How to Resolve Tax Debt and Negotiate a Payment Plan With the IRS

Your Complete Guide to IRS Debt Resolution Options and Payment Arrangements

By Mike Habib, EA | Licensed Enrolled Agent | Los Angeles, California

Owing money to the IRS is a stressful experience that millions of Americans face each year. Whether your tax debt stems from an unexpected balance due on your return, accumulated unfiled taxes from previous years, or an audit adjustment you could not pay, the weight of that obligation can feel overwhelming. The good news is that the IRS has established multiple pathways for taxpayers to resolve their debts, and in most cases, a manageable solution exists even when the numbers seem impossible.

This guide answers the most common questions about resolving tax debt and negotiating payment arrangements with the IRS. Understanding your options empowers you to make informed decisions and take meaningful steps toward financial relief.

What Are My Options for Resolving IRS Tax Debt?

The IRS offers several programs and mechanisms for taxpayers who cannot pay their tax debt in full immediately. The right option for your situation depends on how much you owe, your current financial circumstances, your ability to pay over time, and whether you are in compliance with current filing requirements.

The primary tax resolution options include installment agreements, which allow you to pay your debt over time in monthly payments; Offers in Compromise, which allow qualifying taxpayers to settle their debt for less than the full amount owed; Currently Not Collectible status, which temporarily suspends collection activity when you cannot afford to pay anything; and penalty abatement, which can reduce your total liability by removing certain penalties. Each option has specific eligibility criteria and procedural requirements that must be satisfied.

In some situations, waiting for the Collection Statute Expiration Date (CSED) may also be a strategy, as the IRS generally has only ten years from the date of assessment to collect a tax debt. However, this approach requires careful analysis and is not appropriate for everyone. A qualified tax professional can help you evaluate which options are realistic in your circumstances and develop a strategy to achieve the best possible outcome.

What Is an IRS Installment Agreement?

An installment agreement is a payment plan that allows you to pay your tax debt in monthly installments over an extended period rather than paying the full amount immediately. The IRS offers several types of installment agreements with different terms, requirements, and approval processes.

Guaranteed installment agreements are available to individual taxpayers who owe $10,000 or less in combined tax, penalties, and interest, have filed all required returns, have not had an installment agreement in the past five years, agree to pay the full amount within three years, and agree to comply with tax laws during the agreement. If you meet these criteria, the IRS must approve your request.

Streamlined installment agreements are available to individual taxpayers who owe $50,000 or less and can pay the balance within 72 months or before the collection statute expires, whichever comes first. For balances between $25,000 and $50,000, direct debit is typically required.

For larger balances or longer payment terms, non-streamlined installment agreements require submission of a Collection Information Statement (Form 433-A for individuals or 433-B for businesses) that details your income, expenses, assets, and liabilities. The IRS uses this information to determine your ability to pay and to calculate an acceptable monthly payment amount. These agreements involve more scrutiny and negotiation but can accommodate taxpayers who owe substantial amounts.

How Do I Apply for an IRS Payment Plan?

The application process for an IRS payment plan depends on how much you owe and what type of agreement you are seeking. For many taxpayers, the process can be completed relatively quickly, while more complex situations require additional documentation and negotiation.

If you owe $50,000 or less and want a streamlined agreement, you can apply online through the IRS Online Payment Agreement tool, which is available on the IRS website. This tool allows you to propose a monthly payment amount, select a payment method (direct debit is often required or incentivized with lower setup fees), and choose a payment date. Many applications receive immediate approval if you meet the streamlined criteria.

You can also apply by calling the IRS, by mailing Form 9465 (Installment Agreement Request), or by working with a tax professional who can contact the IRS on your behalf. For balances exceeding $50,000 or situations requiring non-streamlined agreements, you will need to complete Form 433-A or 433-B and either mail it with your request or provide it during negotiations with a revenue officer or the Automated Collection System.

