payments. Some of those taxpayers would have qualified for an offer in compromise if they had applied.
On the flip side, some people apply for an offer in compromise when they’re well above the limits for the program. When they’re rejected, they are out the application fee and the down payment, which is either 20% of the lump payment amount offered or monthly payments until the offer is either accepted or rejected.
The monthly or lump sum payments made during the offer in compromise application process will at least go toward your tax debt. Yet this can still be a loss for the taxpayer because of the time and effort the application process required, as well as the lost application fee.
Find Out How a Tax Pro Can Help You With Tax Relief
At Seattle Legal Services, we understand that figuring out tax relief can be overwhelming and stressful. That’s why we work with our clients to compare options and find the best relief for their needs. By doing a thorough analysis of your finances and tax situation, we can help you better understand which programs are available to you. We’ll also handle the application process. Ready to get started? Call us at 206-536-3152 or send us a message online.
Frequently Asked Questions
What is the difference between an OIC and a payment plan?
An offer in compromise settles your debt for less than you owe, while a payment plan leads to payment in full over an extended period of time.
Is an OIC better for my credit than an installment agreement?
Neither an offer in compromise nor an installment agreement should affect your credit. The IRS doesn’t pull your credit or report your offer in compromise or installment agreement to credit bureaus.
How long does the offer in compromise application process take?
It can take six to 24 months to receive a decision from the IRS.
What happens if I default on my installment agreement?
Full payment of the outstanding balance is due immediately, and the IRS may resume collection efforts.
Do I need a tax attorney to help me apply?
If you have a complicated tax situation, you may need a tax attorney to help you with your installment agreement. In any situation where an offer in compromise is on the table, working with a tax professional can help you accurately report your finances, submit the strongest application you can, and figure out how to make the required payments until you receive a final decision.
Sources:
https://www.irs.gov/statistics/collections-activities-penalties-and-appeals
https://www.irs.gov/payments/offer-in-compromise
https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise-faqs
https://www.irs.gov/payments/payment-plans-installment-agreements
https://www.irs.gov/newsroom/irs-payment-plan-options-fast-easy-and-secure
https://www.irs.gov/payments/payment-plans-installment-agreements
https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise-faqs