IRS Payment Plans, Installment Agreements, and Offers in Compromise: Your Complete Guide

For taxpayers and businesses facing significant tax debt, the prospect of an IRS bank levy can be a serious financial threat. A levy allows the Internal Revenue Service to collect unpaid taxes directly from a taxpayer’s bank account, leaving little time to respond. When a taxpayer cannot pay the full balance, programs such as the IRS payment plan and offers in compromise can provide structured solutions that allow debts to be resolved while protecting critical funds. These programs are designed to help taxpayers settle their bills in a manageable way and avoid the disruption of enforced collection.

An installment agreement, commonly called a payment plan, enables taxpayers to make monthly payments toward the outstanding balance by an agreed-upon due date. This approach helps prevent further collection actions while allowing individuals and businesses to manage their finances effectively. Similarly, the offer in compromise program allows eligible taxpayers to settle their debt for less than the full amount owed when paying in full would create financial hardship.

Throughout this guide, taxpayers will find clear explanations, forms they may need to file, and additional information on contacting the IRS, paying the required fee, submitting applications, and resolving tax obligations in their best interest.

Understanding IRS Payment Plan and Offers in Compromise

The IRS payment plan and offers in compromise are two primary solutions created to help taxpayers resolve tax debt while reducing the likelihood of aggressive collection actions. These programs give the IRS a means to collect unpaid taxes while allowing taxpayers a structured approach to settle their bill without facing the immediate risk of a bank account levy. Understanding each option's features and eligibility criteria helps taxpayers choose the most suitable payment method based on their financial situation and due date requirements.

Key Features

• Payment plans, or installment agreements, enable taxpayers to make monthly installments until the balance is fully paid.
  
  
• The offer in compromise program allows taxpayers to settle for less than the total amount owed if paying in full would cause financial hardship.
  
  
• Both programs require applicants to comply with filing all necessary forms before approval.
  
  
• The IRS evaluates eligibility using income, expenses, and asset value.
  
  
• Fees, interest, and penalties may apply until the debt is resolved.

Who Can Apply

• Individuals and businesses owe taxes, but cannot pay them in full immediately.
  
  
• Applicants who have filed all required returns and met previous filing deadlines.
  
  
• Taxpayers whose financial information demonstrates an inability to pay in full.
  
  
• Those with levy notices who contact the IRS quickly to avoid enforced collection.
  
  
• Applicants who submit accurate forms online, by mail, or at an IRS office.

For those unable to pay their full balance, these programs provide a practical route to resolve tax debt while maintaining financial stability. By knowing the requirements and differences between a payment plan and the compromise program, taxpayers can determine the option that aligns with their best interests, ability to pay, and long-term financial goals.

IRS Payment Plans (Installment Agreements)

An IRS payment plan, an installment agreement, is a formal arrangement allowing taxpayers to pay tax debt through monthly installments instead of one large payment. This program is a practical solution for those unable to pay their bill in full by the due date. It also safeguards against enforced collection actions such as a bank account levy. Once an agreement is approved and remains in good standing, the IRS typically halts further collection, giving taxpayers a structured way to resolve their balance.

Short-Term Payment Plan

• Intended for taxpayers who can pay their balance within 180 days.
  
  
• No setup fee for online applications, although interest and penalties will continue until the debt is paid.
  
  
• Available to individuals and businesses that owe less than the maximum threshold set by the IRS for short-term arrangements.

Long-Term Payment Plan

• Designed for taxpayers who need more than 180 days to pay.
  
  
• Requires consistent monthly payments until the balance is resolved.
  
  
• Setup fees vary depending on the payment method, with lower costs for direct debit.
  
  
• Eligible businesses can apply if they have filed all required returns and meet the IRS debt limit.

Application Process

• File all required returns before submitting a request to ensure eligibility.
  
  
• Prepare essential details such as Social Security or Employer Identification Number, bank account information, and the amount owed.
  
  
• Submit Form 9465 or apply online using the IRS Online Payment Agreement tool for faster approval.
  
  
• Select a monthly payment amount that meets the IRS minimum and fits within your budget.
  
  
• Pay the applicable setup fee promptly to avoid delays in processing.

Maintaining the Agreement

• Make all payments on or before the agreed due date each month.
  
  
• Keep all tax filings current, including estimated payments for the current year.
  
  
• Contact the IRS immediately if you cannot make a scheduled payment to avoid default.
  
  
• Be aware that default can trigger reinstatement fees and a resumption of collection actions.

For taxpayers and businesses, an installment agreement offers a clear, enforceable path toward paying the full balance while protecting assets from immediate collection. By meeting all filing requirements, paying the agreed amounts, and maintaining open communication with the IRS, taxpayers can resolve debt over time in a manageable way and in their best interest. This approach not only fulfills tax obligations but also promotes long-term financial stability.

