Blog · 14 October 2026

IRS Collection Alternatives After You Owe: Payment Plans, Offers in Compromise and Automatic Exemption from Penalty for US CPA Firms

By Keshav Bansal, CA

When a client cannot pay in full, IRS collection alternatives matter more than another balance-due lecture. IRS Tax Tip 2026-73 (October 7, 2026) restates the Taxpayer Bill of Rights’ “right to a fair and just tax system”: payment plans, offers in compromise, levy exemptions for living expenses and interest abatement when the IRS causes unreasonable delay. For US CPA firms, that tip pairs with a second 2026 change—Automatic Exemption from Penalty (AEP)—that will replace First Time Abate for many returns due on or after January 1, 2027.

What Tax Tip 2026-73 says

Per IRS Tax Tip 2026-73, taxpayers have the right to expect the tax system to consider facts and circumstances that may affect their tax obligations, ability to pay, or ability to provide information timely. The tip lists practical tools firms already use with balance-due clients:

• Taxpayer Advocate Service (TAS) and Low Income Taxpayer Clinics. Help is available when the taxpayer faces financial difficulty or normal IRS channels have not resolved the issue properly and timely.
• Payment plans (installment agreements). Eligible taxpayers who cannot pay in full may arrange to pay a set amount over time, generally monthly.
• Offer in Compromise (OIC). Taxpayers can ask the IRS to settle for less than the full amount if they believe they do not owe all or part of the debt, cannot pay within the collection period allowed by law, or would face financial hardship or an unjust result if they paid in full.
• Collection financial standards. The IRS uses national and local guidelines on basic living costs when reviewing settlement offers, and will use actual expenses when the guidelines would leave the taxpayer short of money for basics.
• Levy exemptions. The IRS cannot levy or seize all of someone’s wages; a portion is exempt so the taxpayer can cover basic living expenses.
• Interest abatement. The IRS can abate interest that is excessive, erroneous, illegal or assessed after the legal collection period, and has discretion to reduce interest on an underpayment when an IRS employee caused an unreasonable delay or error and the taxpayer did not significantly cause the problem.

Installment agreement vs Offer in Compromise

Clients often treat these as interchangeable. They are not.

• Installment agreement. The taxpayer still owes the full tax, plus interest and any penalties that apply. The agreement is a payment schedule. Entering a plan can stop escalation on the collection notice ladder (the path from early balance-due notices through final levy notices that TIGTA collection reviews describe), but it does not write the debt down.
• Offer in Compromise (§7122). The three grounds Tip 2026-73 tracks are doubt as to liability, doubt as to collectibility, and effective tax administration (hardship or injustice). An OIC starts with Form 656 (and related financial disclosure). Acceptance is only by written IRS notice to the taxpayer or authorized representative.

Estate of Farwell: a pending OIC dies with the taxpayer

Tax Court Estate of Farwell, T.C. Memo. 2026-95 (September 28, 2026; reported by Mitchell Tax Law on October 5) shows how strictly acceptance works. An IRS acceptance letter sent after the taxpayer’s death did not create a binding offer in compromise on a roughly $119,000 lien; death ended the authority to accept, and the estate had to file a new Form 656. The practice point for CPA firms: if a client with a pending OIC dies, do not assume the old offer sticks—confirm status with the IRS and be ready to refile for the estate.

Automatic Exemption from Penalty (AEP)

Penalty relief is the other half of many collection conversations. Per IR-2026-83 (July 8, 2026) and FS-2026-12 (July 2026), Automatic Exemption from Penalty replaces First Time Abate for eligible original returns with due dates on or after January 1, 2027. Key points as the IRS states them:

• Who qualifies. Taxpayers with three prior years of timely filing and payment of tax due (or 12 consecutive quarters for quarterly filers) on the same return type.
• What it covers. Certain failure-to-file, failure-to-pay and (for businesses) failure-to-deposit penalties are not assessed during original return processing when eligibility is met.
• What it does not cover. Accuracy-related penalties and information-return penalties are outside AEP. Tax and interest remain due.
• No request needed. AEP is automatic; if eligible, the IRS applies it and issues a notice confirming relief. First Time Abate remains requestable during the 2026 transition for some earlier periods processed before AEP applied.

Tell clients that AEP is not a free pass to file late every year. It rewards a clean three-year (or 12-quarter) history for a one-time slip—and interest still accrues on unpaid tax.

What US CPA firms should do now

• Separate “can’t pay” from “disputes the bill.” Liability disputes may need a protest, audit reconsideration or Tax Court path; collectibility and hardship point to installment agreements, Currently Not Collectible status or an OIC. Tip 2026-73’s fair-and-just framing only helps if the firm picks the right lane.
• Build a collection intake checklist. Capture notice type and date, assessed balance, prior compliance history (for AEP/FTA), monthly cash flow against IRS collection financial standards, and whether a Form 2848 power of attorney is already on file.
• Watch the notice ladder. Unanswered balance-due notices escalate. A payment plan or other arrangement can stop that escalation; ignoring mail does not.
• Document levy and hardship facts. Wage-levy exemptions and living-expense standards are fact-specific. Keep pay stubs, rent or mortgage statements and necessary-expense support with the client file.
• Train staff on AEP vs FTA language. Clients who get a late-file or late-pay notice for a 2025 return processed before AEP may still need to request First Time Abate. Clients with returns due on or after January 1, 2027 should expect automatic screening instead.
• Escalate when normal channels stall. Point eligible clients to TAS or a Low Income Taxpayer Clinic when financial difficulty or IRS delay meets the Tip 2026-73 criteria.

Where this fits

Collection work usually starts with a letter, not a field visit. Our post on IRS audit rates and CP2000 notices covers how often contact is by mail and what Automated Underreporter notices are. For preparer-side exposure that can create balance-due messes, see ghost preparers and preparer responsibility. Deadline postponements that can pause assessment and collection clocks are covered in our §7508A disaster relief guide.

If balance-due cleanup, notice responses or amended-return volume is stretching your team, outsourced tax prep and bookkeeping support for US CPA firms can take on document gathering and draft work while your signing professionals keep the judgment calls. Email info@taxbrewglobal.com.

Check current IRS guidance: this article summarizes sources as of 14 October 2026 (IRS Tax Tip 2026-73, October 7, 2026; IR-2026-83, July 8, 2026; FS-2026-12, July 2026; Estate of Farwell, T.C. Memo. 2026-95, via Mitchell Tax Law, October 5, 2026; TIGTA collection-notice coverage summarized in tax-learning digests). It is general information, not tax or legal advice. Confirm every figure and eligibility rule with the IRS before acting.