The IRS offers three main ways to settle what you owe: a lump-sum payment, a monthly payment plan, or an offer in compromise if you cannot pay the full amount

If you owe back taxes, you do not have to pay it all at once. The IRS has formal programs that let you pay over time, and one program that lets you settle for less than you owe if your financial situation makes full payment impossible. Which route works depends on how much you owe, how much you can pay right now, and whether you can afford monthly payments.

The IRS will contact you first — usually by mail — with a bill that shows what you owe, penalties, and interest. That letter tells you how many days you have to respond. If you ignore it, the IRS can place a lien on your property or garnish your wages. Acting before that happens gives you more options and more control over the process.

Key Takeaways

  • A payment plan (called an installment agreement) lets you pay monthly; the IRS charges a setup fee and interest continues to accrue on the unpaid balance.
  • An offer in compromise is a formal request to settle for less than you owe, but the IRS approves only about one in five applications, and you must show your income and assets in detail.
  • You can request a short-term extension (up to 180 days) to pay in full without setting up a plan, though interest and penalties keep growing.
  • The IRS will not remove penalties or interest unless you have a valid reason — such as relying on bad information from a tax professional — and you must request it in writing.
  • If you cannot pay and have no income, you may be classified as "currently not collectible," which pauses collection action but does not erase the debt.

Setting up a monthly payment plan with the IRS

An installment agreement is the most common settlement option. You pay a set amount each month until the debt is gone. The IRS charges a setup fee — typically $31 to $225 depending on how you set it up — and you continue to owe interest and penalties on the unpaid balance each month.

You can request an installment agreement online through the IRS website, by phone at 1-800-829-1040, or by mail using Form 9465 (Installment Agreement Request). Online is fastest; you get a decision in minutes. By phone or mail, it takes one to two weeks. The IRS will tell you the monthly payment amount based on what you owe and how long you want to pay.

There are two types: a short-term agreement (you pay within 180 days) and a long-term agreement (you pay over several years). Short-term agreements have no setup fee. Long-term agreements charge the fee but give you more time. The IRS will not approve a payment so small that you never finish paying — there is a minimum, which varies by how much you owe.

Once approved, you must make every payment on time. Missing a payment can end the agreement and trigger collection action. If your financial situation changes and you cannot afford the payment, contact the IRS when ready to modify the plan rather than skip payments.

Requesting an offer in compromise to settle for less

An offer in compromise (OIC) is a formal request to the IRS to accept less than the full amount you owe. The IRS uses a formula based on your income, expenses, and assets to decide whether to accept. You must show that paying the full amount would create genuine financial hardship.

The IRS approves roughly one in five offers. To have a realistic chance, your monthly income after necessary expenses must be very low, or your assets must be minimal. The IRS considers housing, food, utilities, transportation, and medical costs as necessary; luxury expenses do not count.

You submit an offer using Form 656 (Offer in Compromise) along with Form 433-B (Collection Information Statement) or Form 433-A (depending on whether you are self-employed). You also pay a nonrefundable process fee — currently $225 — though you can request a fee waiver if your income is below 250 percent of the federal poverty line. The IRS takes four to six months to decide, sometimes longer.

While your offer is pending, the IRS pauses most collection action, but interest and penalties continue to accrue. If the IRS rejects your offer, you can appeal or submit a new one if your circumstances change. If accepted, you pay the agreed amount and the debt is settled.

Requesting currently not collectible status

If you have no income and no way to pay, you can ask the IRS to classify your account as currently not collectible. This is not forgiveness — it is a pause. The IRS stops collection action (liens, garnishments, levies) but the debt remains, interest keeps growing, and collection can resume if your financial situation improves.

You request this status by submitting Form 433-A or 433-B showing your income and expenses. You can do this by mail, phone, or in person at an IRS office. The IRS will review your situation and decide whether to grant the status. There is no fee.

The IRS can review your account every two years to see whether your situation has changed. If you start earning income, they will contact you about resuming payments. The debt does not disappear after a set time — it can be collected for up to ten years from the date of assessment, though that period can be extended.