Offer in Compromise (Compromise Program)

The offer in compromise program is an IRS option that allows qualifying taxpayers to settle tax debt for less than the total amount owed. It is designed for situations where paying the full balance would cause financial hardship or where there is a legitimate dispute about the tax bill. For taxpayers unable to pay in full, this program offers a practical way to resolve the balance while avoiding aggressive collection actions such as a bank account levy.

Eligibility

• Doubt about collectibility applies when income and assets are insufficient to pay the balance in full.
  
  
• Doubt about liability applies when there is a valid reason to challenge the accuracy of the tax assessed.
  
  
• Effective tax administration applies when full payment is possible but would create significant financial hardship.
  
  
• Applicants must have filed all required tax returns and met prior filing obligations.
  
  
• Taxpayers cannot be in an open bankruptcy proceeding when applying.

Required Steps

• Gather complete financial records detailing income, expenses, asset values, and debts.
  
  
• Complete and submit Form 656 along with the appropriate Collection Information Statement.
  
  
• Pay the application fee unless eligible for a low-income waiver.
  
  
• Calculate the proposed offer amount using IRS formulas with the IRS Offer in Compromise Pre-Qualifier tool before applying.
  
  
• Submit the completed package online, by mail, or at an IRS office, ensuring all details are accurate and up-to-date.
  
  

Benefits and Limits

• Stops most collection actions during the review process.
  
  
• It can reduce the total amount that needs to be paid if eligibility requirements are met.
  
  
• The taxpayer must comply with all filing and payment obligations five years after acceptance.
  
  
• Interest and penalties may continue to accrue until the offer is accepted and fully paid.

Risks

• Applications may be rejected if the IRS determines the taxpayer can pay the debt in full through other means.
  
  
• Incomplete or inaccurate submissions can cause delays, denials, or additional penalties.
  
  
• The review process can take months or even over a year, depending on the case's complexity.

For taxpayers who cannot pay the full tax debt, the compromise program offers a potential solution that aligns with their best interests and ability to pay. By following the required steps and using official IRS tools, applicants can improve their chances of approval and achieve a lasting resolution of their obligations.

Comparing Payment Plans and Offers in Compromise

Choosing between an IRS payment plan and an offer in compromise depends on the taxpayer’s financial situation, the total tax debt owed, and the most realistic way to resolve the balance. Both programs can help settle a bill while protecting against enforced collection actions, but they have distinct requirements and benefits.

When a Payment Plan Works Best

• The taxpayer or business has a steady income to make monthly installments.
  
  
• The balance can be paid fully within the agreement period without undue strain.
  
  
• The taxpayer prefers a straightforward process over the detailed review required for the compromise program.
  
  
• Future filing and payment obligations can be met without difficulty.

When an Offer in Compromise Is a Better Fit

• Income and assets are insufficient to pay the full amount owed, as outlined in the IRS Form 656-B Booklet for more details.
  
  
• Paying in full would cause significant financial hardship, even with compliance on filing.
  
  
• Eligibility is met under doubt as to collectibility or other IRS criteria.
  
  
• There is a reasonable dispute about the accuracy of the assessed tax.
  
  
• The taxpayer has reviewed all instructions and documentation requirements before applying.

Both programs require accurate filing, payment of applicable fees, and submission of the necessary forms online, by mail, or at an IRS office. To maintain protections, taxpayers must stay compliant during the review period and after approval. Missing a due date, failing to file required returns, or not contacting the IRS when payment issues occur can result in termination of the agreement or denial of the offer. By comparing each option's benefits, limits, and eligibility, taxpayers can choose the resolution that best serves their interests and supports long-term financial stability.

How These Programs Protect Your Bank Account

When a taxpayer applies for an IRS payment plan or submits an offer in compromise, both programs can offer immediate protection from specific collection actions, including a bank account levy. This protection is critical for individuals and businesses who need access to their funds to cover essential expenses while resolving tax debt.

Immediate Suspension of Levies

• Once the IRS receives a valid payment plan request or offer in compromise application, most levy actions are suspended during the review period.
  
  
• This suspension prevents the IRS from collecting funds directly from a bank account while evaluating the application.
  
  
• According to IRS Publication 594: The IRS Collection Process, the suspension applies until a decision is made, as long as the taxpayer complies with filing obligations.

Ongoing Protection While Compliant

• After approval, maintaining the agreement is essential for continued protection.
  
  
• For payment plans, this means making monthly installments on or before the due date and filing all future returns on time.
  
  
• For an offer in compromise, protection continues during the payment of the agreed amount and the required compliance period after acceptance.
  
  

Additional Information on Collection Limits

• If the agreement terms are met, both programs restrict the IRS from issuing new levies on the taxpayer’s bank account.
  
  
• If the taxpayer defaults, the IRS can reinstate collection actions, including bank account levies, without further negotiation.
  
  
• Communication with the IRS is critical; taxpayers should contact the agency immediately if they cannot meet the payment schedule.

By applying for one of these programs, taxpayers can secure vital time to resolve their bill, protect their balance from immediate seizure, and work toward a manageable resolution. For those at risk of a levy, acting quickly is in their best interest to ensure funds remain accessible while the debt is being resolved.

