Tax Debt Resolution FAQ

The IRS offers several resolution options depending on your financial situation and the amount owed. Installment agreements under IRC Section 6159 allow you to pay tax debt over time through monthly payments, with streamlined agreements available for debts under $50,000 requiring minimal financial disclosure. These agreements provide immediate relief from enforced collection actions while you pay down the balance over an extended period, typically 72 months or less for individual taxpayers.

Offers in compromise under IRC Section 7122 allow settlement for less than the full amount owed when you cannot pay the full liability, collection would create economic hardship, or doubt exists regarding liability. The IRS accepts approximately 40% of submitted offers when properly documented with accurate financial information. Currently not collectible (CNC) status under IRC Section 6343 temporarily suspends collection activities when paying would prevent you from meeting basic living expenses, though interest and penalties continue accruing and liens may still be filed.

Penalty abatement under IRC Section 6664(c) may reduce or eliminate penalties (though not the underlying tax or interest) based on reasonable cause, first-time abatement policies, or administrative waivers. Innocent spouse relief under IRC Section 6015 protects spouses from liability for their partner's tax obligations in qualifying situations involving understatement, omission, or inequitable circumstances. Each option has specific eligibility requirements, advantages, disadvantages, and long-term implications that should be carefully evaluated based on your complete financial picture.

An installment agreement allows you to pay tax debt over time through monthly payments rather than a lump sum. Under IRC Section 6159, the IRS must enter into installment agreements with eligible taxpayers who demonstrate inability to pay immediately. The type of agreement available depends on the amount owed and your financial situation. Guaranteed installment agreements are available for total combined tax debt under $10,000 if you haven't had an installment agreement in the past five years, have filed all required returns, agree to pay within three years, and agree to remain compliant with all future tax obligations.

Streamlined installment agreements cover combined tax, penalties, and interest up to $50,000, require minimal financial disclosure (no Form 433-F Collection Information Statement), and allow up to 72 months to pay for individuals (24 months for businesses owing under $25,000). You can apply online through the IRS Online Payment Agreement system, significantly reducing setup fees. The user fee ranges from $0 to $225 depending on payment method and income level, with direct debit agreements receiving the lowest fees. Once established, you must make payments on time, file all required returns, and pay any current year tax obligations in full. Failure to comply results in default and potential termination.

While in an installment agreement, interest continues accruing on the unpaid balance at the federal short-term rate plus 3% under IRC Section 6601, compounding daily. Late payment penalties under IRC Section 6651(a)(3) continue but reduce from 0.5% to 0.25% per month, capped at 25% of the unpaid tax. The IRS generally will not levy wages or bank accounts while the agreement remains in good standing, though existing liens remain in place until the debt is fully paid.

An Offer in Compromise (OIC) under IRC Section 7122 is an agreement with the IRS to settle tax debt for less than the full amount owed. The IRS may accept an OIC based on three grounds: doubt as to collectibility (you cannot pay the full amount within the collection statute), doubt as to liability (legitimate dispute exists regarding the tax owed), or effective tax administration (collection would create economic hardship or be unfair). Most accepted offers are based on doubt as to collectibility, where the IRS determines that the offered amount represents the maximum it could reasonably collect within the statutory collection period.

The IRS evaluates your reasonable collection potential (RCP) by analyzing asset equity and future income over the remaining statute period. The calculation includes net realizable equity in assets (quick sale value minus loans and exemptions) plus future income over 12 or 24 months (depending on payment terms) minus allowable living expenses based on Collection Financial Standards. To qualify, you must have filed all required tax returns, made all required estimated tax payments for the current year, and not be in an open bankruptcy proceeding. Business owners with employees must be current on federal tax deposits.

The application process requires Form 656 (Offer in Compromise), detailed financial disclosure on Form 433-A (individuals) or 433-B (businesses), a $205 application fee (waived for low-income taxpayers), and an initial payment (20% for lump sum offers, first month's payment for periodic payment offers). The IRS has 24 months to accept or reject your offer. If accepted, you must remain compliant with all tax obligations for five years. The IRS accepts only about 40% of submitted offers, primarily rejecting those where the taxpayer can pay through installment agreements or liquidating assets.

