How to Settle Tax Debt: Real Options and How They Actually Work

If you owe more in taxes than you can pay, you usually have more than one option: payment plans, reduced settlements, temporary pauses, or asking the IRS or state to waive penalties. The right choice depends on your income, assets, and how quickly you can realistically pay.

Quick summary (if you’re in a rush):

  • The main federal tax debt agency is the Internal Revenue Service (IRS).
  • States also have their own state tax department or revenue agency.
  • Core options: installment agreement, offer in compromise, currently not collectible status, and penalty abatement.
  • First concrete action: get your IRS transcript and organize your finances before you call or apply.
  • Rules, forms, and income limits vary by state and situation; always check your official .gov sites.

1. Your Main Options for Settling Tax Debt

At the federal level, the IRS handles income tax debt, payroll tax debt, and some penalties; at the state level, a state department of revenue or taxation handles state income or sales taxes. Each has its own settlement programs, but the most-used IRS options are fairly standard.

Common tax debt settlement routes:

  • Installment agreement (payment plan) – You pay the full debt, but over time.
  • Offer in compromise (OIC) – You offer less than you owe if full payment would create serious financial hardship.
  • Currently not collectible (CNC) status – IRS acknowledges you can’t pay now and temporarily stops active collection.
  • Penalty abatement – IRS or state may remove or reduce certain penalties if you qualify.
  • State-specific settlement programs – Some states offer their own OIC or amnesty programs through the state tax department.

You can use more than one option over time, such as getting CNC status now and later submitting an offer in compromise when your situation is clearer.

Key terms to know:

  • Installment Agreement — A formal payment plan with the IRS or state where you agree to pay monthly until the tax is paid.
  • Offer in Compromise (OIC) — A settlement where the IRS (or some states) accept less than the full amount because you can’t pay in full.
  • Currently Not Collectible (CNC) — IRS status meaning you can’t afford to pay right now; they pause most collection actions.
  • Penalty Abatement — A request to remove or reduce penalties (not usually the tax itself) due to good compliance history or reasonable cause.

2. Where to Go: Official Agencies and Portals

For federal tax debt:

  • Use the IRS online account portal to view balances, set up some payment plans, and see notices.
  • For more complex options (like an offer in compromise or CNC), you typically submit forms and may mail them to an IRS processing center or work with an IRS collections unit listed on your notice.

For state tax debt:

  • Search for your state’s official department of revenue, department of taxation, or franchise tax board portal.
  • Look in the “payments,” “collections,” or “settlements” section for payment plans and offer/compromise pages.
  • Call the customer service number listed on the government site, not on ads or third-party mailers, to confirm the process for your state.

To avoid scams, look for websites ending in .gov, hang up on unsolicited calls promising “pennies on the dollar” results, and do not give bank or Social Security details to anyone who cannot verify they are from an official .gov office.

3. What You’ll Need to Prepare Before You Contact Them

Before you ask for a reduced settlement or special status, both the IRS and state tax agencies typically expect a full picture of your finances. Getting this together in advance can prevent delays and denials.

Documents you’ll typically need:

  • Recent pay stubs or proof of income (or documentation of unemployment, disability, or self-employment income).
  • Bank statements (usually the last 3–6 months) for all checking, savings, and investment accounts.
  • Most recent tax returns (federal and, if applicable, state) and copies of any IRS or state tax notices you received.

Depending on the program, you may also be asked for:

  • Housing costs (lease, mortgage statement, property tax bill, homeowner’s insurance).
  • Utility bills and regular living expenses (childcare, medical, car payments, insurance).
  • Business records if you’re self-employed (profit-and-loss statements, business bank statements).

If you’re missing old tax returns, you generally need to file or correct those first before most settlement requests will be considered.

4. Step-by-Step: How to Start a Tax Debt Settlement Request

This sequence shows how most people actually move from “I owe money” to actively using a formal IRS or state program.

  1. Get your official tax balance.
    Call the IRS at the number on your latest notice, or log in to your IRS online account to see how much you owe, for which years, and what penalties/interest are included; for state tax, use your state tax department portal or phone number listed on their .gov site.

  2. Check that all required returns are filed.
    If any years show as “unfiled,” ask the IRS or state what forms you’re missing and file those returns (or amended returns) as soon as possible, because most settlement options require that you are up-to-date on filings.

  3. Gather financial proof.
    Collect income records, bank statements, and basic monthly bills for at least the last 3 months and organize them in a folder; these will be needed for forms like the IRS Form 433-A or 433-F (financial statements) in an offer in compromise or CNC request.

  4. Choose the primary route that fits your ability to pay.

    • If you can pay the debt in 6 years or less, look at a payment plan/installment agreement (you may be able to set up a simple one online).
    • If even a low payment makes it impossible to cover basic living expenses, look at offer in compromise or currently not collectible status.

  5. Submit your request through the official channel.

    • For a basic installment agreement, you can typically apply online or by phone using the IRS or state’s official system.
    • For an offer in compromise, you generally complete a detailed package describing your income, expenses, assets, and a proposed settlement amount, then mail or submit it according to the agency’s instructions.
    • For CNC, you usually call the IRS collections line or respond to a notice with your completed financial statement.

  6. What to expect next.
    After a payment plan application, you typically receive a written decision notice stating whether it’s approved and what your monthly payment is; for offers in compromise and CNC requests, the agency may ask for more documents, call to clarify items, or assign a caseworker who will send you letters with questions and a final decision.

A simple phone script you can adapt:
“I owe back taxes and would like to discuss a payment plan or settlement option. Can you tell me what my current balance is and what forms or financial information you need from me to review my situation?”

5. Real-World Friction to Watch For

Real-world friction to watch for

A common snag is that the IRS or state will not finish reviewing your settlement request if a single required document is missing, such as one bank statement or a missing-year tax return, and you might only find out from a mailed letter weeks later. To reduce delays, use the letter or form instructions as a checklist and, if you are unsure you sent everything, call the agency’s collections or customer service line a week or two after mailing to confirm they consider your package “complete.”

6. Getting Legitimate Help (and Avoiding Scams)

For complex cases, or if you’re unsure which option fits your situation, there are legitimate assistance channels beyond the IRS and state tax departments:

  • Low Income Taxpayer Clinics (LITCs) – Independent clinics that often help low- to moderate-income taxpayers deal with the IRS, sometimes for free or low cost; search for them through an official IRS resource list or by calling the IRS and asking where to find LITCs in your area.
  • Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) – Programs that primarily help prepare returns, but staff or volunteers may also point you toward appropriate IRS programs if you already have a debt.
  • Licensed professionals – Enrolled agents, CPAs, or tax attorneys who are in good standing with their licensing bodies and familiar with IRS collection procedures; verify their license and avoid firms that pressure you or promise “guaranteed” settlements.

To protect yourself:

  • Be cautious of companies advertising on TV or social media that claim they can guarantee you’ll “pay pennies on the dollar” or “wipe out all your tax debt”; no one can guarantee that outcome.
  • Do not sign a contract or pay large upfront fees without a clear written explanation of exactly what they will do and what specific IRS or state programs they are applying for on your behalf.
  • Never send your full Social Security number, bank login, or IRS PIN to anyone who contacts you first by phone, text, or email; instead, hang up and call the number listed on the official .gov site or your IRS/state notice.

Once you have your balance, documents, and a basic plan (payment agreement, offer in compromise, or CNC/penalty relief), your next concrete step today is to contact either the IRS or your state tax department through their official .gov portal or phone number and ask which specific form or online system to use for your situation, then start filling it out with the documents you’ve gathered.