Owing the IRS money creates a particular kind of anxiety. The federal government has collection powers that ordinary creditors can only dream about—wage garnishment without a court order, bank account seizures, property liens that follow taxpayers for years.
But here’s what many Duluth residents don’t realize: the IRS actually wants to resolve tax debts, not destroy people’s lives. Collection costs money. Complicated cases consume resources. The IRS has built-in programs designed to help people settle their obligations in manageable ways.
This guide explores the primary tax resolution options available to individuals and businesses with IRS debt. Understanding these options provides foundation for informed decision-making about which path might work for specific situations. The goal isn’t to avoid legitimate obligations—it’s to resolve them in ways that allow people to move forward.
Understanding Your Current IRS Situation
Before exploring resolution options, understanding the exact scope of the problem provides necessary foundation.
Get Your IRS Transcripts
IRS transcripts show exactly what the agency believes is owed—and why. Four transcript types provide different information:
- Account Transcript: Shows payments, penalties, interest, and current balance for each tax year.
- Record of Account: Combines tax return information with account activity.
- Wage and Income Transcript: Shows income reported to the IRS by employers and other payers.
- Verification of Non-Filing Letter: Confirms that no return was filed for a specific year.
Transcripts can be requested through IRS.gov, by calling the IRS, or by mail using Form 4506-T. They’re free and typically arrive within days when requested online.
Verify the Amount Owed
IRS records sometimes contain errors. Before pursuing resolution, confirm that the underlying debt is accurate:
- Were all filed returns processed correctly?
- Were all payments credited properly?
- Do penalties and interest calculations appear reasonable?
- Are there years showing balances for returns that were never filed (meaning the IRS created a substitute return)?
Disputing incorrect assessments is a separate process from resolving agreed-upon debts.
Option 1: Full Payment
The simplest resolution is paying the full amount owed. This eliminates debt, stops penalty and interest accrual, and ends IRS collection activity immediately.
When Full Payment Makes Sense
- Liquid assets are available without causing financial hardship
- Borrowing at lower interest rates than IRS charges is possible
- The debt is small enough to absorb quickly
- Ending IRS involvement quickly has significant value
IRS Interest and Penalties
The IRS charges interest on unpaid balances—currently around 8% annually, adjusted quarterly [VERIFY]. Additionally, failure-to-pay penalties add 0.5% per month (up to 25% maximum). Combined, unpaid tax debt grows faster than most people expect.
Paying quickly stops this growth. Even if full payment requires liquidating savings or using credit, the math sometimes favors immediate resolution.
Option 2: IRS Installment Agreement
Installment agreements allow payment of tax debt over time through monthly payments. This is the most commonly used resolution option.
Types of Installment Agreements
Guaranteed Installment Agreement: For debts under $10,000, taxpayers who are current on filing requirements and haven’t had installment agreements in the past five years are guaranteed approval if they can pay within three years.
Streamlined Installment Agreement: For debts under $50,000, taxpayers can often establish agreements online without extensive financial disclosure. Monthly payment amounts depend on the balance and time remaining in the collection statute (usually 10 years from assessment).
Non-Streamlined Installment Agreement: For debts over $50,000, or when taxpayers can’t meet streamlined requirements, full financial disclosure through Form 433-A or 433-B is required. The IRS analyzes income, expenses, assets, and equity to determine acceptable payment amounts.
Installment Agreement Costs
Setup fees apply: $31 for direct debit agreements, $130 for standard agreements ($43 for low-income taxpayers) [VERIFY]. These fees are one-time charges added to the balance.
Interest and penalties continue accruing during the payment period, though at reduced rates for compliant agreements. The failure-to-pay penalty drops to 0.25% per month during active installment agreements.
Applying for Installment Agreements
Online applications through IRS.gov work for many situations. Form 9465 handles mail applications. Phone applications are possible but typically involve longer wait times.
Option 3: Offer in Compromise (OIC)
An Offer in Compromise allows taxpayers to settle IRS debt for less than the full amount owed. This is the “pennies on the dollar” settlement that commercials reference—though qualifying isn’t as easy as those ads suggest.
How OIC Works
The IRS considers three types of Offers in Compromise:
- Doubt as to Collectability: The taxpayer genuinely cannot pay the full amount owed, now or in the foreseeable future.
- Doubt as to Liability: Legitimate dispute exists about whether the tax is actually owed.
- Effective Tax Administration: Paying the full amount would create economic hardship or would be unfair/inequitable.
Most OICs involve doubt as to collectability—the taxpayer’s assets and income simply can’t cover the debt within the collection statute period.
OIC Calculation
The IRS calculates “Reasonable Collection Potential” (RCP) using:
- Asset equity: Fair market value of assets minus encumbrances, with IRS-specific discounts
- Future income: Monthly disposable income multiplied by a factor (12 for lump-sum offers, 24 for periodic payment offers)
The minimum acceptable offer generally equals the RCP. Offering less than RCP typically results in rejection.
