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If you are in a situation where you owe more to the IRS than you can pay, a couple of options might be worth considering: An Offer in Compromise (OIC) and a Partial Payment Installment Agreement (PPIA).

Both programs may be beneficial for taxpayers who are unable to pay the full amount of federal tax obligations. They are very different, however, in their function. An OIC can sometimes allow you to pay a lower percentage of the tax debt—usually 20% or less—while a PPIA typically allows you to afford monthly payments without paying off the entire balance before the collection period ends.

There is more to it than monthly payments when deciding between them. There are many factors that could determine which is the best choice for you, including your income, expenses, assets, equity, filing history, ability to borrow, and the collection efforts of the IRS.

An Offer in Compromise is a proposal that you could make to the IRS when you can’t pay your tax liability in full, and it may result in a tax debt that’s settled for less.

The IRS typically considers whether the amount received is what it expects to receive. An OIC can be based on different grounds, including:

• Uncertainty regarding liability: There is a real question whether the assessed tax is right.
• Uncertainty about collectability: You don’t have enough assets and income to cover the full liability.
• Effective tax administration: You can technically collect, but if you were to insist on collecting tax, you would be imposing exceptional circumstances which may make collection of the tax unfair or inequitable.

When it comes to choosing between an OIC and a PPIA, doubt as to collectability is the most pertinent category for many taxpayers.

A PPIA is an installment agreement in which the taxpayer makes monthly payments that will not pay off the tax debt before the end of the collection period.

The IRS doesn’t require that you pay the full balance, but they look at your financial situation to determine what you can afford.

A PPIA is different from a traditional installment agreement. A conventional full-payment installment agreement has a payment plan that is intended to collect the full amount of the collection period’s liability.

It is generally believed that the IRS is only allowed to collect for a maximum of 10 years (plus extensions, suspensions, and other laws). This means that, through the use of a PPIA, the taxpayer may end up paying less than the total assessed amount.

The IRS doesn’t just query the amount of money you need to pay. It considers your reasonable collection potential (RCP).

RCP typically takes into account the worth of the assets plus the estimated future income, and any adjustments as per IRS rules.

The following are part of your financial picture:

• Bank accounts
• Investments
• Real estate
• Vehicles
• Retirement accounts
• Business assets
• Other valuable property
• Monthly wages
• Self-employment income
• Income from pensions or from retirement funds.
• Other recurring income

Additionally, the IRS takes into account any living expenses and some required expenses.

That’s why a taxpayer with a $200,000 debt could get some relief, whereas another taxpayer with the same debt wouldn’t be eligible for it.

An OIC can be an option if the taxpayer’s finances suggest it is not feasible to pay in full.

For instance, if a person has $150,000 in debt, but not a lot of income, very little equity, and a lot of expenses they can afford, they may be a good fit for a loan. An OIC may be able to offer a resolution if the IRS believes that the taxpayer has a reasonable potential to pay less than $150,000.

An OIC may be particularly appealing when:

• The tax debt is significantly bigger than what you reasonably expect to collect.
• You do not own a good amount of property.
• You have a low income or an irregular income.
• No full payment is possible due to financial considerations.
• The proposed settlement can be financed.
• It is possible to stay in compliance with federal tax

A person cannot qualify for an OIC simply because he or she can’t pay the entire debt, however.

A PPIA will be desirable when you are not able to pay off your tax debt entirely, but you have enough income to make a reasonable monthly payment.

For example, if your financial situation suggests that you have a maximum monthly payment of $600, but the monthly payments required to pay your full liability during the period in which the collection is allowed are high.

With the payment of a PPIA, you may be able to make that payment, but you could be leaving an unpaid balance at the end of the collection statute.

Consider using a PPIA when:

• The amount you need to pay is too much for a full payment installment.
• An OIC isn’t looking good on the money side.
• You have enough income in the form of recurring payments to make monthly payments.
• You don’t want to sell off some of your assets right away.
• Better options are payments over time to address your projected collection potential.

Taxpayers often make the error of only considering income.

Assets Matter

If you have a house that has a lot of equity, and you need $100,000 in order to pay your debt, what will you do? If you owe $100,000 but you have a lot of equity in your home, what will you do? The IRS might be assuming equity as a factor if they are determining your ability to pay.

Similarly, if there is a significant amount of money in bank accounts, investments, or assets, this can impact the calculation.

Prior to applying for either choice, create a precise listing of:

1. Real estate
2. Vehicles
3. Bank accounts
4. Retirement accounts
5. Brokerage accounts
6. Business interests
7. Valuable personal property
8. Other investment assets

Never conceal assets; do not lie. The disclosure of finances is complete and accurate.

Your Income and Expenses Matter Too

Generally, the IRS reviews your household finances, not your gross income.

It is important to provide information such as:

• Wages and salaries
• Self-employment income
• Rental income
• Pension income
• Social Security benefits
• Investment income
• Necessary housing expenses
• Transportation costs
• Food and personal expenses
• Health-related expenses
• Insurance
• Taxes
• Some other required costs

Actual expenses versus expenses recognized in accordance with relevant IRS collection standards may be significant.