Additional Information for Taxpayers

The IRS offers additional relief programs and resources to help taxpayers and businesses resolve tax debt, safeguard their bank accounts, and comply with filing and payment obligations. This extra information can guide taxpayers toward the most effective resolution strategy.

Other Relief Options

• Currently, the Not Collectible (CNC) status is available for taxpayers who can prove that paying their balance would prevent them from covering basic living costs.
  
  
• Penalty relief may be granted for reasonable cause or under the first-time abatement policy.
  
  
• Short-term extensions to pay offer extra time without entering a long-term agreement, though interest and penalties still apply.
  
  
• Certain businesses may qualify for targeted arrangements for employment tax liabilities.

Communicating with the IRS

• Contacting the IRS early is crucial when facing hardship or approaching a payment due date.
  
  
• Taxpayers must file any required form, provide accurate financial details, and clearly explain their situation.
  
  
• Requests can be submitted online, by mail, or in person at an IRS office.
  
  
• The IRS Contact Your Local Office page offers location-specific information for scheduling appointments and receiving in-person support.

By exploring all available relief measures and maintaining consistent contact with the IRS, taxpayers can take proactive steps to resolve their bills before enforcement actions occur. Whether through an installment agreement, compromise program, or alternative relief, timely action and informed decisions serve the taxpayer’s best interest in meeting obligations and maintaining financial stability.

Common Mistakes to Avoid

Inevitable mistakes can lead to delays, added costs, or renewed collection action when applying for an IRS payment plan or the offer-in-compromise program. Understanding and avoiding these errors helps maintain eligibility and protection from enforcement measures such as a bank account levy.

• Missing the due date for monthly installments can result in default and reinstatement fees.
  
  
• Submitting incomplete or inaccurate forms often causes processing delays or outright rejection.
  
  
• Failing to file all required tax returns before applying makes a taxpayer ineligible for either program.
  
  
• Ignoring IRS notices limits opportunities to resolve the issue before collection escalates.
  
  
• If you do not contact the IRS when payment problems arise, you may forfeit the chance to modify terms and keep the agreement active.

Taxpayers should prepare accurate documentation, confirm that all filings are current, and set realistic payment amounts they can consistently meet. If financial circumstances change during the term of an agreement, proactive communication with the IRS is essential.

By avoiding these mistakes, taxpayers can protect their bank accounts, maintain the benefits of their chosen relief program, and resolve their tax debt in a way that serves their best interests while ensuring compliance with all IRS requirements.

Frequently Asked Questions

How quickly can a payment plan stop a bank levy?

Most levy actions are suspended during review when the IRS receives a valid payment plan request. This protection prevents the IRS from taking funds directly from a bank account. Approval can occur within a few days for taxpayers who qualify for streamlined online processing. It is important to note that protection remains only while the taxpayer meets all the terms of the agreements.

What happens if my offer in compromise is rejected?

If the IRS rejects an offer in compromise, the taxpayer has 30 days from the date on the rejection notice to file an appeal. The appeal should include additional documentation or clarifications that strengthen the case. Specific collection actions may resume during the appeal process, so taxpayers should be ready to request alternative relief. Prompt action helps preserve eligibility and maintain protections while seeking a favorable resolution.

Can I apply for a payment plan online?

Yes, taxpayers can apply online, which is often faster and less expensive than applying by mail. Online applications may qualify for lower setup fees and immediate approval for eligible taxpayers. All required returns must be filed successfully, and financial information should be accurate. Taxpayers can also visit a local IRS office to receive in-person assistance with the application process.

Are there fees for these programs?

Yes, payment plans usually require a setup fee, which varies based on the payment method chosen, such as direct debit or manual payments. Offers in compromise require an application fee unless the taxpayer qualifies for a low-income waiver. Interest and penalties may still accrue until the balance is paid in full. Taxpayers should budget for these costs when determining the most practical relief option.

Which option is in my best interest?

The decision depends on the taxpayer’s income, assets, debt amount, and ability to make consistent monthly installments or a lump-sum settlement. Reviewing eligibility criteria for both the payment plan and the compromise program is essential. Calculating realistic payments and understanding the total costs, including fees, interest, and penalties, will help determine which program aligns with the taxpayer’s financial stability and long-term goals for resolving tax debt effectively.

Can businesses use these programs?

Yes, businesses can apply for either a payment plan or the compromise program if they meet eligibility requirements, have filed all required tax returns, and provide accurate financial documentation. These programs help businesses resolve outstanding liabilities while avoiding enforcement actions like bank account levies. Compliance with filing and payment terms is essential to maintain protection and achieve a successful resolution under either relief option.

What happens if I default on my agreement?

The IRS may terminate the agreement if a taxpayer misses payments or fails to file required returns. Once terminated, collection actions, including bank levies, can resume. The taxpayer will receive a notice of intent to terminate and may have a short period to request reinstatement. Acting quickly to resolve the default or request modified terms can help maintain protections and avoid enforced collection.