Setup fees apply to most installment agreements, ranging from $31 for direct debit agreements set up online to $225 for agreements set up by phone or mail without direct debit. Low-income taxpayers may qualify for reduced or waived fees. Interest and penalties continue to accrue on the unpaid balance during the agreement, so paying as quickly as you can afford reduces your total cost.

What Is an Offer in Compromise and Do I Qualify?

An Offer in Compromise (OIC) is an agreement between you and the IRS that settles your tax liability for less than the full amount you owe. It is sometimes described as settling with the IRS for pennies on the dollar, though the reality is more nuanced. The IRS will only accept an offer that represents the maximum amount they could reasonably expect to collect from you.

The IRS evaluates offers based on your reasonable collection potential (RCP), which includes your future income over a specified period plus the equity in your assets. If your RCP is less than your total tax debt, you may be a candidate for an OIC. However, if the IRS believes they can collect the full amount through an installment agreement or other means, they will likely reject your offer.

To qualify for consideration, you must be current on all filing requirements (all required tax returns must be filed), current on estimated tax payments if you are self-employed, and not in an open bankruptcy proceeding. You must also submit Form 656 (Offer in Compromise) along with Form 433-A (OIC) detailing your finances, supporting documentation, and a $205 application fee (waived for low-income applicants). A partial payment is also required with your application unless you qualify for low-income certification.

The OIC process is document-intensive and can take six months to two years for the IRS to evaluate. The acceptance rate is relatively low, particularly for offers submitted without professional assistance. Having an experienced tax professional prepare your offer, present your financial situation accurately, and negotiate with the IRS significantly improves your chances of success.

What Does Currently Not Collectible Status Mean?

Currently Not Collectible (CNC) status is a designation the IRS applies to accounts when they determine that a taxpayer cannot afford to pay anything toward their tax debt without creating economic hardship. When your account is placed in CNC status, the IRS temporarily suspends active collection efforts, including levies on your wages and bank accounts.

To qualify for CNC status, you must demonstrate that paying anything toward your tax debt would prevent you from meeting basic living expenses such as housing, food, utilities, transportation, and healthcare. The IRS will require you to complete Form 433-A or 433-F, which documents your income, expenses, and assets. They compare your income against allowable expenses based on national and local standards to determine whether you have any disposable income available for tax payments.

CNC status is not a permanent resolution. Interest and penalties continue to accrue, and the IRS will periodically review your financial situation to determine whether your circumstances have improved. They may request updated financial information or automatically review your account when your income appears to increase based on information returns. If your situation improves, the IRS may remove CNC status and resume collection activity.

However, CNC status does provide immediate relief from collection pressure and allows the collection statute to continue running. If your circumstances do not improve before the ten-year collection period expires, the debt will be written off. For taxpayers in genuine financial hardship, CNC status can be an important part of a long-term resolution strategy.

Can I Get IRS Penalties Removed or Reduced?

Yes, the IRS has authority to remove or reduce penalties in certain circumstances, and securing penalty abatement can significantly reduce your total tax debt. Penalties often represent a substantial portion of the balance owed, so pursuing relief is worth exploring in most cases.

Reasonable cause penalty abatement is available when you can demonstrate that you exercised ordinary business care and prudence but were still unable to meet your tax obligations due to circumstances beyond your control. Examples include serious illness or death in the immediate family, natural disasters, inability to obtain records, unavoidable absence, reliance on incorrect advice from a tax professional, and other significant disruptions. The IRS evaluates each request based on the specific facts, and you must provide documentation supporting your claim.

First-time penalty abatement (FTA) is an administrative waiver available to taxpayers with a clean compliance history. If you have filed all required returns and have not had any penalties assessed in the three years prior to the tax year in question, you may qualify for FTA. This relief is often easier to obtain than reasonable cause abatement because it does not require demonstrating circumstances beyond your control. You simply need to have a clean record.

