IRS payment plan in the USA – installment agreement, Offer in Compromise, Fresh Start

Why the IRS is Special

The IRS differs from other creditors:

• Greatest powers – can garnish wages WITHOUT a court order, levy bank accounts, place liens
• Tax debt is NOT dischargeable in bankruptcy (recent tax debt)
• Statute of limitations – 10 years from assessment (CSED – Collection Statute Expiration Date)
• Interest + penalties add up quickly (~6-8% interest + 0.5-1% monthly penalty)
• Passport revocation for $59k+ "seriously delinquent" debt

DO NOT ignore the IRS. However, the IRS also has the most formal payment options of all creditors.

IRS Payment Options – Overview

Option	Best for	Cost
Short-Term Payment Plan	< $100k debt, possible payment within 180 days	$0 setup
Streamlined Installment Agreement	< $50k debt, plan up to 72 months	$31-225 setup
Standard Installment Agreement	$50k-$250k debt, varying length	$31-225 setup
Partial Pay Installment Agreement	Cannot pay in full even over time	$225 setup
Offer in Compromise	Pay less than full owed	$205 application + 20% offer
Currently Not Collectible	True hardship	Free
Innocent Spouse Relief	Spouse's tax debt	Free application

Short-Term Payment Plan

Eligibility

• Owe < $100,000 (combined tax, penalties, interest)
• Can pay in full within 180 days (6 months)
• All required tax returns filed

Cost

Free – no setup fee.

How to apply

• Online: irs.gov/payments
• Phone: 1-800-829-1040
• Mail: Form 9465

Interest continues

Interest (6-8%) AND penalty (0.5-1% monthly) continue to accrue during the plan. Just slower.

Long-Term Installment Agreement

Streamlined (most popular)

• Owe < $50,000 (combined)
• Plan up to 72 months (6 years)
• NO financial disclosure required
• Direct debit or payroll deduction strongly preferred

Setup fees

• Online with direct debit: $31
• Phone/mail with direct debit: $107
• Online with check: $130
• Phone/mail with check: $225
• Low-income fee waiver available ($43 reduction or free for < 250% FPL)

Monthly payment calculation

Total debt / number of months = minimum monthly payment.

$24k debt / 72 months = $333/month minimum.

How to apply

Form 9465 (Installment Agreement Request) or online (faster).

Offer in Compromise (OIC)

What it is

The IRS settles your tax debt for LESS than the full amount. Best outcome if possible.

Eligibility

3 grounds for OIC:

1. Doubt as to collectibility – strongest, IRS believes it can't collect the full amount
2. Doubt as to liability – IRS made an error
3. Effective tax administration – exceptional circumstances (medical, age)

"Doubt as to collectibility" is the most common – must show:

• Total assets < total debt
• Income barely covers reasonable expenses
• Cannot pay debt within 10-year CSED period

How the IRS calculates "reasonable collection potential"

RCP = (Net realizable equity in assets) + (Monthly disposable income × 12 or 24 months)

Net realizable equity = assets minus allowed liabilities (mortgage, car loan).

Monthly disposable income = monthly income minus allowable expenses (IRS publishes standard amounts for housing, food, etc).

If RCP < total tax debt → OIC may succeed.

Lump sum vs Periodic Payment OIC

Lump Sum (most popular)

• 20% offer up front + Form 656
• Rest in 5 payments after acceptance
• Faster decision

Periodic Payment

• First payment with Form 656
• Continue monthly payments during review (6-24 months)
• Often rejected – periodic gives the IRS time to collect more

Application

• Form 656 + Form 433-A (OIC) – financial information
• $205 application fee (waived for low-income)
• 20% offer payment (or first periodic payment)
• Documentation: tax returns, paystubs, bank statements, asset valuations

OIC pre-qualifier

The IRS has OIC Pre-Qualifier Tool on irs.gov – quick check if OIC is realistic. Use it first.

Acceptance rate

• ~40% acceptance rate (improved from decades ago)
• Most common rejection: insufficient documentation, hidden assets discovered
• Average accepted offer: 30-50% of original debt

Currently Not Collectible (CNC) Status

What it is

The IRS designates your account as "Currently Not Collectible" if you demonstrate that paying any amount would cause significant hardship.

Effect

• IRS suspends active collections (no liens, levies, garnishments)
• Interest + penalties still accrue
• 10-year CSED CONTINUES counting
• IRS reviews status periodically (annually)

How to apply

• Form 433-A or 433-F (financial disclosure)
• Documentation of hardship
• Often requires a phone call or in-person meeting with an IRS revenue officer

Best for

• Temporary hardship (illness, job loss)
• Wait for CSED if more than 10 years from assessment
• Used with OIC as a parallel strategy

Statute of Limitations – 10-Year CSED

The IRS has 10 years from the ASSESSMENT date to collect tax. After that – "Collection Statute Expiration Date" (CSED) – the IRS can no longer collect.

Assessment vs filing date

Assessment = the date when the IRS officially recorded the tax debt. Often = filing date, but can be later (audit results).

Tolling events

Some events "toll" (pause) the CSED:

• Bankruptcy filing (CSED tolled + 6 months)
• OIC pending
• Innocent Spouse claim pending
• Collection Due Process appeal
• Living outside the US for 6+ months

Important: requesting an installment agreement does NOT toll the CSED. OIC DOES TOLL.

