Tax Debt Settlement vs. Payment Plans: Which is Right for You?
If you owe taxes to the IRS, you have two main options to resolve your debt: settling for less or setting up a payment plan. Understanding the differences can help you choose the best path for your financial situation.
Option 1: Tax Debt Settlement (Offer in Compromise)
If you can’t afford to pay your full tax debt, the IRS may allow you to settle for less than what you owe through an Offer in Compromise (OIC).
✅ Pros of Tax Settlement:
- You may pay significantly less than your total tax debt.
- Once accepted, your remaining balance is forgiven.
- Stops IRS collection actions like liens or wage garnishments.
🚨 Cons of Tax Settlement:
- The IRS rarely approves offers (only 30-40% get accepted).
- You must prove financial hardship with detailed documentation.
- It takes 6-12 months for approval.
🔗 Learn more: Offer in Compromise Guide
Option 2: IRS Payment Plans (Installment Agreements)
If you don’t qualify for a tax settlement, the IRS allows you to pay your debt over time through a monthly payment plan.
✅ Pros of Payment Plans:
- No negotiation needed—most taxpayers automatically qualify.
- Prevents aggressive IRS collection actions (liens, levies, etc.).
- More affordable than taking out high-interest loans.
🚨 Cons of Payment Plans:
- Interest and penalties continue to accrue until the balance is paid.
- The IRS may review your finances for larger debts.
- Defaulting on payments can result in collections or wage garnishment.
🔗 Learn more: How to Apply for an IRS Payment Plan
Which Option Is Best for You?
| Situation | Best Option |
|---|---|
| Can’t afford to pay anything | Tax Settlement (OIC) |
| Can make monthly payments | IRS Payment Plan |
| Need to stop IRS collections | Either option |
| Have financial hardship | Tax Settlement (if eligible) |
🚀 Next Steps:
- Check if you qualify for an Offer in Compromise.
- Apply for an IRS Payment Plan if settlement isn’t an option.
- Avoid IRS penalties by taking action before collections begin.
🔗 Need help deciding? Read our IRS Penalties & Interest Guide.