IRS Payment Plan vs Tax Settlement: An IRS Payment Plan (Installment Agreement) provides you with additional time to pay your tax debt and a Tax Settlement (Offer in Compromise) lets you pay less of your tax debt if you are experiencing financial hardship. While settlements are not as common as those that are accepted for payment plans.
IRS Payment Plan (Installment Agreement)

Tax Settlement (Offer in Compromise)

• How it works
• Eligibility
• Cost
• Application

IRS Payment Plan vs Tax Settlement: Which Option Is Right for You?

As noted by Advocate Shahid (Tax Legal Research Specialist). If you are behind on your taxes, receive a notice from the IRS or are unable to pay the taxes in full, it can seem overwhelming to owe money to the IRS. The upside to this is that the IRS has a number of options when it comes to working out unpaid taxes. There are two popular options: IRS payment plan or tax settlement.

These choices are different. An IRS payment plan typically results in the payment plan being the full amount spread out over time. Some taxpayers might be able to settle IRS debt for less than they owe, through a tax settlement. The best option is going to be determined by your income, expenses, assets, all your tax debt, filing history, and if you’re able to pay or not.

This guide provides simple IRS payment plan vs tax settlement information, and explains these options in layman’s terms for better understanding your IRS tax debt relief options. This article provides general information and is not meant to be, nor should it be relied upon as, legal or tax counsel.

What Is the Main Difference?

It’s an easy thing to differentiate. An IRS payment plan is a way to pay off your tax debt gradually, typically over a period of months if not years. If you are a qualified taxpayer, a tax settlement may be an option, such as an Offer in Compromise, to pay IRS debt for less than the amount that is owed.

Generally, a payment plan will be easier to qualify for, since you’re agreeing to pay back the debt. It’s more difficult to get a settlement because the IRS has to feel like you’re not able to pay the full amount of taxes owed, or it would create financial hardship for you.

IRS Payment Plan vs Tax Settlement: Simple Comparison Table

What Is an IRS Payment Plan?

Basic Meaning

IRS payment plan (also known as an installment agreement) is a plan that lets taxpayers pay back taxes over time. This is among the most usual IRS debt resolution selection.

In most payment plans, you will still have to pay the tax balance and any penalties and interest due. The plan generally doesn’t decrease the actual tax debt. Rather it provides you with a framework for repayment.

If the back tax payment plan is approved, and it is paid on time, then it can also alleviate collection pressure. But, there are requirements to be compliant with future tax filing and tax payment.

How an IRS Payment Plan Works

The basic process usually looks like this:

1. Check how much you owe.
2. File all required tax returns.
3. Apply for a payment plan.
4. Choose a realistic monthly payment.
5. Make payments on time.
6. Stay current with future taxes.

Types of IRS Payment Plans

There are a number of payment plans available. A short-term payment plan allows taxpayers additional time to pay all the taxes. An installment agreement is a long-term payment plan, which means that the payments are made monthly over an extended time.

Direct debit installment agreement will automatically deduct from the bank account. This can help minimize the risk of missed payments. If the taxpayer is not able to pay all the amount due prior to expiration of the IRS collection period, then a partial payment installment agreement might be available, which will result in reduced monthly payments – however, it will involve more financial scrutiny.

While looking at IRS installment agreement vs tax settlement, keep in mind that an installment agreement is primarily related to a payment plan rather than a tax settlement. Settlement is an effort to lessen the overall debt.

Pros of an IRS Payment Plan

• The principal advantage with an IRS payment plan is that it is typically more straightforward to get compared to a tax settlement. If you are in debt due to back taxes but you have an income, paying them off in monthly installments may be a better option than paying them off in full.
• Another benefit of a payment plan is that you get time. It’s not necessary to pay off the entire amount at once. This may be helpful if you’ve got an IRS notice, but you need to have some breathing room in your budget.
• Additionally, the benefit is the construction. You have a plan to follow rather than a ‘best guess’ on what to pay each month. That helps alleviate the burden of the debt on many taxpayers.
• While a payment plan has its advantages and disadvantages, it is always best to review carefully, for many, this is their most feasible payment plan.

