Hardship Payment Plans for Resolution of Tax Debt

Last updated on March 6, 2023

Tax debt resolution does not always involve payment of the entire tax debt amount. Taxpayers that are going through financial hardship and cannot pay their entire tax bill can qualify for a payment plan that reduces their tax debt or postpones it until they are able to make payment.

Tax Debt Resolution using Offer in Compromise   

Offer in Compromise (OIC) is a useful tax debt reduction plan for taxpayers that are financially incapable of paying their full tax debt. If you are undergoing a financial hardship and can only pay a reduced amount of tax debt, then you may consider applying for an Offer in Compromise.

Before applying for OIC, make sure that you are current with all filing and payment requirements. If you are in an open bankruptcy proceeding, you cannot apply for OIC. After you have applied, the IRS will consider your special circumstances, including your:

• Ability to pay
• Income and expenses, and
• Asset equity

You can either pay the reduced amount of the tax debt in a lump sum cash payment, or can make an initial payment with the application and continue to pay the balance in monthly installments.

Low income taxpayers should try to qualify for the Low Income Certification, which provides them benefits during the evaluation process of their application. The benefits include:

• No application fee
• No initial payment
• No monthly payments in installments during evaluation

Tax Debt Resolution using Currently Not Collectible

The Offer in Compromise payment plan is for taxpayers that can pay a reduced amount, whereas Currently Not Collectible (CNC) payment plan is for taxpayers that cannot pay any amount of their tax bill. If you are only able to meet basic living expenses and have no means to fulfill any amount of tax debt, then you may consider applying for Currently Not Collectible.

To qualify for CNC, you must not own any assets that can be sold to fulfill the tax debt and you must also not have enough income to repay any amount of tax debt. If any amount of payment can force you into a financial crisis, the IRS cannot request payment.

The IRS encourages taxpayers to explore every other option of payment of the tax bill before applying for tax reduction or postponement. It is important to note that even after a taxpayer has qualified for CNC, if the IRS finds improvement in their financial condition, then the IRS will ask for payment of the tax debt, partial or in full, depending on the current financial situation of the taxpayer.