You can settle IRS debt by negotiating payment terms, applying for an Offer in Compromise, requesting Currently Not Collectible status, or setting up a payment plan—each with specific requirements and pros/cons.

Owing the IRS is stressful, but you have more options than you might think. Whether you owe a few thousand dollars or six figures, the IRS offers programs to help taxpayers resolve their debt in ways that fit their financial situation.

This step-by-step guide explains how to settle IRS debt, including what each program entails, who qualifies, and how to choose the right path forward.

Table of Contents

1. Step 1: Confirm What You Owe

2. Step 2: File All Missing Returns

3. Step 3: Understand Your Settlement Options
     - Offer in Compromise
     - IRS Payment Plans
     - Currently Not Collectible (CNC) Status
     - Partial Payment Installment Agreement

4. Step 4: Weigh the Pros and Cons

5. Step 5: Gather Financial Documentation

6. Step 6: Apply or Negotiate

7. Step 7: Stay in Compliance

8. When to Get Professional Help

9. FAQs About Settling IRS Debt

Step 1: Confirm What You Owe

Before you can settle, you need to know exactly how much you owe.
You can check your IRS account online at irs.gov or call the IRS directly. Your balance will include:

• Tax owed
• Accrued penalties
• Daily compounding interest

Make sure the amount is accurate—errors can happen, and you may be able to dispute certain items.

Step 2: File All Missing Returns

The IRS won’t approve any settlement or payment plan unless all required tax returns are filed. Even if you can’t pay, file now to avoid additional penalties and show you’re serious about resolving your situation.

If you have unfiled returns, act quickly. The IRS may file a Substitute for Return (SFR) on your behalf, often overstating your tax due because it won’t include deductions or credits.

Step 3: Understand Your Settlement Options

There’s no one-size-fits-all answer for how to settle IRS debt—the right solution depends on your financial situation, total balance, and future earning potential.
Here are the main programs available:

Offer in Compromise (OIC)

An Offer in Compromise allows you to settle your IRS debt for less than the full amount owed if paying in full would cause significant financial hardship.

Key Requirements:

• Must be current on all tax filings
• Must not be in an active bankruptcy
• Must demonstrate inability to pay in full through detailed financial disclosure

How It Works:
You propose a lump sum or short-term payment amount based on your ability to pay, not the total debt. If the IRS accepts, your debt is considered settled once you make the agreed payments.

Pros:

• Can significantly reduce your debt
• Stops most collection activity during review
• Provides a fresh start when approved

Cons:

• Application process is complex and slow (6–12 months or longer)
• Low acceptance rate without strong supporting documentation
• Requires full financial transparency

Pro Tip: Because the OIC process is complex and approval rates are low without strong documentation, working with a tax relief professional can significantly increase your chances of success.

IRS Payment Plans

If you can’t pay in full now but can over time, the IRS offers installment agreements.

Short-Term Payment Plan

• Pay balance within 180 days
• No setup fee
• Best for smaller debts or temporary cash flow issues

Long-Term Payment Plan (Installment Agreement)

• Pay monthly over several years
• Setup fees apply (waived for low-income taxpayers in some cases)
• Can be direct debit or manual payment

Pros:

• Easy to qualify if debt is under $50,000
• Prevents aggressive collection actions while in good standing
• Flexible payment amounts

Cons:

• Interest and penalties continue until paid in full
• Missing a payment can default the agreement

Currently Not Collectible (CNC) Status

If you truly cannot pay anything without creating severe financial hardship, you can request Currently Not Collectible status.

How It Works:
You prove to the IRS—through financial documentation—that you have no ability to make payments. The IRS pauses active collection efforts.

Pros:

• Stops levies and garnishments while in effect
• Provides breathing room for those in hardship

Cons:

• Debt still accrues interest and penalties
• Status is temporary and subject to periodic review
• Does not eliminate the debt

Pro Tip: Expert representation can ensure your hardship is fully documented, help protect you from aggressive collections, and position you for the strongest possible case when requesting CNC status.

Partial Payment Installment Agreement (PPIA)

This is a hybrid between an installment agreement and a settlement. You make lower monthly payments that won’t fully pay off your balance before the IRS’s 10-year collection statute expires. Once the statute runs out, the remaining debt is forgiven.

Pros:

• Lower monthly payments
• Can result in paying less than full amount

Cons:

• Requires detailed financial disclosure
• IRS may review your finances periodically and increase payments if your situation improves.

Step 4: Weigh the Pros and Cons

Here’s a quick comparison of your main options:

Step 5: Gather Financial Documentation

No matter which option you pursue, you’ll need to provide accurate financial details, including:

• Pay stubs or income statements
• Bank statements
• Monthly bills and expenses
• Asset documentation (real estate, vehicles, investments)
• Any special hardship evidence (medical bills, job loss documentation)

Complete disclosure is critical—omitting assets or income can derail your application.

Step 6: Apply or Negotiate

Offer in Compromise: Submit Form 656 and  Form 433-A(OIC) with your application fee and initial payment.

Payment Plan: Apply online or submit Form 9465.

CNC Status: Request by phone or in writing, providing Form 433-F financial statement.

PPIA: Negotiate directly with the IRS using detailed financial documentation. Because the IRS reviews your income, expenses, and assets closely, having an  experienced tax professional represent you can strengthen your case and improve your chances of approval.

Step 7: Stay in Compliance

The IRS will revoke any agreement if you fail to:

• File future tax returns on time
• Pay new taxes owed promptly
• Make agreed payments

Keeping up with your obligations protects your settlement arrangement and prevents you from falling back into collections.

When to Get Professional Help

IRS settlement programs have strict eligibility rules, and navigating them can be overwhelming.
A licensed tax relief professional can:

• Determine the best settlement path for your situation
• Complete paperwork accurately and fully
• Negotiate directly with the IRS on your behalf
• Help you avoid costly mistakes

At Top Tax Defenders, we’ve helped thousands of taxpayers successfully resolve IRS debt through tailored strategies.

FAQs About Settling IRS Debt

How long does the IRS have to collect debt?
Generally 10 years from the date of assessment, but this can be extended.

Can I settle IRS debt on my own?
Yes, but working with a professional increases your chances of approval, especially for an OIC.

Will settling affect my credit score?
IRS debt itself isn’t reported to credit bureaus, but liens and judgments may appear.

Final Thoughts: Take Action Now

If you owe the IRS, you have options—but time matters. Interest, penalties, and collection pressure only increase the longer you wait.
Whether you qualify for an Offer in Compromise, a payment plan, CNC status, or another arrangement, the key is acting now to protect your finances and peace of mind.

Need help figuring out how to settle IRS debt? Contact Top Tax Defenders today for a free consultation and take the first step toward financial relief.