Cons of an IRS Payment Plan

• The negatives are that an IRS payment plan typically won’t pay off any of the initial debt, and it will not provide any tax refund. You’re still liable to pay the tax debt and penalties and interest can still accrue until the debt is repaid in full.
• One of the other risks is default. The IRS may terminate the agreement and go to tax collection if you miss a payment or don’t file subsequent tax returns.
• It can also take a long time to come up with a payment plan. It will take months or years to settle the debt completely, depending on the amount of debt and monthly payment.
• This is why it’s not advisable to simply accept a payment amount just to be approved. The plan must be within the budget.

What Is a Tax Settlement?

Basic Meaning

• The IRS typically involves with tax settlement when they can lessen the tax debt that is owed. The most prevalent official IRS settlement choice is known as an Offer in Compromise.
• An offer in compromise is not a right, it’s something that must be attempted. The IRS won’t accept an offer just because the taxpayer desires to pay less. Based on your financial situation, the IRS will determine if the offer is reasonable.
• This is the real problem with IRS payment plan vs. the Offer in Compromise. A payment plan is will be based on repayment. The basis for an Offer in Compromise is that it’s not likely you’ll be able to pay your tax debt fully based on your financial circumstances.

How an Offer in Compromise Works

• The IRS considers your finances, income and expenses, assets and financial condition when reviewing an Offer in Compromise. The Internal Revenue Service (IRS) is asking if it should attempt to collect more using regular collection methods.
• In general, taxpayers will need to have current tax filing requirements before applying. The IRS has the option of accepting, rejecting or returning the offer. If the offer is accepted, the taxpayer will be required to comply with all terms and obligations as well as their future obligations.
• Tax settlement can be effective but it will not be an easy way to get it done. Requires disclosure of money and documents.

Other Tax Resolution Options Often Confused With Settlement

Not all of the IRS relief options are payments for settlements. The Currently Not Collectible status is only a temporary collection status, and it doesn’t eliminate the debt, but instead can stop collection if a taxpayer is unable to pay living expenses.

Penalty relief may lessen some of the penalties — but it won’t typically get rid of the tax. Installment agreements are a method of paying in installments. Partial payment installment agreements do not necessarily mean that less will be paid over the course of the collection period, but it is still a payment agreement, not an Offer in Compromise.

Pros of Tax Settlement

The greatest advantage of a tax settlement is that it could lead to a lower overall tax debt. If eligible, you can possibly get IRS debt reduced to less than the total amount that is due.

It could be beneficial for taxpayers who aren’t able to afford to pay the debt in full, over time. It can also offer a way out for those who have been struggling financially for an extended period of time.

If the IRS agrees to the offer, it could be quicker to pay off the debt in a tax settlement than over a long-term payment plan. It can be one of the most beneficial IRS tax debt relief choices for the correct taxpayer.

Cons of Tax Settlement

• Before applying for IRS tax settlement, one must be aware of the pros and cons of it. Its biggest drawback is that it’s more difficult to qualify for a settlement than for a payment plan.
• The IRS needs in-depth financial data such as income, outgo, assets and liabilities. It can take time and when you offer the IRS this option, it may refuse the offer if the IRS thinks you can pay them more.
• Some of the taxpayers who file settlement applications want to use time and time again—months of it—when they have no right to settlement. That delay can cause penalties and interest to be increased, and increase collection pressure.
• There also may be requirements for application, conditions for payments, and future compliance requirements. When approved, if you don’t abide by the terms, the settlement may cause additional issues.

IRS Payment Plan vs Tax Settlement: Which Is Easier to Qualify For?

• Most taxpayers will be more likely to be able to have a payment plan approved. That’s because you’re willing to make payments over time to pay the debt.
• There is a need to have more evidence in a settlement. A failure to demonstrate that the full amount is not affordable, or that the full amount would create hardship, will result in an inability to pay.A lack of showing inability to pay the full amount or that paying the full amount would result in hardship will lead to a lack of ability to pay. The Internal Revenue Service will take a look at your financial profile prior to deciding.
• If you have a steady income, assets and money that after you pay your bills will still be useful, then you may have trouble settling. In the event that you have limited earnings, few assets and have a real hardship, you might want to consider settlement.

Which Option Saves More Money?

• If the IRS accepts your offer, there’s a chance that you could save more money through tax settlement.
• But not all are eligible. The IRS may reject the settlement, if the IRS thinks you can pay the balance in full, either by having a monthly payment plan with the IRS or any other method.
• You may end up paying more with a payment plan as penalties and interest may be charges throughout the duration of the plan. However, it could be the more suitable choice if you don’t qualify for settlement measures.
• The true answer will of course depend on your numbers. The wrong choice can be both a time and money waster.

