IRS payment plan or offer in compromise: how to choose and apply
Educational information only, not tax, legal, or financial advice. We are not a CPA, enrolled agent, attorney, or the IRS. Talk to your own tax professional about your situation.
Short answer: If you can pay the full balance over time, look at a payment plan first, because the IRS generally won’t accept an offer in compromise when you could pay in full through an installment agreement or the equity in your assets (IRS Form 656-B booklet). An offer settles the debt for less than you owe, and in most cases the IRS won’t accept one unless the amount offered is at least what it calls your reasonable collection potential, its measure of your ability to pay (IRS Tax Topic 204). If you can’t pay anything without falling behind on basic living expenses, ask about currently not collectible status instead.
This page explains the process. It doesn’t promise any IRS result; the IRS decides outcomes based on your own account and facts.
If you just got a bill and haven’t read it closely yet, start with what to do first after an IRS balance-due notice. This page picks up when you know the balance and need to choose how to deal with it.
The two options in plain English
- Payment plan. An agreement with the IRS to pay what you owe within an extended timeframe. The IRS says to request one if you believe you’ll be able to pay in full within that time. A short-term plan gives you 180 days or less; a long-term plan, also called an installment agreement, means monthly payments (IRS: payment plans).
- Offer in compromise. An agreement that settles your tax debt for less than the full amount. The IRS says it considers your income, expenses and asset equity, generally won’t accept an offer if you can pay in full through a payment plan or the equity in your assets, and tells you to explore other payment options before you apply (IRS: offer in compromise).
The IRS measures ability to pay with what it calls reasonable collection potential: the value it could get from your assets, such as real estate, vehicles and bank accounts, plus expected future income minus certain allowed basic living expenses. In most cases it won’t accept an offer below that amount (IRS Tax Topic 204). That is why the same balance can make sense as an offer for one household and not for another.
Side by side: what IRS.gov says
Every cell below comes from the IRS page linked in it. Fees are the IRS’s posted amounts as checked on October 7 and October 19, 2026; confirm them on the IRS page before you apply.
| Question | Payment plan (short-term or installment agreement) | Offer in compromise |
|---|---|---|
| Who it fits | You expect to pay the full balance within the extended timeframe (payment plans). | You can’t pay in full, or doing so would cause financial hardship (offer in compromise). The IRS generally won’t accept an offer if you can pay in full through an installment agreement or asset equity (Form 656-B). |
| Before you apply | You must be current on all filing and payment requirements; people in an open bankruptcy generally aren’t eligible (Tax Topic 202). | All required returns filed, a bill received for at least one debt in the offer, current-year estimated payments made, and no open bankruptcy. Employers must also have made federal tax deposits for the current quarter and the two before it (Tax Topic 204). |
| How to apply | Online through your IRS online account, by mail with Form 9465, or by phone or in person (payment plans). | Individuals can apply in their IRS Individual Online Account. Businesses, and individuals without an account, use the forms and step-by-step instructions in the Form 656-B booklet (offer in compromise): Form 656 plus Form 433-A (OIC) for individuals and/or Form 433-B (OIC) for businesses (Tax Topic 204). |
| Up-front cost | Short-term plan: $0 setup fee. Long-term plan by direct debit: $29 online, or $107 by phone, mail or in person. Long-term plan paid other ways: $69 online, or $178 by phone, mail or in person. Low-income taxpayers: the direct debit fee is waived, and the other fee is $43, which may be reimbursed if certain conditions are met (payment plans). | A $205 application fee and a first payment. Lump-sum offers pay 20% of the offer when you apply; periodic offers make the first payment when you apply. Individuals who meet the low-income qualifications don’t pay the fee, the first payment or periodic payments during the review, and only individuals can qualify for that exception (offer in compromise). The 20% payment and periodic offer payments are generally nonrefundable (Tax Topic 204). |
| Penalties and interest | Penalties and interest continue to accrue until the balance is paid in full (payment plans). If you filed on time as an individual, the failure-to-pay penalty drops from 0.5% to 0.25% per month during an approved plan (failure to pay penalty). | Penalties and interest continue to accrue while the IRS considers your offer (Form 656-B). |
| Collection while you wait | With certain exceptions, the IRS is generally prohibited from levying while a request is pending, and it generally won’t take enforced collection action while a plan is in effect (payment plans). | The IRS suspends most collection activities while it evaluates the offer, and your collection period is extended (offer in compromise). It may still levy up to the time it signs and acknowledges the offer as pending (Form 656-B). |
| Tax liens | If you don’t qualify for the IRS’s simple or guaranteed plans, you may still get a plan, but a Notice of Federal Tax Lien determination and a collection information statement may be required (Tax Topic 202). | The IRS may file a notice of federal tax lien while it evaluates the offer, and it doesn’t release federal tax liens until the offer is paid in full (offer in compromise). |
| Your tax refunds | Future refunds are applied to the debt until it’s paid in full, and you still make every scheduled payment (payment plans). | If the offer is accepted, the IRS keeps any refund, including interest, for returns filed through the date it accepts the offer (Tax Topic 204). |