Interest abatement is much more difficult to obtain. The IRS generally only abates interest when it accrued due to IRS errors or unreasonable delays attributable to the agency. However, when penalties are abated, the interest that accrued on those penalties is also removed, which provides additional savings. A tax professional can review your account to identify all potential opportunities for penalty and interest relief.

What Happens If I Cannot Afford the IRS’s Proposed Payment Amount?

When you apply for a non-streamlined installment agreement or are dealing with a revenue officer, the IRS will calculate a payment amount based on your reported income minus allowable expenses. Their calculation uses standardized expense allowances from the Collection Financial Standards, which include national standards for food, clothing, and other items, and local standards for housing and transportation based on your geographic area.

If the IRS proposes a payment amount you cannot afford, you have options. First, you can verify that your financial information was accurately captured and that all legitimate expenses were included. Errors in the Collection Information Statement can lead to inflated payment calculations. Second, you can argue for allowance of expenses above the standards if you can demonstrate that the additional amount is necessary for the health, welfare, or production of income of you or your family.

Third, you can request a partial payment installment agreement (PPIA), which is an agreement where the monthly payments will not fully satisfy the debt before the collection statute expires. The IRS may approve a PPIA when a full-pay agreement is not feasible, though they will require more detailed financial documentation and may include equity in assets in their calculation.

If no payment is affordable, you may qualify for Currently Not Collectible status as discussed above. You also retain the right to appeal if you disagree with the IRS’s determination. Having professional representation during payment negotiations can help ensure your financial situation is presented accurately and that you receive fair treatment under the applicable rules.

Will the IRS File a Tax Lien Against Me?

A federal tax lien is a legal claim against your property that arises automatically when you have an assessed tax liability, receive a notice demanding payment, and fail to pay in full. The lien attaches to all your property, including real estate, personal property, and financial assets, and secures the government’s interest in your property as collateral for the tax debt.

While the lien arises automatically, the IRS does not always file a Notice of Federal Tax Lien (NFTL) in the public records. Filing the NFTL makes the lien a matter of public record, which notifies creditors and can affect your credit score and ability to obtain financing. The IRS has internal guidelines for when to file NFTLs, generally doing so for balances exceeding $10,000 unless special circumstances apply.

If you enter into a streamlined installment agreement for a balance under $25,000 and agree to direct debit, the IRS will generally not file a new lien. If a lien has already been filed, the IRS may withdraw the NFTL once you have made three consecutive direct debit payments. For balances between $25,000 and $50,000, lien filing is more likely but withdrawal may still be available after establishing a payment history.

The lien is released when the tax liability is fully satisfied, when the collection statute expires, when the IRS accepts a bond guaranteeing payment, or when an Offer in Compromise is accepted and paid. In some circumstances, you can request a lien discharge for specific property or subordination of the lien to allow refinancing. These requests require demonstrating that the action will facilitate collection or is otherwise in the government’s interest.

How Can I Stop an IRS Wage Garnishment or Bank Levy?

Wage garnishments and bank levies are enforced collection actions the IRS takes to seize your income and assets to satisfy your tax debt. A wage levy (garnishment) requires your employer to withhold a significant portion of your paycheck and send it directly to the IRS. A bank levy freezes the funds in your account and, if not released, transfers those funds to the IRS after 21 days.

Before the IRS can levy your property, they must send you a series of notices, culminating in a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (Letter 1058 or LT11). This final notice gives you 30 days to request a Collection Due Process (CDP) hearing before the Office of Appeals. If you request a CDP hearing within that window, the IRS cannot proceed with the levy until the hearing is resolved.

If a levy has already been issued, you can still take action to get it released. The IRS is required to release a levy if the liability is satisfied, the release will facilitate collection, you enter into an installment agreement that includes a provision for levy release, the levy is creating economic hardship (preventing you from meeting basic living expenses), or the fair market value of the property exceeds the liability and release of the levy will not hinder collection.

