IRS Tax Debt Relief for Small Businesses: Every Option Explained

The letter arrives on a Tuesday. Or maybe a Friday — the IRS doesn’t care about your schedule. You owe $47,000. Or $12,000. Or $200,000. The number almost doesn’t matter because the feeling is the same: your stomach drops and your brain starts racing through worst-case scenarios.

I’ve sat across the desk from hundreds of Houston business owners who opened that letter. Restaurant owners on Westheimer. Construction company operators in Pasadena. Medical practice owners in the Med Center. The details change but the panic is identical.

Here’s what I tell every single one of them: the IRS has more options than you think, and they’d rather get paid something than chase you forever. The trick is knowing which option fits your situation — and not making it worse by doing nothing.

Why Small Businesses End Up Owing the IRS

Here’s how business owners end up here in the first place. Most of the time it’s not one big screwup. It’s a bunch of smaller ones that pile up.

Payroll tax deposits that slipped. You had a rough quarter. Cash was tight. You paid your employees but didn’t deposit the withholding taxes on time. The IRS treats this differently than income tax debt — they consider it trust fund money that belongs to employees. This is the debt that escalates fastest.

Estimated tax payments you skipped. As a sole proprietor, LLC member, or S-corp shareholder, you’re responsible for quarterly estimated payments. Miss two or three quarters and suddenly you owe the full year’s tax plus penalties and interest.

An audit that went sideways. The IRS examined your returns and decided you owe more. Disallowed deductions, reclassified expenses, added penalties. Now you’re staring at a bill you didn’t plan for.

Your prior accountant messed up. I see this more than you’d think. The previous bookkeeper classified things wrong, missed deductions you were entitled to, or filed late and triggered penalties. The IRS doesn’t care whose fault it was. They want their money.

Option 1: Installment Agreements (Payment Plans)

This is the most common resolution and the one most business owners qualify for.

An installment agreement lets you pay your tax debt over time in monthly payments. The IRS offers several versions:

Short-Term Payment Plan (180 days or less). If you owe under $100,000 in combined tax, penalties, and interest, you can set up a short-term plan with no setup fee for online applications. You pay the balance in full within 180 days. Interest and penalties continue to accrue, but you avoid the collection escalation.

Long-Term Installment Agreement (monthly payments). If you owe $50,000 or less, you can apply online for a streamlined installment agreement. No financial disclosure required. The IRS calculates a monthly payment that pays off the debt within the remaining collection statute (usually 10 years from assessment). Setup fees range from $31 to $225 depending on how you apply and whether you set up direct debit.

Non-Streamlined Installment Agreement. Owe more than $50,000? You’ll need to submit Form 9465 along with a Collection Information Statement (Form 433-A for individuals or 433-B for businesses). The IRS will review your income, expenses, assets, and liabilities to determine what you can afford. This takes longer and involves more negotiation, but it still works.

Partial Payment Installment Agreement (PPIA). This is the version nobody talks about. If you can’t afford to pay the full debt within the collection statute, the IRS will accept lower monthly payments that won’t fully satisfy the balance. The remaining debt gets written off when the statute expires. I’ve used PPIAs for clients who owe six figures but have modest income. The IRS doesn’t advertise this option, but it exists.

The catch with all installment agreements: interest and the failure-to-pay penalty continue to accrue. You’re paying down a balance that’s still growing. That’s why faster payoff is always better if you can swing it.

Option 2: Offer in Compromise

An Offer in Compromise (OIC) lets you settle your tax debt for less than what you owe. It’s the option everyone wants and the one that’s hardest to get.

The IRS accepted about 17,000 offers in 2023 out of roughly 36,000 submitted. That’s a 47% acceptance rate — better than most people assume, but still means more than half get rejected.

To qualify, you must demonstrate that either:

Doubt as to collectibility — You can’t pay the full amount within the collection statute based on your income and assets. This is the most common basis.
Doubt as to liability — You genuinely don’t owe the amount the IRS claims. Maybe there was an error in the assessment.
Effective tax administration — You technically could pay, but doing so would create an economic hardship or would be unfair/inequitable — basically, paying would wreck your life even though you technically have the money.

The IRS uses a formula called the Reasonable Collection Potential (RCP) to determine your minimum offer. It’s basically: (monthly disposable income x number of remaining months in the collection statute) + (equity in assets). If your RCP calculation shows you can pay the full amount, your offer gets rejected.

I had a client who ran a small trucking operation out of Channelview. He owed $89,000 from a combination of unfiled returns and payroll tax issues. After running the RCP numbers — his income, his truck values, his home equity — we submitted an offer of $22,000. The IRS countered at $31,000. We accepted. That $31,000 settled $89,000 in debt.

But here’s what I didn’t tell you: it took 14 months from submission to acceptance. During that time, he had to stay current on all new tax obligations. He had to make estimated payments on time. He had to file every return. One slip and the offer would have been rejected.

For a deeper breakdown of offers in compromise, read our full guide on how OICs work (coming soon).

Option 3: Currently Not Collectible (CNC) Status

If you genuinely cannot pay anything right now, the IRS can place your account in Currently Not Collectible status. This means they stop active collection — no levies on your bank accounts, no wage garnishments, no seizure of assets.

CNC status doesn’t make the debt go away. Interest and penalties keep accruing. But it buys you breathing room. The IRS will periodically review your financial situation (usually annually) to see if your ability to pay has changed.

The 10-year collection statute keeps running while you’re in CNC status. If the statute expires before your situation improves, the debt gets written off.

I use CNC status strategically for clients whose businesses hit a temporary wall. A restaurant owner in East Downtown whose dining room flooded. A contractor whose biggest client went bankrupt and left $80,000 in unpaid invoices. When the current crisis passes and cash flow recovers, we transition to an installment agreement or submit an offer.