Currently Not Collectible (CNC) status, also called hardship status, temporarily suspends IRS collection activities when paying would prevent you from meeting basic living expenses. Under IRC Section 6343(a)(1)(D), the IRS must release levies if the action is creating an economic hardship, meaning you cannot pay reasonable basic living expenses. The IRS places your account in status code 53 (hardship) after analyzing your monthly income and allowable expenses using the Collection Financial Standards published by the agency, which specify allowable amounts for housing, utilities, food, transportation, and other necessary expenses.

To request CNC status, you must complete Form 433-F (Collection Information Statement) or the more detailed Form 433-A, providing comprehensive financial information including income sources, bank accounts, assets, and monthly expenses. The IRS compares your income against allowable expenses and determines whether surplus income exists for tax payments. If expenses equal or exceed income, demonstrating inability to pay anything toward the debt, the IRS may grant CNC status. While in CNC status, the IRS will not levy your wages, bank accounts, or other assets, though the agency may still file a Notice of Federal Tax Lien to protect the government's interest in your property.

Important limitations of CNC status include: interest and penalties continue accruing under IRC Sections 6601 and 6662; the collection statute of limitations under IRC Section 6502 continues running (potentially allowing the debt to expire uncollected after 10 years); the IRS periodically reviews your financial situation (typically every two years or when notified of income increases) and may resume collection if circumstances improve; and tax refunds may be offset against the debt. CNC status provides breathing room but isn't a permanent solution, making it most appropriate for taxpayers facing temporary hardship with potential for improved finances before the statute expires.

Defaulting on an installment agreement has serious consequences and should be avoided whenever possible. Under IRC Section 6159(d), the IRS can terminate your agreement if you: fail to pay any installment when due, fail to timely file any required tax return or pay current year tax obligations, fail to pay any other tax liability that accrues during the agreement period, or provide inaccurate or incomplete financial information when establishing the agreement. The IRS will send Notice CP523 (Intent to Terminate Your Installment Agreement) warning of the impending termination and providing 30 days to cure the default by bringing payments current.

Once an agreement is terminated, several adverse consequences follow immediately: the full remaining balance becomes due and payable in full; the IRS may file a Notice of Federal Tax Lien under IRC Section 6321 if not already filed; the agency can initiate levy actions against wages, bank accounts, and other assets under IRC Section 6331 without further notice; and the reduced 0.25% monthly failure-to-pay penalty increases back to 0.5% per month under IRC Section 6651(a)(3). You lose the protection from enforced collection that the agreement provided.

You can request reinstatement of a defaulted agreement by filing Form 9465 (Installment Agreement Request), paying the reinstatement fee ($89), and bringing all payments current. The IRS has discretion to approve or deny reinstatement requests, considering factors including your payment history, reason for default, and current ability to comply. If reinstatement is denied, you may need to submit a new installment agreement application with updated financial information. To avoid default, contact the IRS immediately if you cannot make a payment or foresee compliance difficulties. The agency may modify agreement terms, temporarily suspend payments, or restructure the obligation rather than defaulting and terminating the arrangement.

Yes, California offers similar debt resolution programs through the Franchise Tax Board (FTB), though with some procedural differences from federal programs. The FTB Offer in Compromise program under California Revenue and Taxation Code Section 19443 allows settlement of tax debt for less than the full amount based on doubt as to collectibility (inability to pay) or effective tax administration (collection would cause undue hardship or be unfair). Unlike the IRS, California does not accept offers based solely on doubt as to liability. The FTB evaluates your reasonable collection potential using similar methodology to the IRS, examining asset equity and future income potential.

California installment agreements are available under Revenue and Taxation Code Section 19008, allowing monthly payments over time. The FTB offers online installment agreement applications for individual taxpayers owing $25,000 or less (including tax, penalties, and interest) through the MyFTB online portal, with terms up to 60 months. Larger balances or business debts require more extensive financial disclosure and FTB approval. Unlike IRS agreements, California charges no setup fees for installment agreements, making them more accessible for taxpayers with limited resources.

