The Truth About Offer in Compromise vs. Partial Pay Installment Agreements

Why the “pennies on the dollar” offer isn’t always the best option.

The Offer in Compromise Obsession

We get it—everyone wants an Offer in Compromise (OIC). You’ve seen the ads: “Settle your tax debt for pennies on the dollar!”

But what those commercials don’t tell you is that OICs are approved in only a small percentage of cases. The IRS only accepts offers when your total offer amount equals or exceeds what it believes it could collect during the 10-year collection period—including most of the equity in your assets (home, vehicle, retirement account, etc.).

If you own a home or have any significant savings or equity, your offer is likely dead before it begins.

The Overlooked Alternative: Partial Pay Installment Agreements

A Partial Pay Installment Agreement (PPIA) is one of the most underused but effective tools available for resolving IRS debt. It allows taxpayers to make affordable monthly payments until the IRS’s collection period expires. Once the 10-year statute runs out, any unpaid balance (including interest and penalties) is wiped out.

You get real relief—without liquidating assets or submitting an unrealistic “pennies on the dollar” offer.

Offer in Compromise vs. Partial Pay Installment Agreement

Who Qualifies for a PPIA?

To qualify for a Partial Pay Installment Agreement, you must:

• Owe more than you can afford to pay in full before the IRS’s 10-year collection period expires

• Be current on all tax return filings

• Have limited ability to borrow or liquidate equity

• Have consistent income that allows partial payments

• Not be in an active bankruptcy case

If your finances show that you can make some payments—but not enough to pay the full balance within the remaining collection period—the IRS will usually approve a PPIA.

How PPIA Payments Are Calculated

The IRS determines your monthly payment based on your disposable income after necessary living expenses.

Example: If your take-home pay is $5,000/month and your verified living expenses (rent, food, insurance, transportation, etc.) total $4,750, the IRS will set your payment around $250 per month—regardless of whether you owe $20,000 or $200,000.

With proof, you can include actual expenses such as:

• Mortgage or rent (even if above local standards)

• Health insurance and medical costs

• Childcare and dependent expenses

• Car loans, utilities, and necessary business costs

OICs, by contrast, restrict you to standardized amounts even if your actual costs are higher.

Why a PPIA Can Be Just as Effective

Here’s what the IRS doesn’t advertise:

1. Equity isn’t an automatic disqualifier. You can still qualify even if you own a home or vehicle with value.

2. You can attempt to extract equity first. Applying for loans or HELOCs shows good faith, even if denied.

3. If financing fails, you’re still eligible. Denial letters or unaffordable loan terms actually help your case.

4. Joint ownership matters. If a co-owner won’t sell or refinance, the IRS can’t force you to.

5. The collection clock keeps running. With a PPIA, time works in your favor. Every month of payments brings you closer to expiration.

Expense Rules: OICs Are Strict, PPIAs Are Realistic

• Offer in Compromise: The IRS limits expenses to national and local “standards,” which may not match real costs in high-cost areas like Northern Virginia. If your mortgage or rent exceeds the standard, the IRS often caps your allowance.

• Partial Pay Installment Agreement: The IRS allows actual, reasonable expenses with documentation—making it far more flexible and realistic for families and small business owners.

What Happens If You Owe Again

An OIC comes with a five-year probation period. If you owe or miss a filing during that time, the entire forgiven balance returns—with interest and penalties.

A PPIA is much more forgiving. If you owe again or miss a payment, your agreement may default, but you can reapply or modify it based on updated financials. You don’t lose all progress made.

Understanding the 10-Year Collection Statute

The IRS has 10 years from the date of assessment to collect unpaid taxes—known as the Collection Statute Expiration Date (CSED).

• Filing bankruptcy, submitting an OIC, or leaving the country pauses the clock.

• Entering a PPIA does not stop the clock.

• When the 10 years expire, any remaining balance is permanently forgiven.

Example: If your taxes were assessed in 2018, the IRS’s ability to collect ends in 2028 (unless other activity has tolled the collection timeline, i.e., tax court, bankruptcy, etc.). If you enter a PPIA in 2025, you typically only pay for the remaining 3 years before the debt expires.

Does a PPIA Stop Tax Liens and Levies?

Once approved, a PPIA generally stops levies and garnishments. However, existing tax liens usually remain until the balance is satisfied or the statute expires. After expiration, liens are released automatically. If you do not have a tax lien before you enter into a PPIA, then one likely will be filed after you set up the agreement.

A PPIA won’t remove old liens, but it will stop future enforcement and give you financial breathing room.

How Long Does It Take to Get Approved?

The IRS typically takes 2 to 3 months to review and approve a Partial Pay Installment Agreement—much faster than an Offer in Compromise, which often takes 9 to 18 months (or longer).

During review, active levies are paused, and most collection activity is suspended.