Which Option Stops IRS Collection Faster?

For some taxpayers, particularly those who don’t owe a lot of money and who have not been filing on time with the IRS, a payment plan might be quicker to arrange out.

Tax settlements typically take longer since the IRS will have to review in depth financial documents. When making their decision, taxpayers will not want to overlook IRS notifications.

Who Should Consider an IRS Payment Plan?

An IRS payment plan may be better for someone who:

• Can afford monthly payments
• Has steady income
• Does not qualify for settlement
• Wants a simpler IRS resolution option
• Owes a balance but can repay it over time
• Wants to avoid default by choosing a realistic payment amount

Who Should Consider Tax Settlement?

Tax settlement may be better for someone who:

• Cannot afford to pay the full IRS balance
• Has limited income
• Has few assets
• Would face financial hardship by paying the full amount
• Has filed all required tax returns
• Can provide financial documents to support the request
• Understands that approval is not guaranteed

Common Mistakes When Choosing Between Payment Plan and Settlement

Applying for Settlement Without Checking Eligibility

A lot of taxpayers apply for settlement due to the reason they wish for a lower balance. That is not enough. The IRS considers if you qualify according to their financial requirements.

Choosing a Monthly Payment You Cannot Afford

It is possible for an unrealistic payment plan to result in default. Generally, it’s best to opt for a payment that you are comfortable with.

Ignoring Penalties and Interest

Be sure to check spending total.

Not Filing Missing Tax Returns

Often compliance is the first step.

Waiting Too Long to Respond to IRS Notices

Failure to respond to notices, can aggravate the situation. Avoiding the decision for the long term means you have more choices available to you in the short term.

How to Decide Between an IRS Payment Plan and Tax Settlement

If you have a regular income, you can afford to pay off the balance over time, you do not want to go through the settlement process and you are not eligible for settlement, then you can choose a payment plan.

If you are not able to pay the entire amount of tax debt, paying it all would put you in a difficult financial situation, your financial records support your argument and you are eligible for IRS settlement, then you should consider settling instead.

Should You Speak With a Tax Professional?

IRS tax debt decisions can have implications for your finances, risk of collection and compliance in the long run. Your tax professional will be able to look at your income, expenses, assets, notices, deadlines and eligibility for IRS tax debt relief options.

Professional assistance is particularly beneficial if you need to pay a big amount of money back or have a wage garnishment, a federal tax lien, business tax debt or had an offer of settlement rejected.

A tax expert can assist you in comparing an IRS payment plan vs tax settlement options and provide you with insight in to which one is feasible for you.

Final Thoughts

A plan to pay the IRS is typically one in which you pay your tax debt over a period of time. If you’re able to make monthly payments, you might want to consider an IRS back tax payment plan. An Offer in Compromise is an option to consider if you’re struggling financially and are unable to afford the full balance due on your tax bill; there are other tax relief options, too, that may be worth considering if you have true financial hardship.

FAQs About IRS Payment Plans and Tax Settlement

Is an IRS payment plan the same as tax settlement?

No. An IRS payment plan typically is a plan to pay off the entire tax debt over time.

Does an IRS payment plan reduce my tax debt?

Usually, no. Payment plan is a way to pay in installments – typically would not decrease the original tax amount.

Can I settle IRS debt for less than I owe?

There are some taxpayers who might be eligible for an Offer in Compromise.

Which is better, IRS payment plan or tax settlement?

If you are able to make monthly payments, then a payment plan may be a viable option. If you’re unable to pay off the balance, consider settling.

Is tax settlement hard to qualify for?

Yes. Prior to accepting a settlement, the IRS will assess income, expenses, assets and your ability to pay.

Will penalties and interest stop on an IRS payment plan?

Penalties and interest may be allowed to accrue until the debt has been paid in full.

Can the IRS reject a tax settlement offer?

Yes. The IRS has the power to reject an offer if they think that the taxpayer can pay more or doesn’t qualify.

What happens if I miss payments on an IRS payment plan?

The agreement could expire and the IRS may resume collection efforts.

Do I need to file all tax returns before applying?

In many cases, yes. Many IRS tax relief options are only available to those who are up-to-date with their taxes.

Can I switch from a payment plan to a settlement?

If the financial circumstances of a taxpayer change, he or she might consider seeking a settlement later. Still subject to IRS examination.