The FTB can also grant currently not collectible status when collection would cause undue economic hardship, though California statutes don't specifically codify this process. Penalty abatement is available under Revenue and Taxation Code Section 19132, allowing the FTB to abate penalties for reasonable cause such as disaster, serious illness, or reliance on erroneous written advice from the FTB. California's One-Time Abatement program provides first-time penalty relief similar to IRS first-time abatement policies for taxpayers with clean compliance history. The FTB also offers innocent spouse relief under Revenue and Taxation Code Section 18533, mirroring federal protections under IRC Section 6015.

Under IRC Section 6502, the IRS generally has 10 years from the assessment date to collect tax debt through enforced collection actions such as levies, seizures, and suits. This Collection Statute Expiration Date (CSED) runs from the date the IRS formally assesses the tax liability on its records, not from the return's filing date or original due date. Once the 10-year period expires, the IRS loses legal authority to collect the debt, and it is effectively discharged. However, numerous actions can suspend or extend the CSED, potentially adding months or years to the collection period.

Common suspension events include: filing bankruptcy suspends the CSED for the duration of the bankruptcy case plus six months under 11 USC Section 108(c); submitting an offer in compromise suspends it while the offer is pending, for 30 days after rejection, and during any appeal period under IRC Section 6331(k)(3); requesting a Collection Due Process hearing suspends it while the hearing is pending and during any subsequent judicial review under IRC Section 6330; filing a request for innocent spouse relief suspends it under IRC Section 6015(e)(1)(A); living outside the United States continuously for six months or more suspends it; and military service in a combat zone suspends it for the service period plus 180 days under IRC Section 7508.

Additionally, signing Form 900 (Tax Collection Waiver) extends the CSED by the agreed period. Each suspension adds to the original 10-year period, and multiple suspensions are cumulative. Understanding suspension periods is crucial when evaluating resolution strategies, as actions that suspend the statute may not be in your best interest if the debt is close to expiring. For California tax debt, Revenue and Taxation Code Section 19255 generally provides a 20-year collection period, significantly longer than the federal statute.

Innocent spouse relief under IRC Section 6015 relieves you from responsibility for tax, interest, and penalties arising from your spouse's or former spouse's actions on a joint return when holding you liable would be unfair. When you file a joint tax return, both spouses are jointly and severally liable for the entire tax debt under IRC Section 6013(d)(3), meaning the IRS can collect the full amount from either spouse regardless of who earned the income or claimed the deductions. Section 6015 provides three types of relief from this joint liability.

Innocent spouse relief under IRC Section 6015(b) applies when your spouse understated tax by improperly reporting income, deductions, or credits, you didn't know and had no reason to know of the understatement when signing the return, and holding you liable would be inequitable considering all facts and circumstances. Separation of liability relief under IRC Section 6015(c) allocates the deficiency between you and your spouse or former spouse when you're divorced, legally separated, widowed, or living apart for at least 12 months. This relief allows you to be held responsible only for your allocated portion based on items giving rise to the deficiency.

Equitable relief under IRC Section 6015(f) and Treasury Regulation 1.6015-4 applies when you don't qualify for the first two types but holding you liable would be inequitable. Factors considered include: whether you received a significant benefit from the unpaid tax; whether you knew or had reason to know about the liability when signing; whether you've since divorced or separated; your current economic hardship; and whether you were abused by your spouse. You must request relief on Form 8857 (Request for Innocent Spouse Relief) generally within two years of the first collection action, though equitable relief requests under Revenue Procedure 2013-34 have no time limit under Treasury Regulation 1.6015-5(b)(1).

IRS installment agreement user fees vary based on your payment method, how you apply, and your income level. The standard user fee for installment agreements is $130 if you apply online using the IRS Online Payment Agreement system, or $225 if you complete the application by phone, mail, or in person at an IRS office. However, significant fee reductions and waivers are available for qualifying taxpayers, making payment plans accessible even with limited financial resources.