Does a PPIA Affect My Credit Score or Mortgage?

No. The IRS does not report payment plans to credit bureaus, and being in a PPIA typically won’t impact your credit score. If a tax lien has already been filed, that may appear on public records, but the PPIA itself won’t add new credit damage. Tax liens also do not appear on typical credit reports.

When a PPIA Might Not Work

A PPIA isn’t the best fit for everyone. It may not work well if:

• Your income is likely to increase significantly in the next few years.

• You have substantial unencumbered assets that could easily pay the debt.

• You’re very close to the end of the collection period (under one year). In those situations, other options—such as a short-term payment plan or Currently Not Collectible (CNC) status—may be more appropriate.

The Strategy That Works

At Ashley F. Morgan Law, PC, we often use this three-step strategy when equity or income makes an OIC unrealistic:

1. Attempt legitimate financing. We advise clients apply for loans or HELOCs to show effort.

2. Document rejections. If denied, we use those letters to prove liquidation isn’t possible.

3. Show shared ownership. When property is co-owned, we demonstrate why your equity isn’t accessible.

These steps frequently lead the IRS to approve a PPIA—or, if income is very limited, to grant Currently Not Collectible (CNC) status where no payments are required.

Documentation Checklist for a Strong PPIA

• Loan denial letters or proof of unaffordable terms

• Mortgage or lease statements

• Pay stubs and bank statements

• Tax transcripts for all years owed

• Proof of co-ownership or spousal refusal to sell

• Documentation for medical, childcare, or insurance expenses

Real-World Case Study

A Northern Virginia small-business owner owed $150,000 in back taxes and had $75,000 in home equity.

She used a national tax resolution company that helped her submit an Offer in Compromise to deal with her debt. Her Offer in Compromise was rejected because of that equity. We had her apply for refinancing, but the offers were rejected or only were approved subject to affording payments far beyond her budget. We documented each denial and demonstrated that selling was unrealistic.

Result: The IRS approved a $350/month Partial Pay Installment Agreement. After the collection period expired, over $80,000 was forgiven (since interest and penalties still accrued). She kept her home, stayed current on future taxes, and rebuilt her finances.

Bankruptcy: Sometimes the Better Option

For clients with both tax and consumer debt (credit cards, medical bills, or loans), bankruptcy can be a smarter, faster, and more comprehensive solution.

• Chapter 7 bankruptcy can eliminate qualifying older income taxes and discharge other unsecured debts.

• Chapter 13 bankruptcy allows you to repay priority taxes over 3–5 years while wiping out credit card and medical debt.

• Bankruptcy also stops all IRS collections and levies immediately through the automatic stay.

If your debt problems extend beyond taxes, a PPIA or OIC may only address part of the issue. Bankruptcy can often offer a true fresh start.

👉 Learn more in our post: Can Bankruptcy Discharge Tax Debt?

Don’t Chase the Wrong Solution

The Offer in Compromise is flashy—but often unrealistic. For many taxpayers, especially homeowners or business owners with real expenses, the Partial Pay Installment Agreement is the smarter and more sustainable way to resolve IRS debt.

Don’t fall for the hype. The best solution depends on your full financial picture.

FAQ: Offer in Compromise vs. Partial Pay Installment Agreement

1. What is a Partial Pay Installment Agreement (PPIA)?
A PPIA is an IRS payment plan that allows you to make affordable monthly payments until the collection statute expires. Any remaining balance is forgiven.

2. How long does a PPIA last?
It lasts until the 10-year collection period expires—usually several years, depending on how old your debt is.

3. Can I switch from a PPIA to an Offer in Compromise later?
Yes. If your financial situation worsens or your equity decreases, you can apply for an OIC later.

4. Does a PPIA stop IRS levies and garnishments?
Yes, once approved, it stops new levies and garnishments. Existing liens remain until the debt is paid or expires.

5. Does a PPIA affect my credit score?
No. The IRS does not report installment agreements to credit bureaus.

6. Can the IRS change my payment amount?
Yes, the IRS may review your finances every two years and adjust your payment if income increases. In the review, you can submit evidence of new income an expenses.

7. Can I include state taxes in a PPIA?
No, a PPIA only applies to IRS (federal) taxes. However, states like Virginia have similar hardship or partial-pay options that we can help coordinate.

Talk to an Experienced Tax Resolution Attorney

At Ashley F. Morgan Law, PC, we’ve helped hundreds of clients resolve IRS debt through Offers in Compromise, Partial Pay Installment Agreements, Currently Not Collectible status, and bankruptcy.

We never submit cookie-cutter applications. Every case receives a detailed financial review to ensure the highest chance of approval and the best long-term result.

📞 Call 703-880-4881 or visit AFMorganLaw.com to schedule your free consultation and find your path to real tax relief.