Option 4: Penalty Abatement

The IRS charges two main penalties: failure to file (5% per month up to 25%) and failure to pay (0.5% per month up to 25%). On a $50,000 debt, penalties alone can add $25,000.

First-Time Penalty Abatement (FTA) is the easiest relief to get. If you’ve been compliant for the prior three years — filed on time, paid on time, no penalties — the IRS will remove the failure-to-file and failure-to-pay penalties for one tax period. You don’t need to explain why you were late. You just need a clean three-year history.

I’ve saved Houston clients thousands of dollars with a single phone call requesting FTA. It’s absurdly simple and most people don’t know it exists.

Reasonable Cause abatement applies when you have a legitimate reason for the failure: a fire destroyed your records, a serious illness prevented you from filing, your accountant died (yes, I’ve seen this), or a natural disaster disrupted your business. Hurricane season in Houston makes this more relevant than in most cities. After Harvey, I filed reasonable cause abatement requests for dozens of clients. The IRS has specific procedures for federally declared disaster areas.

Statutory exceptions can also remove penalties in specific situations — like when you relied on incorrect written advice from the IRS itself.

Option 5: Innocent Spouse Relief

If you filed joint returns with a spouse (or ex-spouse) who understated the tax or claimed fraudulent deductions without your knowledge, you can request innocent spouse relief under Section 6015.

This is more relevant for individual returns than business returns, but I see it come up with Houston business owners going through divorce. One spouse ran the business and the books. The other spouse signed the joint return without knowing the business income was underreported.

Three types of relief exist: traditional innocent spouse relief, separation of liability, and equitable relief. Each has different requirements and timelines.

Option 6: Bankruptcy

This is the nuclear option and it’s more nuanced than most people realize.

Chapter 7 bankruptcy can discharge certain tax debts if they meet all of these criteria:

The tax return was due at least three years ago
The return was filed at least two years ago
The tax was assessed at least 240 days ago
The return was not fraudulent
You didn’t willfully evade the tax

Chapter 13 bankruptcy can restructure tax debt into a 3-5 year repayment plan with some penalties discharged.

Payroll trust fund taxes (the employee withholding portion) are never dischargeable in bankruptcy. This is the debt that follows you no matter what.

I’ve referred clients to bankruptcy attorneys when the numbers justified it. A former Galleria-area retailer owed $340,000 in old income tax and $60,000 in sales tax. The income tax met all the discharge criteria. Bankruptcy eliminated it. The sales tax went into a Chapter 13 plan. Combined with penalty abatement on the remaining balances, he went from $400,000 in debt to a manageable $45,000 payment plan.

Option 7: Statute of Limitations

The IRS has 10 years from the date of assessment to collect a tax debt. After that, the debt expires. This is called the Collection Statute Expiration Date (CSED).

This isn’t really a “relief option” you apply for. It’s a clock that’s always running. But it factors into every strategic decision:

Should you stretch out an installment agreement to let part of the debt expire?
Should you go CNC and wait out the statute?
Does the remaining collection period make a partial payment installment agreement viable?
Is an Offer in Compromise even necessary if the statute expires in 18 months?

Certain actions pause the clock: submitting an OIC, filing bankruptcy, living outside the US, or requesting a Collection Due Process hearing. Know what stops the clock before you take action.

Which Option Is Right for Your Business?

There’s no universal answer. The right strategy depends on:

It depends on the amount, the type of tax, whether you have cash flow to make payments, what your assets look like, how much time is left on the collection statute, and whether your current returns are filed. Under $50,000 is streamlined territory; over that requires more documentation. Income tax has different rules than payroll trust fund taxes, and the Texas franchise tax adds another layer for certain entities. If you’re 7 years into a 10-year statute, the strategy is very different than if you’re in year 2. And the IRS won’t negotiate if you’re still falling behind on current obligations.

What Happens If You Do Nothing

This is the part I wish more business owners understood before it’s too late.

The IRS follows a predictable escalation:

Notices. Letters requesting payment — CP14, CP501, CP503, CP504. They come weeks apart and each one sounds a little more serious than the last.
Intent to Levy. Letter 1058 or LT11. This is your last chance to respond before they take action. Most people don’t realize this is the real deadline. Everything before it was a warm-up.
Bank levy. The IRS contacts your bank, freezes the account, and takes whatever’s sitting in it. Doesn’t matter if that money was earmarked for payroll or rent — it’s gone.
Wage garnishment. If you’re a W-2 employee somewhere, they take a percentage of every paycheck. And unlike other creditors, they can take most of it.
Federal tax lien. Filed publicly, this attaches to all your property and destroys your credit. Good luck getting a business loan after that. (I’ve seen landlords refuse lease renewals over a lien.)
Asset seizure. The nuclear option. The IRS seizes and sells business equipment, vehicles, even real estate. Rare for small debts, but it happens.

I’ve watched Houston business owners lose their operating accounts overnight because they ignored the letters. A plumbing company in Spring couldn’t make payroll because the IRS levied their business checking account on a Thursday. Their employees didn’t get paid Friday. Two of them quit.

Don’t be that business owner.

The First Step Is Always the Same

Call. Pick up the phone and talk to someone who handles IRS resolution work. Not your regular tax preparer — someone who specifically deals with back taxes, offers in compromise, and IRS collections.

We handle IRS resolution for Houston small businesses every week. Not as a sideline. As a core part of what we do. If you owe the IRS and don’t know where to start, schedule a consultation with our team. We’ll pull your IRS transcripts, assess your situation, and tell you which option gives you the best outcome.

The IRS won’t stop sending letters. But the options get worse the longer you wait. The penalties grow. The interest compounds. And the collection actions escalate.

The best time to deal with IRS debt was the day you got the first notice. The second best time is today.