There Are Far More Than Two Resolution Options

A general contractor came to me last spring already pleased with himself.

He owed the IRS just under $96,000 across four tax years, and he had solved it on his own. He called the IRS, waited on hold for four hours, got hung up on twice, but ultimately set up an installment agreement of $2,400 a month. There was nobody to hire and nothing to pay for it. He wanted me to glance at it.

So I pulled his account transcripts.

The two oldest years accounted for roughly $38,000 of that balance, and both were nineteen months from the collection statute expiring. At $2,400 a month, applied oldest first, he was going to pay them off in about sixteen. He had volunteered to hand the government money it was about to lose the legal right to collect, and he was going to beat the deadline by three months.

He never called a professional before he did it. Why would he? He thought the hard part was getting the IRS to pick up.

The Two-door Problem

Your clients believe there are two ways out of tax debt.

➲ Door one is the offer in compromise, because somebody has been buying ads for it for the last twenty years. Door two is a monthly payment plan, because it sounds simple.

Door one at least gets people on the phone. It sounds hard enough that they go looking for help.

➲ Door two is the dangerous one. It looks like paperwork. The first you hear about it is your client mentioning at a meeting that they handled it. By then they are eight months into a commitment no one reviewed.

Those are not the only two doors for resolution. There are FAR more than that. I want to walk you through some of the most important to help you recognize them, and because getting this wrong is quietly holding up the work you are actually trying to do.

1. The Partial Pay Installment Agreement

Start with the one almost nobody has heard of, which happens to be where I get more of my results than anywhere else.

The IRS gets ten years from the date of assessment to collect. A partial pay installment agreement sets the monthly payment based on the taxpayer’s financials, and the tax still owed when those ten years run out gets written off permanently.

The taxpayer pays a fraction of the balance owed. That is the same outcome the offer in compromise advertises, through a completely different negotiation.

The difference that matters is who qualifies. In an offer, equity is close to disqualifying, because it goes straight into the calculation and your client either funds it or gets declined.

In a partial pay agreement, equity has to be addressed but not necessarily converted. There is real room to work when no lender will write against the asset, when the equity is too thin to be worth chasing, or when selling it would end the business. Same thing with retirement accounts.

Your client owning a home with equity or having a retirement account does not end the Partial Pay Installment Agreement conversation.

2. Currently Not Collectible

When allowable living expenses outweigh a client's income, the IRS closes the account as currently not collectible and stops collecting. Nothing is forgiven, penalties keep accruing, and a lien is usually filed, but it gives a taxpayer time to get their finances in order and safety during a time when they truly have no ability to pay back the government without creating an economic hardship.

Here’s the other thing: during the time the taxpayer is in the currently not collectible status, the ten-year clock never stops running. Every month in that status burns a month off the government's time to collect.

A client who lands in hardship status with four years left and stays there generally reaches the expiration date having paid nothing at all. I have closed files where the client's total outlay to the IRS was zero dollars. There is no letter and no ceremony. The account just expires.

One more thing: A balance above $66,000 in 2026 gets a taxpayer certified as seriously delinquent, and the State Department can refuse to issue or renew their passport. Hardship status is one of the exclusions from that certification.

3. First-time Penalty Abatement

Taxpayers rarely understand how high penalties are on taxes owed.

Failure to file runs five percent a month, up to a quarter of the balance. Failure to pay stacks alongside it. In all, you’re potentially talking about a 50% increase in the balance owed. Two ugly quarters at a business with real payroll and the penalty amount crosses six figures on its own.

First-time penalty abatement asks for almost nothing in return. If there is no failure to file or failure to pay penalty in the three years prior, the penalty can be removed. No hardship story is necessary. You don’t need to provide reasonable cause.

But once you use it, it can’t be used again, at least not until three more years are clean. Spending it burns the clean three-year history that made it available in the first place.

That choice usually gets made in about four seconds by someone who has no idea a choice is being made.

4. Reasonable Cause

The other path to killing penalties needs much more.

You need to have a reason you didn’t file your return or pay what was owed in order to get penalty relief and that reason has to be specific. Illness, a death in the immediate family, a fire, a flood, destroyed records, written advice from the IRS that turned out to be wrong.

What does not count is the first thing your client will say out loud. "My accountant was handling it" does not excuse a failure to file or a failure to pay, because those duties sit with the taxpayer and cannot be handed to anyone else. Not having the money does not do it either.

Plenty of these come back denied on the first pass. The appeal is very often where they actually get won, so a client who tried once and gave up has not necessarily lost anything but time.

5. Fixing a Number the IRS Invented

This is the door for the client who stopped opening the mail. Did the taxpayer file a return for that year?

If they never filed, the IRS eventually files one for them. It is called a substitute for return. It is not a serious attempt to calculate the real tax but because the taxpayer didn’t file anything, the IRS uses what they have. The government allows no cost basis in anything sold, no business deductions, no dependents, etc.

That is how a restaurant owner with real expenses ends up owing a number that bears no relationship to what he earned. I have seen a $74,000 assessment come down under $9,000 once the actual return was filed.

The fix is more straightforward than people expect. You file the return. The real one, an original return for that year with every deduction and credit he was always entitled to, and the IRS replaces its own figure with the correct one. There is no deadline on doing it.

