Tax season is coming to a close and with that comes the dreaded IRS audit and collection letters. If you are one of millions of taxpayers who owe the IRS additional returns, don’t stress too much. The IRS collected nearly 5 billion dollars last year in nonreturn penalties alone. If you are unable to pay your IRS debt in full there are several options that will help you maintain IRS compliance while also allowing you to pay your debt in a way that does not put too much financial strain on you and your family.
The two most commonly used repayment alternatives are installment plans and Offers in Compromise. When people talk about repayment plans with the IRS, they often use these terms interchangeably but there are a few differences between the two that can make one of the other ideal for different individuals and their tax needs. The main difference between IRS installment plans and offers in compromise lies in how they address tax debt and provide a solution for taxpayers struggling to pay their taxes. Here are some key differences between the two.
Purpose
The most important difference to keep in mind is the purpose of the two different repayment programs. An installment plan is meant to allow taxpayers to pay their tax debt in monthly installments over an extended period of time. If you have a large tax amount that would cause financial hardship to pay all at once, an installment plan could be the perfect solution for you. It can help individuals or businesses who can afford to pay their debt but need more time to do so stay IRS compliant and avoid additional fees and penalties.
Offer in Compromise, on the other hand, typically reduces the total amount due for individuals or businesses who cannot realistically afford to pay their full debt without putting undue financial strain on themselves and their families. An Offer in Compromise is a settlement option that allows eligible taxpayers to negotiate with the IRS to pay a reduced amount to settle their tax debt. It is designed for those facing financial hardship who cannot afford to pay their full tax debt. When determining whether to accept an Offer in Compromise, the IRS considers the taxpayer’s ability to pay, annual income, expenses, asset valuation, and overall financial burden to determine whether to accept your initial offer, counteroffer, or reject the case altogether. The IRS aims to find a reasonable amount that the taxpayer can pay while still recovering a portion of the debt. To do this, they use a sophisticated formula to calculate the taxpayer’s reasonable collection potential. In extreme cases this amount could be as little as 20% of the full debt amount.
This is a more difficult program to qualify, though, and taxpayers hoping to settle their tax debt with an offer in compromise should consider consulting a tax resolution attorney throughout the process for the best results possible.
Repayment Structure
Another important distinction to make is the way each plan is paid back. Under an installment plan, you are to make regular monthly payments towards your debt until it is fully paid off. The amount and duration of payments depend on the total tax debt owed and the agreed-upon terms. This is similar to a regular payment plan like what you may pay toward an appliance payment plan. At the end of the agreed payment period, you have paid your full tax debt and are back in the green.
With an Offer in Compromise, you make a lump sum payment or a limited number of payments to settle their tax debt. Like credit card settlement plans, you typically pay a higher overall amount if you opt for multiple payments, but all options include paying a reduced amount of the overall debt. The amount paid is typically determined based on your ability to pay.
Financial Considerations
Installment plans and Offers in Compromise are meant to relieve two different tax debt burdens: one is meant to help those who simply need to break down their debt in more manageable monthly payments whereas the other is meant to provide relief for those who cannot afford to pay back their debt in full.
With installment plans the IRS assesses the taxpayer’s financial situation to determine the monthly payment amount for an installment plan. This evaluation includes factors such as income, expenses, assets, and liabilities.
In an Offer in Compromise, the IRS examines the taxpayer’s ability to pay the tax debt in full. They consider factors like income, expenses, asset equity, and future earning potential to determine the taxpayer’s reasonable collection potential. They use the data collected to determine what percentage of the total debt a taxpayer can reasonably repay.
How much total debt is eliminated can vary drastically from person to person, as the Offer in Compromise is evaluated in such a specific and situational way. While it is challenging to provide an exact percentage, an Offer in Compromise has the potential to significantly reduce a taxpayer’s total tax debt. In some cases, taxpayers have had as much as 80% or more forgiven. While this may not be the case for every person who applies for an Offer in Compromise, it is a reality for those in extreme situations where large IRS debt could negatively impact the taxpayer’s ability to provide things like food and shelter to themselves and their dependents. It is important to note that the IRS is stringent in evaluating Offer in Compromise applications, and not all offers are accepted. Taxpayers must meet all eligibility requirements and show evidence of financial burden to qualify for any type of relief.
This is why we always recommend that those seeking an Offer in Compromise consult a tax professional or a qualified tax attorney who can assess their specific situation and provide guidance on the potential outcome of their Offer in Compromise request before attempting to file on their own.
Documentation Requirements
While some documentation is required for an installment plan application, it is typically much less intensive when compared to an offer in compromise. The IRS may ask for proof of income, expenses, and assets to assess the taxpayer’s ability to make regular payments, but besides that the application process is fairly straightforward.
For Offers in Compromise, however, the approval process can be much more strenuous. The IRS requires more extensive documentation and more written statements to prove financial need in Offer in Compromise cases. You must provide detailed statements and supporting documentation for financial information including income, expenses, assets, liabilities. The IRS reviews these documents to evaluate the taxpayer’s eligibility and determine the appropriate settlement amount.
Credit Impact
With an installment plan, taxpayers eventually pay off their entire tax debt, including penalties and interest. While the debt remains on record until fully paid, it demonstrates a commitment to resolve the debt and may have a lesser impact on credit. In cases where the taxpayer makes every installment payment in full and on time, it could even improve their credit score.
If accepted, an Offer in Compromise allows taxpayers to settle their debt for less than the total amount owed. Once the agreed-upon amount is paid, the remaining debt is forgiven. However, an Offer in Compromise is considered a settled debt, just like settled credit card or other credit accounts would be. This typically has a negative impact on an individual’s credit. If you can avoid an Offer in Compromise without putting undue financial burden on yourself and your family, it is best to find another repayment path and dodge that hit to your credit. If you simply cannot pay your tax debt, it is still better to go through the Offer in Compromise process than to remain delinquent and allow the IRS to garnish your wages and take and even bigger hit to your credit score.
Steven Klitzner: Tax Attorney
The weight of IRS tax debt can feel overwhelming, but there is hope beyond that initial collection letter. Take the first step towards resolving your tax issues by calling an experienced and trusted tax attorney today. The Law Office of Steven Klitzner is ready to provide personalized assistance, analyze your financial situation, and offer effective solutions to alleviate your tax burden.
For answers to all your debt relief questions and more, contact Steven Klitzner now to schedule a free consultation and embark on a path toward 100% IRS compliance. Call (786) 977-2924 to get started today!
Steven N. Klitzner, P.A. is a tax attorney based in Miami, Florida. He has been practicing tax law for over 40 years, and currently holds a 10.0 rating by Avvo. Mr. Klitzner was appointed to the IRS Service Advisory Council in 2021 and is... 