Strategies with CSED

• Pull "account transcripts" from the IRS – shows CSED for each tax year
• Plan based on CSED – sometimes waiting is worth it
• After CSED – debt is completely wiped

Fresh Start Initiative

2012 initiative expanding payment options:

Streamlined Installment Agreement

• Increased for $50k debt (from $25k)
• 72-month plan (from 60)
• No financial disclosure

OIC expanded

• Less restrictive eligibility
• Faster decisions
• Greater allowable expenses

Lien thresholds raised

• $10k threshold for automatic lien
• Lien withdrawal after payment

What the IRS can do if you ignore them

Notices escalation

1. CP14 – first notice of unpaid balance
2. CP501 – reminder
3. CP503 – second reminder
4. CP504 – "intent to levy state tax refund" (warning)
5. LT11 / Letter 1058 – "Final Notice of Intent to Levy" – must respond within 30 days or appeal rights lost

Wage garnishment

• After LT11 + 30 days, the IRS can garnish wages
• Federal: 25% of disposable income (depending on exemptions)
• Levy continues until debt is paid or released

Bank levy

• 21-day hold – bank holds funds, then sends to the IRS
• Very disruptive – checks bounce, autopay fails

Property lien

• Federal Tax Lien filed in county records
• Affects credit score (less so since 2017)
• Blocks selling/refinancing property

Passport revocation

• $59,000+ debt = "seriously delinquent"
• State Department revokes or denies passport
• Cannot travel

Criminal prosecution (rare)

• Tax evasion – intentional
• 5 years in prison + $250k fine
• Rare – the IRS usually pursues civil

How to respond to an IRS notice

Read carefully

• Notice number (CP14, LT11, etc.)
• Amount owed (tax + penalty + interest breakdown)
• Deadline to respond

Verify accuracy

• Pull account transcript from the IRS
• Compare with your own records
• Common errors: missing payments, wrong tax year

Respond within the deadline

• Pay in full (if possible)
• Set up a payment plan
• Dispute if the amount is wrong
• Request CNC if hardship
• Submit OIC if appropriate

Tax Resolution Companies – be cautious

Advertisements "settle tax debt for pennies on the dollar" – often scams or overpriced.

Red flags

• Guaranteeing specific outcomes
• Require large upfront fees ($1k-10k)
• "Available only today!"
• Cold call sales
• BBB complaints

Legitimate alternatives

• Self-representation – most processes are simple, free tools available
• CPA / Enrolled Agent (EA) – 1-3 hours consultation $200-500
• Tax attorney – for complicated matters ($300-700/h)
• Low Income Tax Clinics (LITC) – free representation for low-income
• Taxpayer Advocate Service – free IRS internal advocate for disputes

Innocent Spouse Relief

If a spouse hid income, errors on a joint return – the innocent spouse may be released from liability.

Three types

1. Innocent Spouse Relief (Form 8857) – full release if truly innocent
2. Separation of Liability – for divorced/separated, splits joint liability
3. Equitable Relief – for cases not fitting above categories

Eligibility

• Filed a joint return
• Tax understatement due to spouse's actions
• Didn't know or have reason to know about the understatement
• It would be unfair to hold liable

Polish Specific Scenarios

Self-employment cash worker who didn't file taxes

5 years of working "under the table" without taxes. Worried about IRS finding out. Realistic situation:

1. File all delinquent returns NOW (Form 1040 with Schedule C for SE income)
2. Voluntary disclosure – the IRS is much friendlier to self-reporters than to those caught
3. Calculate tax owed (SE tax 15.3% + income tax)
4. Apply for an installment agreement or OIC
5. The IRS will work with you

1099 worker without quarterly payments

$15k tax bill after year-end. Standard situation.

1. File return on time (April 15) with Form 9465 (Installment Agreement Request)
2. Streamlined plan, 72 months, ~$210/month payment
3. Set up quarterly payments for the current year to avoid future problems

Foreign income (rental in Poland, Polish pension)

Many Polish emigrants have foreign income but didn't report. This may include:

• Polish rental income (PLN)
• Polish pension
• Polish bank accounts (FBAR if > $10k aggregate)

Failure to report can be expensive – FBAR penalties up to $10k/year (non-willful) or 50% balance (willful).

Strategy: Streamlined Foreign Offshore Procedures – voluntary disclosure with reduced penalties. Consult a tax attorney before initiating.

Filed after Polish instinct (not wanting to declare income)

The Polish mentality of "hiding from the government" does not work with the IRS. Information sharing US-Poland treaty since 2009. The IRS shares information with ZUS and vice versa.

Naturalization candidate with tax debt

USCIS checks tax compliance for "good moral character." Outstanding tax debt – DOES NOT disqualify, but better approach:

• Set up a payment plan BEFORE the naturalization application
• Show tax debt being addressed
• Provide installment agreement letter

Practical Tips

• File all returns first – even if you cannot pay. Late filing penalties are FAR worse than late payment.
• Late filing penalty: 5%/month max 25%. Late payment penalty: 0.5%/month max 25%. Filing on time saves 10x more.
• Pull account transcripts from irs.gov to verify what the IRS thinks you owe
• Installment agreement stops most collection actions
• OIC pre-qualifier on irs.gov – check if realistic
• Direct debit saves on setup fees
• Low Income Taxpayer Clinic – free representation
• Taxpayer Advocate Service – free IRS internal mediator
• DO NOT use tax debt commercials – overpriced
• Pay current year taxes while resolving old debt – penalties get worse if you stop
• 10-year CSED – strategize around if applicable
• Quarterly estimated tax for SE income – prevents future problems
• FBAR for Polish accounts > $10k – file annually
• Polish foreign pension – report on Form 1040