| Rules afterward | Pay at least the minimum each month, and file all required returns and pay all taxes on time. A defaulted plan may carry a reinstatement fee (payment plans). | For offers based on ability to pay, file all required returns and pay all taxes on time for 5 years from the date the offer is accepted, or the IRS may default the offer and collect the original amount, less payments, plus interest and penalties (Tax Topic 204). |
| If it’s turned down | The IRS generally won’t take enforced collection action for 30 days after a request is rejected or a plan is terminated, or while it considers an appeal, and you can appeal either decision (payment plans). | If the IRS rejects an offer, its letter explains why and how to appeal to the IRS Independent Office of Appeals, and the appeal must be made within 30 days from the date of that letter (Tax Topic 204). The application fee isn’t returned, and any payments are applied to your balance (offer in compromise). A returned offer, for example one missing information or a required payment, can’t be appealed, but it can be sent again once fixed (Tax Topic 204). |
How to set up a payment plan
- File first. The IRS lists having filed all required returns as a condition for applying online for a long-term plan (IRS: online payment agreement). If several years are open, sort them with first steps when you owe back taxes for multiple years, and if any are unfiled, catch them up with unfiled tax returns: how to catch up, one year at a time.
- Pay what you can now. The IRS says paying as much as possible reduces the interest and penalties that build on the balance (Tax Topic 202).
- Check whether you can apply online. Individuals may qualify online for a long-term plan if they owe $50,000 or less in combined tax, penalties and interest and have filed all required returns, or for a short-term plan if they owe less than $100,000. Sole proprietors and independent contractors apply as individuals; business accounts can’t apply online (IRS: online payment agreement).
- Have the details ready. You’ll need an IRS online account, which takes a photo ID to create, plus your bank routing and account numbers for direct debit. Once you finish an online application you’re told right away whether the plan is approved (IRS: online payment agreement). Even before a bill arrives, you can set up a plan using the balance due from your return (Tax Topic 202).
- If you can’t apply online, use Form 9465, which is for requesting a monthly plan when you can’t pay the full amount shown on your return or on a notice (About Form 9465). Attach Form 433-F if the instructions require it, or call the number on your bill or notice (IRS: payment plans). The IRS typically responds to a mailed Form 9465 within 30 days, but it may take longer during filing season (Tax Topic 202).
- Pick a payment day you can keep. You choose a day from the 1st through the 28th, and the payment must reach the IRS by that date. Direct debit lowers the chance of missing one (Tax Topic 202).
For the IRS’s Simple Payment Plan, your proposed payment must pay the balance in full by the collection statute expiration date, which is generally 10 years from when the tax was assessed. If you can’t reach that, a partial payment installment agreement may be an option; it needs a collection information statement, may involve a lien decision, and is reviewed every two years (Tax Topic 202). The IRS also suggests weighing a loan or credit card, because their rate and fees may be lower than the combined interest and penalties (Tax Topic 202). If a plan already slipped, see what happens after a missed tax payment?
On liens: if the IRS has filed a notice of lien and you owe $25,000 or less, it may withdraw that notice once you’re on a direct debit plan that pays the balance within 60 months or before the collection statute ends, whichever comes first, you’ve made three consecutive direct debit payments, and you meet the other conditions it lists (IRS: understanding a federal tax lien). Our page on IRS tax liens vs levies explains the difference between the two.
What if you owe again while you’re on a payment plan?
Deal with it before the new balance comes due, because a later balance can break the plan you already have. The Form 9465 instructions say that if you don’t make your payments on time or don’t pay on time a balance due on a return you file later, you’ll be in default on your agreement, and the IRS may end the agreement and file a lien or issue a levy to collect the entire amount you owe. Before it ends the agreement, you may be able to appeal under the Collection Appeals Program (Instructions for Form 9465). The IRS payment plan page puts the rule the same way: file all required returns and pay all taxes in full and on time, and contact the IRS to change your existing agreement if you can’t (IRS: payment plans).
Changing the plan doesn’t mean starting over. In the IRS online payment agreement tool you can change your plan type, monthly amount and payment date, and revising an existing plan online costs $6, which may be reimbursed for low-income taxpayers who meet certain conditions (IRS: online payment agreement). If you use a paper Form 9465 instead, the instructions ask you to list balances that aren’t on your notice or return even if they’re already in an existing agreement, and to propose one monthly amount that covers all of what you owe (Instructions for Form 9465). While any plan is open, the IRS applies your future refunds to the debt until it’s paid in full (IRS: payment plans). Our suggestion: when you file a return that shows a new balance, pay what you can with it and change the plan that same week instead of waiting for a notice. If the plan has already defaulted, see what happens after a missed IRS payment; if the new total is more than your tax-debt budget can carry, read currently not collectible below.