The lowest fee is $31 if you apply online and agree to direct debit automatic payments from your bank account (DDIA - Direct Debit Installment Agreement). Direct debit ensures consistent on-time payments, reduces the risk of default, and substantially lowers administrative costs for the IRS, which it passes to taxpayers through reduced fees. Low-income taxpayers whose adjusted gross income falls below 250% of the federal poverty guidelines published annually by the Department of Health and Human Services qualify for reduced fees. Low-income taxpayers pay only $43 for non-direct debit agreements, or $31 for direct debit agreements.

Additionally, if you qualify as low income and pay by direct debit, you can request full reimbursement of the setup fee after successfully completing the installment agreement by paying the full balance. To request reimbursement, submit Form 13844 (Application for Reduced User Fee for Installment Agreements) after making your final payment. Restructuring a previously established installment agreement or reinstating a defaulted agreement costs $89. These fees are in addition to the tax, interest, and penalties owed, and are non-refundable except for the low-income direct debit reimbursement program.

Yes, the IRS rejects approximately 60% of Offer in Compromise submissions for various reasons, making careful preparation essential to acceptance. Under IRC Section 7122(c), the IRS may reject offers that don't represent the maximum amount collectible, where taxpayers can pay through installment agreements or by liquidating assets, or where acceptance would undermine compliance or be against public policy. The most common rejection reason is insufficient offer amount—the offered sum is below your reasonable collection potential based on asset equity and future income calculated using the IRS's Collection Financial Standards and statutory formulas.

Other frequent rejection grounds include: unfiled tax returns (you must have filed all required returns before the IRS will consider an offer); missing current year estimated tax payments or federal tax deposits for businesses with employees; open bankruptcy proceedings under IRC Section 7122(g) (you cannot submit an offer while in bankruptcy); incomplete or missing Form 656, Form 433-A (OIC), or Form 433-B (OIC); failure to pay the required application fee ($205, waived for low-income taxpayers); missing initial payment (20% for lump sum cash offers, first month's payment for periodic payment offers); or returning to default status by failing to file or pay during the offer investigation period.

The IRS may also reject offers where documentation doesn't support claimed income and expenses, where dissipated assets suggest the taxpayer intentionally reduced their financial position before applying, or where special circumstances don't justify the low offer amount. If your offer is rejected, you have 30 days from the rejection date to appeal to the Independent Office of Appeals under IRC Section 7122(d). Appeals reviews the rejection independently and may reverse the determination if the offer officer made errors. Submitting a well-documented offer with accurate financial disclosure, realistic offer amounts based on proper RCP calculations, and clear explanations of special circumstances significantly improves acceptance chances.

The IRS has extensive collection powers for unpaid tax debt, exceeding those of most creditors. Under IRC Section 6331, the IRS can levy (seize) wages, bank accounts, social security benefits (up to 15%), retirement accounts, investment accounts, vehicles, real estate, business assets, accounts receivable, and other property without obtaining a court judgment. Before levying, the IRS must provide a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (Letter 1058 or LT11) at least 30 days before the levy action, giving you time to request a Collection Due Process hearing under IRC Section 6330.

Wage levies are particularly severe because they continue until the tax debt is paid in full or the levy is released, taking a substantial portion of each paycheck. The amount your employer must send to the IRS is calculated using Publication 1494 tables, leaving you only minimal amounts for basic living expenses based on filing status and number of dependents claimed. For example, a single taxpayer with no dependents typically retains only about $1,000 monthly before the IRS takes the rest. Bank levies freeze your account and remit the balance after 21 days, potentially causing bounced checks and overdraft fees.

The IRS can also file a Notice of Federal Tax Lien under IRC Section 6321, creating a legal claim against all your current and future property. Liens attach to real estate, vehicles, bank accounts, business assets, accounts receivable, and even property acquired after the lien filing. Tax liens appear in public records, severely damage credit scores (though removed from credit reports as of April 2018, they still appear in public records accessible to lenders), prevent property sales or refinancing without lien satisfaction, and give the IRS priority over most other creditors. Additionally, under IRC Section 7345, the IRS can certify seriously delinquent tax debt exceeding $59,000 (adjusted for inflation) to the State Department, resulting in passport denial, revocation, or limitation. The IRS may also offset federal payments including tax refunds, social security benefits, and federal contractor payments against your debt.