The fastest way to stop a levy is often to contact the IRS or have your representative contact them to negotiate a resolution. Entering into an installment agreement, demonstrating hardship for CNC status, or providing missing returns or financial information can all lead to levy release. Acting quickly is essential, particularly with bank levies where the 21-day window is limited.

Should I Handle My IRS Debt Resolution Myself or Hire a Professional?

Taxpayers have the right to represent themselves in dealings with the IRS, and some successfully navigate the resolution process on their own. However, there are significant advantages to working with a qualified tax professional, particularly in complex situations or when significant amounts are at stake.

A tax professional who specializes in IRS representation understands the rules, procedures, and negotiation strategies that can affect your outcome. They know how the IRS evaluates financial information, what expenses are allowable, and how to present your situation in the most favorable light while remaining accurate and truthful. They can identify options you might not know exist and avoid mistakes that could hurt your case.

Professional representation also provides a buffer between you and the IRS. Many people find dealing with the IRS stressful and intimidating, which can lead to poor decisions or simply avoiding the problem. When you have a representative, they handle communications on your behalf, attend meetings, and negotiate directly with revenue officers or the Automated Collection System. This reduces your stress and ensures that interactions are handled professionally.

For straightforward situations, such as a streamlined installment agreement for a modest balance, self-representation may be appropriate. For larger debts, Offers in Compromise, disputes over the amount owed, audit reconsiderations, appeals, or situations involving enforced collection, professional assistance is strongly recommended. The cost of representation is often offset by better outcomes, reduced total liability, and time saved.

What About My California State Tax Debt?

If you owe back taxes to California, you are dealing with the Franchise Tax Board (FTB) for income taxes, the Employment Development Department (EDD) for payroll taxes, or the California Department of Tax and Fee Administration (CDTFA) for sales and use taxes. Each agency has its own procedures and resolution options, and California is generally considered more aggressive in collection than the IRS.

The FTB offers installment agreements for taxpayers who cannot pay their state income tax debt in full. You can request an agreement online, by phone, or in writing. The FTB also has an Offer in Compromise program, though their acceptance criteria and procedures differ from the IRS. California can suspend your driver’s license, professional licenses, and vehicle registration for unpaid taxes, which adds urgency to resolving state tax debt.

When you owe both federal and state taxes, coordinating your resolution strategy is important. The terms of one agreement can affect what you can negotiate with the other agency. A tax professional experienced with both IRS and California tax resolution can help you develop a comprehensive approach that addresses all your obligations efficiently.

How Long Does Tax Debt Resolution Take?

The timeline for resolving your tax debt depends on which resolution option you pursue and the complexity of your situation. Streamlined installment agreements can often be established within days if you apply online and meet all the criteria. Non-streamlined agreements that require financial documentation typically take several weeks to a few months as the IRS reviews your Collection Information Statement and negotiates terms.

Offers in Compromise have the longest timeline, typically six months to two years from submission to final decision. During this period, the IRS is reviewing your application, verifying your financial information, and determining whether your offer is acceptable. Collection activity is generally suspended while your offer is being evaluated, provided you remain in compliance with filing and payment requirements for current taxes.

Currently Not Collectible status can often be obtained relatively quickly if you can demonstrate immediate financial hardship. Penalty abatement requests vary in processing time depending on the basis for the request and whether the IRS needs additional information. Throughout any resolution process, prompt response to IRS requests for information helps keep things moving forward.

Why Work With Mike Habib, EA for Tax Debt Resolution?

Mike Habib is a licensed Enrolled Agent based in Whittier, Los Angeles County, California, with extensive experience helping taxpayers resolve their IRS and state tax debts. As an Enrolled Agent, Mike holds unlimited practice rights before the Internal Revenue Service, meaning he can represent you in all matters including audits, collections, appeals, and negotiations with the same authority as attorneys and CPAs.