How to apply for an offer in compromise
- Run the IRS pre-check. The Offer in Compromise Pre-Qualifier asks about your assets, income and expenses and calculates a preliminary offer amount. The IRS calls it a guide only and makes its final decision from your full application and its own investigation. It doesn’t apply to partnerships, corporations, U.S. territory or foreign residents, or APO/FPO addresses (IRS: OIC Pre-Qualifier). Your Individual Online Account can also check your eligibility (Form 656-B booklet).
- Clear the blockers. Resolve any open audit or innocent spouse claim before you submit (our guide to spouse and ex-spouse tax debt explains innocent spouse relief and Form 8857). If you think you don’t owe the tax at all, that’s a different offer, Form 656-L for doubt as to liability, and you can’t file both kinds at the same time (Form 656-B booklet).
- Build the package. The Form 656-B booklet holds the instructions and the forms: Form 656, Form 433-A (OIC) for wage earners and self-employed people, and Form 433-B (OIC) for businesses (About Form 656). Individual and business debts go on separate Forms 656, each with its own $205 fee and initial payment; individuals who meet the low-income certification guidelines don’t send these (Form 656-B booklet).
- Choose how you’ll pay. A lump-sum offer sends 20% with the application and the rest in 5 or fewer payments within 5 or fewer months after acceptance. A periodic offer is paid in 6 or more monthly payments within 24 months, and you keep paying while the IRS reviews it. These payments are generally non-refundable and go toward your tax debt (Tax Topic 204). You can’t pay the offer with an expected tax refund or money already paid (Form 656-B booklet).
- Keep current while it’s reviewed. Keep filing and paying all required taxes, or the IRS may return the offer (Form 656-B booklet). If you already have an installment agreement, you don’t make its payments during the review, and if the offer isn’t accepted and you have no new tax debt, the IRS reinstates it (Form 656-B booklet).
- Know the timeline. If the IRS confirms you’re eligible and processes your application, you’ll get a notification, and it may ask for more information to complete its investigation. An offer is approved automatically if the IRS doesn’t accept or reject it within two years of receiving it, not counting time during an appeal (IRS: offer in compromise).
If you hire someone to help with an offer, check their qualifications first. Pack your papers with documents to bring when talking with a tax professional, and if you’re self-employed, separate business and household figures first using self-employed tax debt: records to separate first.
When neither fits: currently not collectible
If paying anything would leave you unable to meet basic living expenses, you can ask the IRS to delay collection (Tax Topic 202), and it may place your account in currently not collectible status. The debt isn’t forgiven, penalties and interest keep accruing, and the IRS may still file a lien and apply your refunds (IRS: temporarily delay the collection process). Our currently not collectible overview covers what that conversation usually involves.
Which to look at first
This order is our own suggestion for sorting your options, built on the IRS rules above. It isn’t an IRS rule and your facts may call for a different one.
| Step | Ask yourself | If yes, look at |
|---|---|---|
| 1 | Is any required return still unfiled? | File it first. Both a payment plan and an offer expect filed returns (catching up on unfiled returns). |
| 2 | Do you think the tax itself is wrong? | Follow the dispute steps in your notice (balance-due notice guide). An offer for doubt as to liability uses Form 656-L, not Form 656. |
| 3 | Could you pay it all within 180 days? | A short-term plan, with a $0 setup fee. |
| 4 | Could you pay it all with monthly payments before the collection statute ends? | A long-term plan. Direct debit has the lowest posted setup fee for a long-term plan. |
| 5 | Even with steady payments and your asset equity, would the balance never be paid? | Run the Offer in Compromise Pre-Qualifier, then talk with a qualified tax professional about an offer or a partial payment plan. |
| 6 | Can you pay nothing at all without missing basic living expenses? | Ask about currently not collectible status (CNC overview). |
Penalties are a separate question from all of these. Asking for penalty relief doesn’t replace choosing how to pay; see penalty abatement basics. To find the monthly number for steps 3 to 5, start with how to build a realistic tax-debt budget.