Sometimes, professional help can help in complex situations that this is part of.

An accepted OIC is subject to conditions.

In general, taxpayers will have to follow federal tax filing and payment obligations for a certain time after the acceptance. If the terms are not adhered to, it can impact the agreement.

Taxpayers may also be required to demonstrate the acceptance of the offer by making a lump sum payment or regular payments under the payment terms.

When considering an offer, you should find out:

• The quantity you’re putting in.
• When and how it is to be paid.
• If a required initial payment is required.
• Application fees and exceptions that may be available.
• What do you do if you don’t accept the offer?
• Your continuing tax filing responsibilities.

Under a PPIA, you simply pay the agreed monthly payments, and the IRS retains its collection rights, with provisions as provided by law and agreement.

The balance might still earn interest, and some penalties till the liability is completely settled or until it is not collectable.

Not all PPIAs should be presumed to be a discount.

It is the most simple and quickest.

You might be able to get away with an unaffordable payment and pay the debt in smaller installments.

The Internal Revenue Service (IRS) has a 10-year time limit to collect an assessed federal tax liability, though a variety of events may impact it.

The collection period may be suspended and/or extended under specific conditions. Some administrative collection actions, for instance, and bankruptcy proceedings may alter the calculation.

So, don’t assume that a tax debt will disappear 10 years after the last day a tax notice is issued.

Knowing the real date of expiration of a collection statute for each obligation may be very significant if considering a PPIA.

1. Based on the monthly payment only

Just because something has a low monthly payment doesn’t necessarily mean it’s your best choice, as far as PPIAs are concerned. Consider all the financial implications and the time of collection.

2. Don’t assume that an OIC is automatically better

An offer that is less than the full amount sounds good, but may require a big payout depending on the amount of money you have.

3. Ignoring Asset Equity

Your real estate, investments, retirement plans, etc could impact your relief.

4. Not keeping up with the alerts

Compliance with tax filing and payment obligations is usually required. New tax debts may get in the way of your resolution.

5. Using inaccurate financial information

Don’t underestimate your income or assets or overstate your expenses to boost your application.

6. Notifying the Parent/Guardian or Emergency Contact in a timely manner

The IRS may have started aggressively collecting after you and may have limited options and time to create a strong financial case.

These tips can help before you make your decision:

1. Check all tax debts.
2. Identify outstanding tax years & tax types.
3. Estimate the size of your potential collection.
4. Discuss assets, income, allowable costs, and IRS guidelines.
5. Check your collection statute dates.
6. The expiration dates for different tax periods may vary.
7. Make a realistic household budget.
8. Understand your spending limits per month.
9. Evaluate your assets.
10. Identify possible consequences of selling or pledging an asset.
11. Keep up-to-date with tax requirements.
12. Submit and pay required returns.

You can consult with an enrolled agent, CPA, or tax attorney who has experience with IRS collection actions to review your financial information and to discuss the options available to you.

There’s no one right answer.

An Offer in Compromise might be a better alternative if you have a reasonable collection potential that is significantly less than the amount you owe and can provide the requirements for an acceptable settlement.

If you cannot afford to pay the entire amount of the liability, but you can make affordable monthly payments, a Partial Payment Installment Agreement might be more suitable than an OIC.

There are additional options available in some cases for taxpayers to be able to pay, including a full-payment installment agreement, currently-not-collectible status, and other relief options based on individual situations.

The secret is to look at the options through your own eyes and not just at your balance due with the IRS.

When you have a significant IRS debt, it can feel overwhelming, but there are options available if you don’t have enough money to pay that debt.

An OIC versus a PPIA should be carefully considered based on income, expenses, assets & equity, tax compliance, and remaining collection period. An OIC may allow a person to settle an eligible debt for less than the amount owed, and a PPIA could be a helpful plan to pay off an eligible debt in installments when full repayment is not feasible.

Understand how the IRS will look at your financial situation before you submit paperwork. With careful analysis, you can prevent making a payment plan that imposes an undue burden on your finances—or accept an offer that you may not be able to make.

Most important of all, do not delay in paying the debt. The quicker you review your choices, the better you will be able to safeguard your finances and get started working toward resolution of your IRS tax debt.

An Offer in Compromise may help a taxpayer to settle debts with the IRS for less than the amount they are obligated to pay. A Partial Payment Installment Agreement enables a taxpayer to make reduced monthly payments while their case is under consideration.

Possibly, but equity in personal assets is significant in determining the collection potential of a taxpayer. A big amount of equity can greatly increase the value the IRS will expect a taxpayer to pay.

There is no way of knowing which option is the best. An offer in compromise can help a taxpayer pay significantly less than they have to when the taxpayer’s collection potential is lower than the amount of money owed to the IRS. A Partial Payment Installment Agreement is appropriate for taxpayers who can afford to make monthly payments but not pay off the liabilities in full.