Offer in Compromise vs. Payment Plan Checklist
Understanding Your Two Main Options
An Offer in Compromise allows you to settle a tax debt for less than the full amount you owe to the IRS. A Payment Plan requires you to pay the complete tax amount over time through monthly installments. The IRS evaluates these two options using different criteria and processes.
Choosing one path affects the financial information the IRS investigates, the length of the resolution, and the alternatives available to you. Your decision between these options shapes your relationship with the IRS throughout the debt resolution process.
Who Should Use This Checklist
This checklist applies to you if you owe federal income tax, self-employment tax, or payroll taxes and are unable to pay the full amount immediately. Use this guide if the IRS has sent you a billing notice for unpaid taxes. This checklist helps you decide whether to settle the debt for less money or spread payments over time.
You can use this guide if you have not yet filed an Offer in Compromise or committed to a payment arrangement. This checklist does not apply if you currently have an active payment plan already in place. You cannot use this guide if the IRS has already rejected an Offer in
Compromise application.
This checklist does not apply to situations where you are currently undergoing an audit or examination process. Do not use this guide if you are dealing with business payroll tax debt that involves employee trust fund recovery penalties.
What the IRS Evaluates First
The IRS focuses primarily on your ability to pay based on monthly income, essential expenses, and assets you could liquidate. Your financial numbers carry more weight than explanations about hardship or circumstances.
The IRS calculates your Reasonable Collection Potential by examining what it could collect through installments, asset sales, or future income. Payment plans require less financial scrutiny than Offer in Compromise applications because they collect the full amount of the debt.
Steps to Make Your Decision
Step 1: Request your complete IRS account transcript to confirm the exact tax amount,
penalties, interest, and assessment dates for each tax year owed.
Step 2: Calculate your actual monthly income for the past three months, including all sources
such as wages, business income, rental income, Social Security, and unemployment.
Step 3: List all monthly essential expenses, including housing, utilities, food, transportation,
insurance, child support, and court-ordered payments, using IRS allowable amounts.
Step 4: Identify all assets you own that could be sold, including vehicles, real estate, retirement
accounts, savings accounts, and business equipment.
Step 5: Determine if you qualify for Currently Not Collectible status, which temporarily suspends
collection activity if you are unable to pay reasonable living expenses.
Step 6: Decide whether you will pursue an Offer in Compromise or request a payment plan
before contacting the IRS about either option.
Step 7: File Form 656 with required financial statements and the $205 application fee if
pursuing an Offer in Compromise, or submit Form 9465 if requesting a payment plan.
Step 8: Submit your initial payment with your Offer in Compromise application as required by
the payment option you select on Form 656.
Step 9: Monitor your case status monthly by checking IRS.gov or calling the assigned employee
to verify your application remains in active processing.
- Wage garnishment and bank levy release
- Tax lien removal and credit protection
- Offer in Compromise and installment agreements
- Unfiled tax return preparation
- IRS notice response and representation
Step 10: Appeal within 30 days using Form 13711 if the IRS rejects your Offer in Compromise.
Current Payment Plan Options and Fees
Individuals qualify for a short-term payment plan if they owe less than $100,000 in combined tax, penalties, and interest and can pay within 180 days. Short-term payment plans have no setup fee regardless of the application method. Individuals who owe $50,000 or less qualify for a Simple Installment Agreement, which allows for monthly payments over a period of up to 72 months.
Setup fees for long-term payment plans vary: an online application with direct debit costs $31, an online application without direct debit costs $149, a mail or phone application with direct debit costs $107, and a mail or phone application without direct debit costs $225.
How Offer in Compromise Processing Works
The IRS typically takes six to twelve months to process an Offer in Compromise application from submission to final determination. Complex cases involving multiple tax years, business income, or disputed asset values may require longer processing times than average. The IRS must determine within 24 months of receiving your application; after this period, your offer will automatically become accepted.
Collection activity generally stops while the IRS reviews your Offer in Compromise application.
You must continue to file all required tax returns and make estimated tax payments during the review period.
Critical Mistakes That Damage Your Position
Filing an Offer in Compromise when you can realistically afford a payment plan will likely result in rejection due to the inability to pay. Hiding income or assets on financial forms triggers rejection and immediate resumption of collection activity when the IRS discovers the discrepancy. Waiting to contact the IRS until after the wage levy or bank levy begins eliminates most negotiating flexibility. Missing deadlines for requested financial documentation causes the
IRS to close your file and resume collection action immediately.
Proposing an offer in compromise that is significantly below your reasonable collection potential will likely result in automatic rejection without serious consideration. Changing from an Offer in
Compromise to a payment plan request mid-process may trigger immediate collection action.
Assuming a payment plan approval is guaranteed without verifying your income supports the proposed monthly payment amount creates problems when the IRS requests additional financial documentation.
Understanding IRS Wage Levies
The IRS does not limit wage levies to 25 percent of your income, like private creditors do. The
IRS calculates an exempt amount based on your standard deduction and the number of dependents, then levies all wages above that amount. This calculation method often results in the IRS taking 50 to 70 percent or more of your paycheck. Wage levies continue until you pay the full debt, establish a payment arrangement, or the IRS releases the levy.
Currently Not Collectible Status Facts
Currently Not Collectible status temporarily stops IRS collection activity when you cannot afford to pay reasonable living expenses. The debt remains on your account, and interest plus
penalties continue accumulating during the Currently Not Collectible status. The IRS reviews your financial situation periodically to determine if your ability to pay has changed. Currently, Not
Collectible status represents a formal alternative to collection alongside payment plans and
When Professional Help Becomes Necessary
Contact a tax professional if you have more than $50,000 in total tax debt across multiple years.
You need professional assistance if your financial situation involves business income, rental property, investments, or multiple income sources. Seek professional guidance if the IRS has already rejected one Offer in Compromise and you are considering a second attempt. You should consult a professional if the IRS has filed a Notice of Federal Tax Lien or begun wage or bank levy action.
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