A client owes $42,000 in 2024 income tax and cannot pay by April 15, 2026. She has equity in her home, steady wages, and no prior collection history. Six tools sit on the IRS menu: extension to pay, installment agreement, offer in compromise, CDP hearing, CAP appeal, and currently not collectible. Picking the right one depends on numbers, deadlines, and what you can prove.
The opener client ($42,000 balance, steady wages, no prior IA) lands cleanly in a streamlined installment agreement: under the $50K ceiling, no Form 433 required, and direct debit will keep an NFTL off her file.
Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship) is the only mechanism that defers the payment deadline itself. It is separate from Form 4868 (extension to file).
- Standard: must show undue hardship, meaning more than mere inconvenience. Substantial financial loss (e.g., sale of property at sacrifice prices) qualifies
- Income tax extension: up to 6 months beyond the original due date
Common mistakes
- Confusing Form 4868 with Form 1127. Form 4868 does NOT defer the payment deadline. A taxpayer who files only 4868 still owes FTP penalty and interest from April 15. Form 1127 with proof of undue hardship is required to extend payment.
- Filing CDP late and assuming Tax Court rights survive. Day 31 means equivalent hearing only, no Tax Court access. Calendar the 30-day clock from the notice date, not the receipt date.
- Treating a returned OIC as a rejected OIC. A returned offer (not processable) has no appeal rights, only resubmission. Only a rejected offer carries the 30-day Form 13711 appeal right.
Bottom line
- Form 1127 extends time to PAY (not file); requires undue hardship; max 6 months for income tax, up to 12 for estate tax (renewable to 10 years under §6161).
- Installment agreements: Guaranteed ≤ $10K (36 months, IRS must accept), Streamlined ≤ $50K (72 months, no financial disclosure), Short-term plan ≤ $100K (180 days). Form 9465.
- OIC three grounds: doubt as to collectibility, doubt as to liability, effective tax administration. Form 656. $205 fee + 20% lump-sum or first monthly payment.
- OIC RCP = net realizable equity + future income × 12 (lump-sum) or × 24 (periodic); §7122(f) deems an offer accepted if the IRS does not reject within 24 months.
Exam shortcut
30-day deadlines to memorize: CDP request (Form 12153), OIC rejection appeal (Form 13711), IA termination appeal, Notice of Determination petition to Tax Court. If a collection notice mentions a hearing right, the default clock is 30 days. Dollar thresholds: Guaranteed IA $10K, Streamlined IA $50K, Short-term plan $100K, NFTL administrative threshold $10K, DDIA effectively required above $25K. The ladder climbs $10K, $25K, $50K, $100K. CAP vs.
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Learning objectives
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