How penalties and interest work while you settle

When you owe back taxes, the IRS adds two things on top: a failure-to-pay penalty (usually 0.5 percent of what you owe per month, up to 25 percent total) and interest (currently 8 percent per year, compounded daily). Both continue to grow while you are on a payment plan or waiting for an offer decision.

You cannot stop interest from accruing — it is automatic. You can request that the IRS remove or reduce penalties, but only if you have a valid reason. Valid reasons include relying on incorrect information from a tax professional, a serious illness or injury that prevented you from filing, or a death, fire, or natural disaster in your family. You must request penalty relief in writing and provide documentation of your reason.

The IRS rarely removes interest unless the agency made an error in calculating what you owe. If you believe the IRS made a mistake, you can dispute it, but you must do so in writing with supporting documents.

Requesting a short-term extension to pay in full

If you need time but expect to pay the full amount within six months, you can request a short-term extension without setting up a formal payment plan. This gives you up to 180 days to pay. There is no setup fee, and you do not have to provide financial information.

You request an extension by calling 1-800-829-1040 or by responding to the IRS notice you received. The IRS will tell you the new due date. Interest and penalties continue to accrue during the extension period, just as they do on a payment plan.

A short-term extension is useful if you are waiting for a tax refund, a bonus, or an inheritance. Once the extension expires, if you have not paid in full, you must set up a payment plan or request an offer in compromise.

What happens if you ignore an IRS notice

If you do not respond to an IRS bill within the time shown on the notice, the IRS can take collection action without your input. This includes placing a tax lien on your property (a legal claim against your assets), garnishing your wages (taking money directly from your paycheck), or levying your bank account (seizing funds).

A tax lien damages your credit and makes it hard to sell property or borrow money. A wage garnishment can take a large portion of each paycheck. A bank levy can empty your account in one transaction. All of these are legal and happen automatically if you do not respond.

If the IRS has already taken collection action, you can still set up a payment plan or request an offer in compromise. The sooner you act, the more options you have. If you have a lien, paying off the debt does not automatically remove it — you must request a lien release from the IRS after you pay.

Working with a tax professional or getting free help

You can handle settlement with the IRS on your own, but a tax professional — a CPA, enrolled agent, or tax attorney — can negotiate on your behalf and represent you in discussions with the IRS. They charge a fee, usually a percentage of what you owe or a flat rate.

If you cannot afford a professional, the IRS has a free program called the Taxpayer Advocate Service (TAS). TAS helps people who are experiencing financial hardship or who have had problems with the IRS. You can contact TAS by phone at 1-877-777-4778 or by mail. TAS does not charge a fee and can push the IRS to act faster on your case.

Some nonprofit organizations also offer free or low-cost tax help. You can find them through the IRS website or by calling 211 (a referral line for local services). These organizations cannot represent you before the IRS, but they can help you understand your options and fill out forms.

Frequently Asked Questions

Can the IRS take my paycheck or bank account while I am on a payment plan?

No. Once you have an approved installment agreement, the IRS stops wage garnishments and bank levies. However, if you miss a payment, the agreement can be terminated and collection action can resume. If the IRS has already placed a lien on your property, the lien stays in place even after you set up a payment plan.

What is the difference between an installment agreement and an offer in compromise?

An installment agreement is a promise to pay the full amount you owe over time. An offer in compromise is a request to pay less than the full amount. The IRS approves most payment plans but rejects most offers. Use an offer only if you genuinely cannot pay the full amount.

How long does it take to get approved for a payment plan?

Online approval takes minutes. Phone approval takes a few minutes to a few hours. Mail approval takes one to two weeks. Once approved, your first payment is usually due within 30 days, though you can request a later start date.

If I set up a payment plan, will the IRS remove the penalties?

No. Penalties stay on your account and continue to accrue. You can request penalty relief only if you have a valid reason — such as relying on bad information from a tax professional — and you must ask in writing with supporting documents. The IRS rarely grants relief.

What happens to my tax debt if I do not pay it off?

The IRS can collect for up to ten years from the date the tax was assessed. After ten years, the debt expires and the IRS cannot collect. However, the IRS can extend this period in certain situations, such as if you file for bankruptcy or live outside the country. Interest and penalties continue to grow until the debt is paid or expires.