Payment option worksheet
Write these down before you apply or call anyone. You can download our blank payment option worksheet (CSV file), which opens in Excel, Google Sheets or Numbers. Here it is filled in with the made-up example below:
| Item | Where to check | Example (made up) |
|---|---|---|
| Total balance today (tax, penalties and interest) | IRS online account or your latest notice | Written down from the online account |
| Tax years included | Notice or account transcript | Two years |
| Any required returns not filed? Which years? | Your records (see honesttaxrelief.com/blog/20.html) | None, all filed |
| Current-year estimated payments made? | Your payment records | Yes |
| Open bankruptcy, open audit or innocent spouse claim? | Your records | No |
| Monthly amount you can keep paying after essentials | Your budget (see honesttaxrelief.com/blog/8.html) | An amount they kept for three test months |
| Rough months to pay the balance at that amount (interest and penalties add more) | Balance divided by monthly amount | About four years |
| Can you pay in full within 180 days? | Your budget | No |
| Assets you could sell or borrow against (equity) | Bank, retirement, vehicle and property statements | Small savings, no home equity |
| OIC Pre-Qualifier or online account result, and date | irs.treasury.gov/oic_pre_qualifier | Not run; they can pay in full over time |
| Earliest deadline on any notice | The notice itself | Date from the latest notice |
| Option to look at first | The decision path on this page | Long-term plan by direct debit |
| Questions for a tax professional | Your notes | Is direct debit right for my pay schedule? |
Example (made up)
This is a hypothetical case to show the steps in order. It isn’t anyone’s real situation and isn’t advice.
Someone owes for two years after a stretch of contract work with too little withheld. Both returns are filed and this year’s estimated payments are current. Their budget shows a monthly amount they can keep paying that would clear the balance in about four years, and they have little equity to sell or borrow against. Because they can pay in full over time, an offer is unlikely to fit, so they apply online for a long-term plan by direct debit and pick a payment day just after payday. They file the next return on time, and when that refund is applied to the balance, they keep making the scheduled payment anyway.
Change one fact: their income drops for good and the budget shows payments that could never clear the balance before the collection statute ends. Now they run the Pre-Qualifier, gather the statements Form 433-A (OIC) asks for, and ask a qualified tax professional whether an offer, a partial payment plan or currently not collectible status fits better.
Myths that lead to the wrong choice
- “Anyone can settle for pennies on the dollar.” In most cases the IRS won’t accept an offer for less than your reasonable collection potential (Tax Topic 204), and it generally won’t accept one if you can pay in full through a payment plan or the equity in your assets (offer in compromise).
- “A payment plan freezes my balance.” Penalties and interest keep accruing until the balance is paid in full (payment plans).
- “Sending an offer stops everything right away.” The IRS may levy until it acknowledges the offer as pending, and penalties and interest continue while it’s considered (Form 656-B).
- “If my offer is rejected, I get my money back.” If your offer is rejected, the $205 fee isn’t returned and any payments are applied to your balance due. Only if you apply and aren’t eligible does the IRS return the application and fee, and even then your payments go toward your tax debt (offer in compromise).
- “I’ll still get my refund while I’m paying.” Refunds are applied to the debt during a payment plan (payment plans) and kept by the IRS for returns filed through the date an offer is accepted (Tax Topic 204).
Questions to bring to a tax professional
- Can I pay the full balance before the collection statute ends for each of my years?
- Do I meet the online limits, or will I need Form 9465 and a collection information statement?
- Would the IRS likely see my reasonable collection potential as less than what I owe?
- Is a lien already filed, and could a direct debit plan let me ask for the notice to be withdrawn?
- Would penalty relief change the balance I’m choosing a plan for?
Our list of tax records organized by year helps you bring the right papers. Keep full Social Security numbers and bank details out of casual email.
Next steps
For the bigger picture, from a first notice through collections, see our plain-English guide to IRS tax debt. Honest Tax Relief provides independent education and matching. We are not the IRS, a CPA firm, or a law firm, and no payment plan, offer in compromise or other result is guaranteed. When your worksheet is filled in, see how we help or contact us with questions.
How this page is made
Every IRS rule, fee and number on this page comes from the IRS page linked beside it, and those pages were checked on October 7, 2026 and again on October 19, 2026. By the second check the IRS had rewritten its offer in compromise page (it shows a last-reviewed date of October 14, 2026), so we updated every statement here that cites it, and moved a few to Tax Topic 204, the Form 656-B booklet or the Pre-Qualifier page, where the IRS still says them. Payment plan fees and online limits were unchanged. The comparison table pulls those IRS statements side by side; the decision path, the worksheet, the example and the questions are our own organizing suggestions. On October 29, 2026 we added the question about owing again while on a payment plan, from the Instructions for Form 9465 (revised July 2024), the IRS online payment agreement page and the IRS payment plans page, all checked on October 28, 2026; the “same week” suggestion is our own. IRS fees and online limits change, so if an IRS page differs from this one, follow the IRS page.
Keep reading: How to build a tax-debt budget the IRS can follow · What happens after a missed IRS payment, and how to get back on track · IRS tax debt: a plain-English guide, stage by stage
Educational information only. Not IRS, legal, or accounting advice. No outcome is guaranteed.