The IRS offers payment plans and even debt settlements — but they don’t always go far enough. Bankruptcy can sometimes give broader and faster relief. Learn how the two options stack up, and which might work best for you.
When you’re behind on taxes, the IRS will initiate collections following the initial notice and demand for payment by mailing you a series of formal notices before any enforced collection activity commences — but it also offers some options to make satisfaction of their claim more manageable. Two common tools are Installment Agreements (payment plans) and their Offer in Compromise program (a possible settlement for less than you owe). These programs can provide relief for some taxpayers, but they don’t always go far enough. For those with people with larger or older tax debt, bankruptcy may offer the only meaningful relief. Understanding how these options compare can help you choose the best path forward.
IRS Installment Agreements
An Installment Agreement is essentially a monthly payment plan with the IRS. If you can’t full pay your tax bill , the IRS may allow you to spread payments over time. This can stop enforced collection activity like wage garnishments or levies, but interest and penalties keep piling up until the debt is fully paid (and the interest is compounded daily). For many people, the monthly payments can feel like a second mortgage — heavy and never-ending, and oftentimes, the monthly payment is not even covering the ongoing accrual of interest and penalties.
The Offer in Compromise (OIC)
An Offer in Compromise is the IRS’s version of a settlement. If you can prove that paying your full debt would cause extreme financial hardship, the IRS may agree to accept a smaller amount as “payment in full.” While this sounds appealing, the process is complicated, and approval rates are relatively low. The IRS scrutinizes your income, expenses, and assets, under a magnifying glass, and most applications are denied (see if you qualify – here). Note that if the Offer-In-Compromise is rejected, the IRS keeps the 20 percent deposit required for submission of the offer. Even when accepted, it may not wipe away all of your tax debt.
How Bankruptcy Stacks Up
Bankruptcy is a very different tool. Instead of dealing with the IRS administratively, all of your tax claims are resolved by the Federal bankruptcy court which can eliminate certain types of tax debt entirely. If your tax claims meet the 3-2-240 timing rules, bankruptcy may erase income tax debts that would otherwise linger for years under an installment plan. Bankruptcy also has the advantage of addressing all your debts at once — not just taxes, but also credit cards, medical bills, and more.
When IRS Programs Work Best
IRS payment plans or settlements may be the right choice if:
- Your tax debt is relatively small compared to your income.
- You can afford the monthly payments without sacrificing necessities and fully pay the tax claims within 2-3 years.
- Your tax debt is not dischargeable .
- You are a strong candidate for an Offer-In-Compromise.
- You can qualify for “hardship” status and have collections suspended.
In these cases, working directly with the IRS — often with guidance from a free credit counselor or tax professional — may be the simpler and more cost-effective solution.
When Bankruptcy Makes More Sense
Bankruptcy may be the stronger option if:
- Your tax debt is large in amount.
- You have a lot of non-tax debt (credit cards, loans, medical bills).
- The amounts you can afford to pay under an IRS Installment Agreement are not sufficient in amount to fully pay the tax claims in a reasonable period of time (2-3 years), considering the ongoing accrual of penalties and interest.
- You need a comprehensive solution that gives you a real financial reset (secured debt restructuring).
For many debt-stressed individuals, bankruptcy can provide relief that IRS programs simply can’t match.
Choosing the Right Path
No one solution fits every case. For some people, an IRS payment plan is a manageable fix. For others, especially those facing overwhelming tax and non-tax debts together, bankruptcy is the only effective path to a fresh start. If you’re unsure where you fall, you don’t have to figure it out alone.
- If your debt feels heavy but possibly manageable, a nonprofit debt counselor (like A Debt Coach) can help you review your budget and explore IRS options.
- If your tax debts are large, old, or combined with other substantial debt, a tax- bankruptcy attorney (such as those at Tax Workout Group) can analyze your case and explain the best way to resolve these claims.
Bottom Line
The IRS offers tools like payment plans and settlement options, but they often don’t go far enough. Bankruptcy can sometimes provide broader, faster relief — especially when your debt picture is overwhelming. Knowing the difference helps you make the right decision for your financial future.