With over 20 years of financial experience including executive roles as Controller at Xerox Corporation and Director of Finance at AEG, Mike brings sophisticated financial analysis skills to tax debt resolution. He understands how to evaluate your financial situation, identify the resolution options most likely to succeed, and present your case effectively to the IRS. His background in corporate finance provides a level of analytical rigor that benefits clients with complex financial situations.

Mike’s practice focuses specifically on tax representation and tax problem resolution, including negotiating installment agreements, preparing and submitting Offers in Compromise, obtaining Currently Not Collectible status, securing penalty abatement, and stopping enforced collection actions like levies and garnishments. He also represents clients before California state agencies including the FTB, EDD, and CDTFA, providing comprehensive resolution of both federal and state tax debts.

Unlike large accounting firms that charge premium rates and often assign your case to junior staff members, working with Mike means direct access to an experienced professional who personally handles your matter from start to finish. His competitive rates of $400-500 per hour compare favorably to the $850-1,500 hourly rates charged by major firms, and many engagements are structured on a value flat fee basis for cost certainty. Although based in the Los Angeles area, Mike serves taxpayers nationwide and Americans living overseas.

Tax Debt Resolution Services Offered

Mike Habib, EA provides comprehensive tax debt resolution services designed to help you achieve the best possible outcome for your specific situation. For taxpayers who can pay over time, Mike negotiates installment agreements with terms that fit your budget while minimizing total interest and penalties. He handles both streamlined and non-streamlined agreements, including partial payment installment agreements for those who cannot pay in full before the collection statute expires.

For taxpayers who qualify, Mike prepares and submits Offers in Compromise that accurately present your financial situation and maximize your chances of acceptance. His experience with the OIC process helps avoid common mistakes that lead to rejection and ensures your application is complete and persuasive.

When financial hardship exists, Mike obtains Currently Not Collectible status to provide immediate relief from collection pressure. He also pursues penalty abatement through reasonable cause arguments and first-time abatement requests, reducing your total liability where grounds for relief exist.

If you are facing active collection enforcement such as wage garnishments, bank levies, or property seizure, Mike can intervene quickly to stop the levy and negotiate a resolution. He represents clients in Collection Due Process hearings, appeals, and other proceedings where your rights need to be protected.

Taking the First Step Toward Resolution

Resolving tax debt requires understanding your options, gathering accurate financial information, and engaging with the IRS or state agencies in a strategic manner. While the process can feel daunting, millions of taxpayers successfully resolve their tax debts each year through the programs and mechanisms described in this guide.

The most important step is to take action. Ignoring tax debt allows penalties and interest to accumulate, moves you closer to enforced collection, and limits your options over time. Conversely, proactive engagement demonstrates good faith and opens doors to resolution programs that may not be available if you wait for the IRS to force the issue.

Whether you are considering handling your case yourself or seeking professional representation, understanding what you owe, what options exist, and what outcomes are realistic is the foundation for moving forward. A consultation with a qualified tax professional can provide clarity about your situation and help you determine the best path to financial relief.

If you are ready to resolve your tax debt and would like to discuss your options with an experienced professional, Mike Habib, EA welcomes the opportunity to learn about your situation and explain how his services can help you achieve a fresh start.

Contact Mike Habib, EA

Tel: 1-562-204-6700 – Toll Free: 1-877-788-2937 [1877-78-TAXES]

Licensed Enrolled Agent | Whittier, Los Angeles County, California

Serving Taxpayers Nationwide and Americans Living Overseas

Tax Debt Resolution | IRS Payment Plans | Offers in Compromise | Penalty Abatement | Levy Release

Disclaimer: This article is provided for general informational purposes only and does not constitute tax or legal advice. Tax laws and IRS procedures are complex and subject to change. The information presented may not apply to your particular situation. Every case is different, and outcomes depend on individual facts and circumstances. Please consult with a qualified tax professional for advice tailored to your specific situation.