If there was an actual audit and your client simply did not show up or did not respond, that’s something different. It’s called audit reconsideration. It requires information the IRS never had a chance to evaluate, and it closes for good once a signed closing agreement, an accepted offer, or a Tax Court decision made the number final.

6. Innocent Spouse and Separation of Liability

This section is important for family law attorneys.

Innocent spouse relief exists for one situation, and you see it constantly. Your client signed a joint return, their spouse understated the income or invented the deductions, and your client had no idea. Because the return was joint, the IRS can pursue either of them for the entire balance. Doesn’t sound fair, and there are three ways for the innocent spouse to remove themselves.

Traditional relief and separation of liability both deal with an understatement, where the return itself was wrong. Equitable relief covers the far more common case, where the return was accurate, both spouses knew exactly what was owed, and the money simply never got paid.

Now the part many family law attorneys don’t seem to be aware of. An agreement allocating tax debt between spouses binds those two people but does nothing whatsoever to the IRS. The government was not a party and does not care what the parties agreed to.

If the decree says he pays it and he does not pay it, the IRS still enforces collection against her.

7. The Statute of Limitations

The IRS has ten years from the date of assessment to collect from taxpayers. Not from the tax year, and not from when the return was filed.

That means five bad years carry five different expiration dates.

However, several things stop that clock, including filing an offer in compromise, a collection due process appeals hearing, and a bankruptcy.

So picture an offer submitted with eighteen months left on a balance. It sits for a year, then it gets rejected. The offer filing adds more than a year of additional collection time on a debt that was nearly gone.

This is also where my contractor was standing without knowing it. Nobody had told him that two of his four years were about to become uncollectible, certainly not the IRS, so when he told them he would pay off the balance in full months before the statute of limitations, they were happy to oblige.

On old balances, the best advice is sometimes to do nothing. Nobody can give that advice responsibly without every date on the transcripts sitting in front of them.

8. Bankruptcy Discharge

Bankruptcy counsel already know income tax can be discharged, but only under certain circumstances.

Here are the requirements:

• Three years since the return was due, including extensions;

• Two years since it was actually filed;

• And 240 days since the tax was assessed.

All three conditions are evaluated separately for every single year on the file.

Trust fund taxes can never be discharged, nor the trust fund recovery penalty, which is the assessment that follows a business owner home personally when the company's payroll taxes go unpaid.

A lien filed before the petition survives the discharge and stays attached to pre-petition equity, so a client who wipes out $200,000 and owns a house does not own it free and clear upon discharge.

What Ties All These Resolution Types Together?

A partial pay agreement and hardship status are not really forgiveness programs at all. They are ways of holding a stable, approved position while the statute of limitations does the forgiving in the background.

I have gotten far more clients to an outcome below full payment through those two routes than through the offer in compromise, and it is not close. The qualification standards are looser, so the population they reach is much larger. They are simply harder to advertise, because there is no triumphant acceptance letter to hold up for a photograph.

Which brings me back to the contractor and his paid-in-full payment plan.

He did not miss some obscure remedy nobody could have found. He committed to a resolution before anyone analyzed which resolution was best for him.

If he had, the difference in how much he paid would have been substantial.

TL;DR

⏩ Clients believe tax debt has two solutions: an offer in compromise or a self-serve payment plan. That’s not true.

⏩ Partial pay installment agreement: payment set at true ability to pay, and the remaining balance is written off when the ten-year statute expires. Equity is not the automatic disqualifier it is in an offer.

⏩ Currently not collectible: collection halts while the ten-year clock keeps running underneath, so a client can reach expiration having paid nothing. It is also an exclusion from passport certification.

⏩ First-time penalty abatement: penalties removed with no explanation required if there is no failure to file or failure to pay penalties within the three prior years.

⏩ Reasonable cause: requires a specific reason that matches a dated failure. Preparer reliance does not excuse filing or paying. Denials are frequently reversed on appeal.

⏩ Assessments made without the client: where no return was filed, the IRS prepares a substitute allowing no deductions, and the remedy is filing the actual original return.

⏩ Innocent spouse and separation of liability: spouses who are liable for a balance owed that they knew nothing about have a way out. A divorce decree allocating tax debt is not binding on the IRS.

⏩ Statute of limitations: ten years from assessment, calculated separately for each year, and pending offers, appeals hearings, and bankruptcies all suspend it.

⏩ Bankruptcy discharge: three years, two years, and 240 days, all required. Trust fund taxes never discharge, and pre-petition liens survive.

- Stephen A Weisberg

One last thing. I get the same three questions from CPAs, financial advisors, and attorneys every single time a client's tax debt lands on their desk, so I sat down and wrote out the answers.

➥ You can find them here: https://stephen-a-weisberg-tax-attorney.kit.com/3questions

Want to understand your options before you call anyone?

Download my free book — Freedom From Tax Debt — a plain-language guide to how the IRS collections process actually works and what resolution really looks like.

➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.

Contact Me Here: https://www.weisberg.tax/contact-1

Email: s.weisberg@weisberg.tax

Phone/Text: (248) 971-0885

Address: 300 Galleria Officentre, Suite 402, Southfield, MI 48034