3 Little-Known IRS Tax Debt Relief Solutions

IRS tax debt relief comes in a few forms. If you cannot meet your federal tax obligation, you may be able to take advantage of one of the solutions the IRS offers to those who qualify based on unusual financial hardship and other factors.

Solution 1: The Currently Not Collectible Status

If you have experienced a serious hardship, you should consult with a tax attorney to file for the not collectible status. Filing form 433-F will notify the IRS that you are unable to pay any bills. If you are declared uncollectible, the IRS will stop all collections, including liens and garnishments. This isn’t necessarily a "get out of jail free" card, but it will save you from losing property and other assets if you’ve suffered a hardship.

You will still receive a statement from the IRS each year letting you know how much you owe. There is a 10-year statute of limitations on tax collection. During the time you are in the not collectible status, the clock keeps ticking. This means that if the 10 years conclude during this time, your debt expires.

Solution 2: An Installment Arrangement

Just as you can make payment arrangements for most of your other bills during times of hardship, you can do this with the IRS. The process isn’t quite as easy as dealing with your local utility company, but it’s a good option for those who can afford smaller monthly payments.

You will need to fill out and mail a form or go to the IRS website for it. There will be a fee assessed to set up a new arrangement or to reinstate an unpaid balance arrangement. The cost for this is between $43 and $105 depending on your situation.

You can make your payments in a few different ways: by check, money order or credit card or by arranging for a monthly automatic payroll deduction or electronic funds transfer from your bank account. Before you decide that this is the solution for you, factor in that interest will be compounded daily on your balance due. 

Solution 3: An Offer in Compromise

If you owe a large amount of money to the IRS and there is no way you can pay it, you may be able to qualify for an offer in compromise (OIC). With this, you would be able to settle your debt to the IRS by paying less than the full sum owed. This program was heavily abused by unscrupulous tax preparers in the past, so some changes were recently made to it. The IRS has made it much easier for the average person to apply for an OIC, without the help of a tax preparer. Few taxpayers qualify for this type of agreement, however.

Except in what the IRS deems exceptional circumstances, you will not qualify for an OIC if the IRS believes that you could pay off your taxes either in a lump sum or through an installment plan. The IRS may agree to an OIC for one of three reasons:

  • the IRS doubts your ability to pay off the full debt within the term prescribed by the statute of limitations;
  • there is reasonable doubt that you owe the amount the IRS claims as due; or
  • although there is no doubt about the amount owed and you have the potential to pay off the full debt, due to exceptional circumstances, paying it would likely bring undue hardship or be unfair (IRS.gov provides the example of a couple with the assets to cover the tax bill and pay for their disabled child's care at present but who needs the equity in their assets to continue covering basic living expenses and medical care for the child).

In general, an OIC is accepted only if the taxpayer offers to pay at least as much as what the IRS considers the reasonable collection potential (RCP), based on that taxpayer's particular case.

One payment option is to pay at least 20 percent of the offer amount upon application and, after acceptance, to pay the remainder off in no more than 5 monthly installments. The other option is to make a first installment upon application; to continue making installment payments while your offer is being considered; and after acceptance, to pay off the remainder in more than 5 months. Whichever option you choose, you will need to pay a $150 application fee.