Key Takeaways
- Offer in Compromise (OIC) settles debt for less than full amount.
- Three OIC grounds: Doubt as to Liability, Doubt as to Collectibility, Effective Tax Administration.
- Installment Agreements (IA) allow monthly payments.
- Guaranteed IA: Debt < $10,000, pay within 3 years.
- Streamlined IA: Debt ≤ $50,000, pay within 72 months.
- Currently Not Collectible (CNC): Halts collection due to hardship.
Collection Representation: Resolving Tax Debts
Why This Matters for the Exam
Collection alternatives are heavily tested on Part 3. The exam tests your knowledge of Offers in Compromise, Installment Agreement thresholds, and Currently Not Collectible status.
Expect at least 4-5 questions on collection options.
Collection Options Overview
When a taxpayer owes tax they cannot pay in full, several options exist:
| Option | Description | Best For |
|---|---|---|
| Full Payment | Pay the entire balance | Those who can afford it |
| Installment Agreement | Monthly payments over time | Those who can pay but need time |
| Offer in Compromise | Settle for less than owed | Those who cannot pay in full |
| Currently Not Collectible | Pause collection | Those facing extreme hardship |
| Bankruptcy | Discharge (in some cases) | Extreme situations |
Offer in Compromise (OIC)
An Offer in Compromise allows a taxpayer to settle their tax debt for less than the full amount owed.
Three Grounds for OIC:
| Ground | Description | When Used |
|---|---|---|
| Doubt as to Liability | Legitimate dispute about whether the tax is owed | Tax assessment appears incorrect |
| Doubt as to Collectibility | Taxpayer's assets and income are insufficient to pay | Financial hardship |
| Effective Tax Administration | Taxpayer can pay, but it would cause hardship or be unfair | Exceptional circumstances |
Most Common: Doubt as to Collectibility (taxpayer simply can't afford to pay).
OIC Application:
- Form 656 (Offer in Compromise).
- Form 433-A (OIC) (individual) or Form 433-B (OIC) (business) for financial information.
- Application fee: $205 (waived for low-income).
- Initial payment: Required with application (varies by payment option).
Installment Agreements (IA)
An Installment Agreement allows the taxpayer to pay the tax debt over time through monthly payments.
| IA Type | Debt Limit | Payment Term | Financial Statement | Notes |
|---|---|---|---|---|
| Guaranteed | < $10,000 | Within 3 years | Not required | Must be in compliance for 5 years |
| Streamlined | ≤ $50,000 | Up to 72 months | Not required | Can apply online |
| Non-Streamlined | > $50,000 | Negotiated | Form 433-A/F required | Financial analysis by IRS |
Guaranteed Installment Agreement:
- Debt < $10,000.
- Can pay within 3 years (36 months).
- Filed all required returns for past 5 years.
- Not had an IA in the past 5 years.
- IRS must approve (hence "guaranteed").
Streamlined Installment Agreement:
- Debt ≤ $50,000 (including penalties and interest).
- Pay within 72 months (6 years) or before CSED, whichever is sooner.
- No Form 433 required.
- Can apply online via IRS.gov.
Currently Not Collectible (CNC) Status
If paying any amount would prevent the taxpayer from meeting basic living expenses (food, housing, utilities, medical), the IRS may place the account in Currently Not Collectible (CNC) status.
Effects of CNC:
- Collection actions (levies, liens) are suspended.
- The debt is not forgiven—interest and penalties continue to accrue.
- IRS will review the account periodically.
- CSED (10-year collection statute) continues to run.
Form 433-A (Collection Information Statement): Required to document financial hardship.
Comparison: OIC vs. IA vs. CNC
| Factor | OIC | Installment Agreement | CNC |
|---|---|---|---|
| Debt Paid | Less than full | Full (over time) | None (suspended) |
| Duration | One-time settlement | Monthly payments | Until review |
| Requires 433 | Yes | Only for non-streamlined | Yes |
| Debt Forgiven | Yes (remaining) | No | No |
| Interest Stops | Yes (upon acceptance) | No | No |
Real-World Scenario
Scenario: Your client owes $35,000 in assessed taxes. They have a steady income but cannot afford to pay in full.
- Option 1: Streamlined IA. Debt ≤ $50,000, so no Form 433 required. Client can pay over 72 months (~$486/month + interest).
- Option 2: OIC (Doubt as to Collectibility). If client's assets and income are truly insufficient, they may qualify to settle for less.
- Option 3: CNC. Only if paying anything would cause inability to meet basic needs.
On the Exam
Expect 4-5 questions on collection, typically:
- OIC Questions: "What are the three grounds for an Offer in Compromise?"
- IA Threshold Questions: "What is the maximum debt for a Streamlined IA?"
- Guaranteed IA Questions: "What is required for a Guaranteed IA?"
- CNC Questions: "What happens when an account is placed in CNC status?"
The key is to remember: OIC = settle for less (3 grounds). Guaranteed IA = <$10K/3 years. Streamlined = ≤$50K/72 months. CNC = hardship pause.
Which ground for an Offer in Compromise requires showing the tax assessment itself is incorrect?
For a Streamlined Installment Agreement, what is the maximum debt allowed?
What is the maximum payment term for a Guaranteed Installment Agreement?