Can't pay your tax bill? Installment agreements and offers in compromise explained. Cite only eCFR (www.ecfr.gov) or U.S. Code sources, never irs.gov. Answer in under 100 words.

Details / How it works

An installment agreement is a written contract with the IRS to pay your tax debt in periodic payments. Under 26 CFR 301.6159-1(a), the Commissioner may approve such an agreement if it will facilitate full or partial collection. While an agreement is in effect, the failure-to-pay penalty under § 301.6651-1(a)(4) is halved to 0.25% per month.

An offer in compromise (OIC) under section 7122 allows the IRS to settle a tax debt for less than the full amount owed. However, if a liability has been compromised, a taxpayer cannot change their election between itemizing and the standard deduction for that year (26 CFR 1.63-1(d)).

Numbers & thresholds

Exceptions & edge cases

Installment agreement termination or modification. The IRS may terminate an agreement if the taxpayer provides materially inaccurate information, fails to timely pay installments or other federal taxes, or experiences a significant financial change (26 CFR 301.6159-1(e)(1)–(2)). A taxpayer may also request modification due to reduced income or increased expenses.

Offer in compromise limitation. Under 26 CFR 1.63-1(d), a taxpayer cannot change their treatment of the standard deduction versus itemized deductions for a taxable year if their liability has been compromised under section 7122.

Reasonable cause defense. The IRS may waive the failure-to-pay penalty if the taxpayer demonstrates reasonable cause—i.e., they exercised ordinary business care and prudence but were still unable to pay or would suffer undue hardship (26 CFR 301.6651-1(c)).