IRS Payment Plans and Offers in Compromise: Options Compared

An IRS payment plan lets you pay a tax debt over time instead of all at once, and an offer in compromise can settle some debts for less than the full amount. Both are options when you file a return and cannot pay, or when a balance due notice arrives. The best choice depends on how much you owe, how long you need, and what assets and income you have. This guide compares each option as of October 2026, with the fees and limits the IRS publishes, so you can pick one before collection action begins.

How does an IRS payment plan work?

A payment plan is an agreement to pay within an extended time. The IRS says to request one if you can pay in full within that period. While a plan request is pending, the IRS is generally prohibited from levying, and the time it has to collect is suspended or extended. If a request is rejected, the collection period is suspended for 30 days, and likewise if the IRS proposes to terminate a plan. The IRS also says it generally will not take enforced collection while a plan is being considered, while it is in effect, for 30 days after rejection or termination, or while it evaluates an appeal. As of March 2026 the IRS describes Simple payment plans for individuals and businesses.

Low-income taxpayers (adjusted gross income at or below 250 percent of the federal poverty level) can have the long-term setup fee waived with direct debit, or pay a reduced fee that may be reimbursed. Sole proprietors and independent contractors apply as individuals; other businesses generally apply by phone, mail or in person.

How to set up an IRS payment plan step by step

1. File all required returns. Only filed returns qualify (our 1040 roadmap lists the schedules), and the IRS may ask for a collection information statement.
2. Check what you owe. Sign in to your IRS online account to view the balance and payment history. Allow one to three weeks for a recent payment to post.
3. Pick the plan type. Under 180 days and under $100,000: short-term. Longer: long-term, ideally with direct debit.
4. Apply. Use the online payment agreement tool or mail Form 9465. If the IRS needs financial information, it will direct you to Form 433-F, 433-H or 433-B. Phone and in-person options also exist.
5. Make payments on time. Pay at least the minimum each month, file future returns on time and pay future taxes in full.
6. Update changes. Change the payment, date or bank account online, and tell the IRS if you move using Form 8822.
7. Respond fast to a default notice. Contact the IRS immediately if you receive a notice of intent to terminate. A reinstatement fee may apply.

The failure-to-pay penalty falls to 0.25 percent a month while a plan is in effect if you filed on time as an individual; separate penalty relief may also be available. Interest and penalties continue to accrue until the balance is paid, and the IRS may file a Notice of Federal Tax Lien. Your future refunds will be applied to the debt until it is paid.

What is a partial payment plan or currently not collectible status?

If you cannot afford to pay in full by the collection statute expiration date, generally 10 years, you may qualify for a partial payment installment agreement. It requires a collection information statement and supporting records, and it is reviewed every two years. If you cannot pay anything toward the debt because payment would prevent you from meeting basic living expenses, you can ask the IRS to delay collection and report your account as currently not collectible. Penalties and interest still accrue, and the IRS may still file a lien.

What is an offer in compromise?

An offer in compromise (OIC) may settle your tax debt for less than the full amount if you cannot pay in full or doing so would cause financial hardship. The IRS considers your income, expenses and asset equity, and generally will not accept an offer if you can pay in full through a payment plan or by using equity in assets. Publication 594 also describes an offer based on doubt that the tax debt is accurate.

Eligibility. You must have filed all required returns, made required estimated tax payments, not be in an open bankruptcy and, if you are an employer, have made required deposits for the current and prior two quarters. The Offer in Compromise Pre-Qualifier tool is a first check.

Cost and payments. Every application requires a $205 fee and a first payment unless you meet the low-income qualifications. A lump-sum offer requires 20 percent of the offer with the application and the rest in five or fewer payments if accepted; a periodic-payment offer requires an initial payment and continued payments during review.

What happens after you apply. The IRS suspends most collection activity and extends the collection period, but it may file a Notice of Federal Tax Lien. It will not release liens until the offer is paid in full. An application the IRS does not accept or reject within two years is automatically approved; the clock excludes appeal time. If an offer is rejected, the fee is not returned, payments are applied to the balance, and you may appeal to the Independent Office of Appeals.

Country notes for cross-border filers

If you live abroad, confirm which payment method works from your bank; the IRS Pay menu lists a foreign electronic payments page. A new plan does not fix a late filing: file on time and consider the extension rules in the future.

A worked example

Kiran, a restaurant owner in Plainfield, owes $38,000 for 2025 after interest and penalties. He cannot pay within 180 days. He owns a home with equity and holds savings, so an OIC is unlikely to be accepted, and a partial plan is unnecessary. Because he owes less than $50,000 and has filed all returns, he can use the online payment agreement tool and chooses direct debit, paying the $29 setup fee. At about $1,000 a month he expects just over three years of payments, with interest continuing to run. Numbers are hypothetical.

Mistakes to avoid

• Applying for an offer when you can pay through a plan or equity; the application fee is not returned if rejected.
• Missing a payment or filing a future return late, which can default the plan.
• Forgetting that interest runs during the plan.
• Ignoring a levy or lien notice while a request is pending; check the deadline on the notice and our first steps guide.

How we can help

Our firm helps individuals and small businesses in Aurora, Naperville and across Illinois evaluate payment plans and offers, prepare the collection information, and negotiate with the IRS and the Illinois Department of Revenue. We coordinate with your Canadian CPA or Indian Chartered Accountant when a debt overlaps with filings abroad. No plan or offer is guaranteed. See IRS and state tax representation and the federal tax calendar. Browse the notices hub for every guide in this series.

Frequently asked questions

General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.