Navigating Back Taxes: Payment Plans and Offer in Compromise Explained

Feb 28, 2026By SN Accountancy

SA

Dealing with back taxes can be a daunting task. Whether it's due to unforeseen circumstances or simple oversight, falling behind on tax payments is more common than you might think. Fortunately, the IRS provides options to help taxpayers manage their debt. Two of the most effective solutions are payment plans and an Offer in Compromise.

tax debt

Understanding Payment Plans

A payment plan, or installment agreement, allows taxpayers to pay their tax debt over time. This option is ideal for those who cannot pay their full tax bill upfront but can manage smaller, regular payments.

Types of Payment Plans

There are generally two types of payment plans: short-term and long-term. A short-term plan is typically for those who can pay off their debt within 120 days. A long-term plan, on the other hand, is for those who need more time and can extend beyond 120 days.

  • Short-term payment plan: No setup fee, but interest and penalties apply until the balance is paid in full.
  • Long-term payment plan: Requires a setup fee, with monthly payments made until the debt is settled.
installment plan

Offer in Compromise

An Offer in Compromise (OIC) is a program that allows taxpayers to settle their tax debt for less than the full amount they owe. This option is suitable for those who genuinely cannot pay their full tax liability or if doing so would create financial hardship.

Eligibility for an Offer in Compromise

Not everyone qualifies for an OIC. The IRS considers several factors, including income, expenses, asset equity, and the taxpayer's ability to pay. It's crucial to ensure all tax returns are filed and any required estimated tax payments are made before applying.

  1. Submit a completed OIC application.
  2. Pay an application fee unless you qualify for a waiver.
  3. Include an initial payment with your offer.
offer in compromise

Choosing the Right Option

Deciding between a payment plan and an Offer in Compromise depends on your financial situation. If you can manage regular payments without significant strain, a payment plan might be more suitable. However, if your financial circumstances are dire, an OIC could be a viable alternative.

It's often beneficial to consult with a tax professional who can guide you through the process and help determine the best course of action. Understanding your options and taking proactive steps can alleviate the stress of dealing with back taxes.

The Importance of Taking Action

Ignoring tax debt can lead to severe consequences, including liens, levies, or wage garnishments. Exploring payment plans or an Offer in Compromise can prevent these outcomes and put you on the path to resolving your tax issues.

By taking the initiative to address your tax debt, you can regain control of your financial situation and work toward a more secure future.