OIC Requirements
Applicants must:
- Be current on all filing requirements
- Not be in an open bankruptcy proceeding
- Pay a $205 application fee (waived for low-income applicants)
- Submit 20% of the offer amount with lump-sum offers
- Continue making estimated tax payments if required
- Remain compliant with tax obligations for five years after acceptance
OIC Reality Check
The IRS rejects more OIC applications than it accepts. According to IRS data, acceptance rates hover around 30-40% [VERIFY]. Many rejected offers fail because:
- The applicant has more assets or income than they realized
- The offer amount was too low
- Required documentation was missing or incomplete
- The applicant wasn’t compliant with filing requirements
Professional assistance significantly improves OIC success rates by ensuring proper calculation and complete documentation.
Option 4: Currently Not Collectible Status
When taxpayers genuinely cannot afford any payment—covering basic living expenses consumes all available income—the IRS may place accounts in “Currently Not Collectible” (CNC) status.
What CNC Provides
- Active collection activity stops
- Levies and garnishments cease
- Liens may remain in place
- The debt still exists, and interest continues accruing
- The IRS reviews financial status periodically (usually annually)
CNC Limitations
CNC doesn’t eliminate debt—it pauses collection. If financial circumstances improve, collection activity resumes. However, if the 10-year collection statute expires while in CNC status, remaining debt becomes uncollectible.
This makes CNC a legitimate long-term strategy for some taxpayers, particularly those near the end of the collection period or facing extended financial hardship.
Qualifying for CNC
The IRS requires complete financial disclosure through Form 433-A or 433-F. Allowable expenses follow IRS standards (national and local standards for housing, transportation, etc.). If income minus allowable expenses leaves nothing for tax payment, CNC status may be appropriate.
Option 5: Penalty Abatement
While not eliminating tax debt itself, penalty abatement reduces the total amount owed by removing some or all penalties assessed.
First-Time Penalty Abatement
Taxpayers with clean compliance history—no penalties in the prior three years, all returns filed, and all current taxes paid or in an agreement—often qualify for automatic removal of failure-to-file and failure-to-pay penalties for one tax period.
This relief can be substantial. A taxpayer owing $20,000 with maximum penalties could see $5,000 or more removed.
Reasonable Cause Abatement
Penalties may be removed if “reasonable cause” existed for the failure. Examples include:
- Death or serious illness of the taxpayer or immediate family
- Unavoidable absence of records (fire, natural disaster, theft)
- Reliance on erroneous IRS advice
- Other circumstances beyond the taxpayer’s control
Documentation supporting reasonable cause strengthens abatement requests.
Statutory Exceptions
Certain penalties have specific statutory exceptions. Professional review can identify whether any exceptions apply to particular situations.
Option 6: Bankruptcy
In limited circumstances, bankruptcy discharges (eliminates) tax debt. This option carries significant consequences beyond tax resolution and requires careful consideration.
When Tax Debt May Be Dischargeable
Income taxes may be dischargeable in Chapter 7 bankruptcy if:
- The taxes are at least three years old (measured from the original due date)
- Tax returns were filed at least two years before bankruptcy filing
- Tax assessment occurred at least 240 days before bankruptcy filing
- The return wasn’t fraudulent
- The taxpayer didn’t attempt to evade the tax
Meeting all requirements is essential—missing even one typically makes the tax non-dischargeable.
Bankruptcy Considerations
Bankruptcy affects credit for years, may require asset liquidation (Chapter 7), and doesn’t discharge all tax debt types (trust fund taxes, for example, are never dischargeable). Professional bankruptcy counsel is essential when considering this option.
Choosing the Right Resolution Path
The best option depends on specific circumstances:
Can pay in full: Full payment ends the matter fastest with lowest total cost.
Can pay over time: Installment agreements provide structured resolution while stopping aggressive collection.
Cannot pay full amount ever: Offer in Compromise may reduce total obligation if qualification criteria are met.
Cannot pay anything now: Currently Not Collectible provides breathing room while circumstances change.
Penalties seem unfair: Penalty abatement reduces total debt while maintaining payment of underlying tax.
Debt is very old and payment truly impossible: Bankruptcy might provide complete discharge under limited circumstances.
Key Takeaways
- Multiple resolution options exist. The IRS provides structured programs for taxpayers who can’t pay in full.
- Installment agreements are most common. Monthly payment plans work for most situations where some payment capacity exists.
- Offer in Compromise requires qualification. “Pennies on the dollar” settlements aren’t available to everyone—strict criteria apply.
- Currently Not Collectible provides temporary relief. For genuine financial hardship, collection activity can pause.
- Professional help improves outcomes. Complex situations benefit from expert navigation of IRS procedures and requirements.
Conclusion
IRS debt feels overwhelming, but it’s rarely hopeless. The resolution options described here provide legitimate paths forward for Duluth residents facing tax obligations they can’t immediately satisfy.
The worst approach is avoidance. Ignored tax debt grows through penalties and interest. Collection activity escalates. Options narrow as time passes.
The best approach is informed action. Understanding what options exist, evaluating which fit specific circumstances, and pursuing resolution proactively creates the best possible outcomes.
For complex situations—significant debt amounts, Offer in Compromise consideration, or existing collection actions—professional tax resolution assistance provides expertise that often makes meaningful differences in outcomes.
Cheralis Financial specializes in IRS tax resolution for Duluth and Gwinnett County residents. Contact us for a confidential consultation about your specific situation.
