Receiving an IRS bill for more than you can pay is one of the most stressful financial situations a taxpayer can face. The IRS has broad collection authority — it can file liens, levy bank accounts, garnish wages, and seize property. But it also has a structured set of collection alternatives that allow taxpayers to resolve liabilities in a way that reflects their actual financial circumstances.

Understanding these alternatives — and the financial standards the IRS uses to evaluate them — is the first step toward resolving an IRS collection matter without losing assets or income.

Before discussing alternatives, it helps to understand the collection timeline.

After the IRS assesses a tax liability, it sends a series of notices:

1. CP14 — first notice of balance due;
2. CP501, CP503 — reminder notices;
3. CP504 — final notice before levy (state tax refund offset);
4. Letter 1058 / LT11 — Final Notice of Intent to Levy and Notice of Your Right to a Hearing.

The Letter 1058 / LT11 is the critical document. It triggers the taxpayer's right to a Collection Due Process (CDP) hearing under IRC §6330. The taxpayer has 30 days to request a CDP hearing, which suspends levy action while the hearing is pending.

If the taxpayer does not request a CDP hearing and does not enter into a collection alternative, the IRS may proceed with enforced collection — bank levies, wage garnishments, and property seizures.

An installment agreement (IA) is an arrangement under IRC §6159 that allows a taxpayer to pay a tax liability over time in monthly installments. Interest and the failure-to-pay penalty continue to accrue during the agreement, but enforced collection is suspended.

For individual taxpayers who owe $50,000 or less in combined tax, penalties, and interest, the IRS offers a streamlined installment agreement that does not require a financial statement. The taxpayer must:

• Agree to pay the full balance within 72 months (or before the collection statute expires, whichever is earlier);
• Set up direct debit payments; and
• File all required returns.

For balances between $50,000 and $100,000, a streamlined agreement is available with a 84-month repayment period.

For larger balances or taxpayers who cannot pay the full liability within the streamlined timeframe, the IRS requires a Collection Information Statement — Form 433-A for individuals or Form 433-B for businesses. The IRS uses this financial statement to determine the taxpayer's ability to pay based on Allowable Living Expenses (ALE) standards.

The IRS will generally approve a monthly payment equal to the taxpayer's disposable income — gross income minus allowable expenses. If the taxpayer's disposable income is insufficient to pay the full liability before the collection statute expires (generally 10 years from assessment under IRC §6502), the IRS may accept a partial pay installment agreement (PPIA).

A PPIA allows a taxpayer to make monthly payments based on ability to pay, even if those payments will not fully satisfy the liability before the collection statute expires. The IRS reviews PPIAs every two years and may increase the payment if the taxpayer's financial situation improves.

An Offer in Compromise (OIC) is an agreement under IRC §7122 that allows a taxpayer to settle a tax liability for less than the full amount owed. The IRS accepts OICs when:

1. Doubt as to Collectibility (DATC) — the taxpayer cannot pay the full liability from assets and future income;
2. Doubt as to Liability (DATL) — there is genuine doubt that the assessed tax is correct; or
3. Effective Tax Administration (ETA) — the taxpayer could pay the full amount but doing so would create economic hardship or be inequitable.

Most OICs are submitted on the basis of doubt as to collectibility.

The IRS calculates the minimum acceptable offer using the Reasonable Collection Potential (RCP) formula:

RCP = Net Realizable Value of Assets + Future Income

• Net Realizable Value — the quick-sale value of the taxpayer's assets (generally 80% of fair market value) minus secured debt;
• Future Income — the taxpayer's monthly disposable income (income minus allowable expenses) multiplied by either 12 (if paying in a lump sum within 5 months) or 24 (if paying in installments over 24 months).

If the taxpayer's RCP is less than the full tax liability, the IRS may accept an offer equal to the RCP.

To submit an OIC, the taxpayer must:

• Be current on all required tax filings;
• Not be in an open bankruptcy proceeding;
• Have made all required estimated tax payments for the current year; and
• Submit Form 656 (Offer in Compromise) with the applicable application fee ($205 as of 2026) and initial payment.

The IRS rejects approximately 60% of OIC submissions. Common reasons for rejection include:

• The taxpayer's RCP exceeds the offered amount;
• The taxpayer has assets that could be liquidated to pay the liability;
• The taxpayer failed to submit required financial documentation; or
• The taxpayer is not current on filing or payment obligations.

After submission, the IRS assigns the offer to an Offer Examiner who reviews the financial statement, verifies assets and income, and calculates the RCP. The process typically takes 6 to 12 months.

During the evaluation period, the IRS suspends collection activity (except for tax liens already filed). The collection statute is also tolled during the evaluation period plus one year.

If the IRS rejects the offer, the taxpayer has 30 days to appeal the rejection to the IRS Independent Office of Appeals.

Currently Not Collectible (CNC) status — also called "hardship status" — is a designation under IRM 5.16 that the IRS applies when a taxpayer's income is insufficient to pay basic living expenses and the tax liability. When a taxpayer is placed in CNC status:

• The IRS suspends active collection activity;
• No levies or garnishments are issued;
• The collection statute continues to run; and
• The IRS reviews the taxpayer's financial situation periodically (typically every 1 to 2 years).

CNC status does not eliminate the liability. Interest and penalties continue to accrue. If the taxpayer's financial situation improves, the IRS will resume collection. However, if the collection statute expires while the taxpayer is in CNC status, the liability is extinguished.

To qualify for CNC status, the taxpayer must demonstrate that monthly income does not exceed monthly allowable expenses under the IRS's ALE standards. The taxpayer submits Form 433-A or 433-F with supporting documentation.

CNC status is appropriate for taxpayers who are genuinely unable to pay — retirees on fixed income, individuals with serious medical conditions, or taxpayers who have experienced significant financial hardship.

In addition to collection alternatives, taxpayers may request penalty abatement to reduce the total amount owed. See our separate guide on penalty abatement for a full discussion of first-time abatement, reasonable cause, and statutory exceptions.

The IRS has broad collection authority, but it also has a structured set of alternatives designed to resolve liabilities in a way that reflects the taxpayer's actual financial situation. The right alternative depends on the amount owed, the taxpayer's assets and income, and the time remaining on the collection statute.

If you are facing IRS collection action, contact us for a consultation. Our team includes former IRS agents who understand the collection process from the inside and can help you evaluate the best path forward.

Governing authority: IRC §§6159, 6330, 6502, 7122; IRM 5.8, 5.14, 5.16; Form 433-A; Form 433-B; Form 656.

Related: IRS Appeals Rights · IRS Penalty Abatement · IRS Representation: What It Is and When You Need It