Facing a $25k tax bill with no way to pay - OIC vs Payment Plan?

You've got a few options here, and tapping into your IRA should probably be your last resort, not your first. An IRS Payment Plan is usually the simplest solution. If you can pay the full amount within 72 months (6 years), you can set up a long-term payment plan online. The setup fee is cheaper if you agree to direct debit payments. The interest rate is currently 5% annually plus a 0.25% failure to pay penalty each month until the balance is paid. So you're looking at about 8% annual interest overall. An Offer in Compromise (OIC) is harder to qualify for. The IRS only accepts these if they believe the offered amount is the most they can expect to collect from you within a reasonable time. They look at your income, expenses, asset equity, and ability to pay. With $65k in an IRA, they may determine you have the ability to pay the full amount and reject your offer. Before making any decisions, I'd recommend completing the IRS's pre-qualifier tool for an OIC to see if you might qualify: https://irs.treasury.gov/oic_pre_qualifier/

I was in a similar situation last year with about $18k in unexpected tax debt and honestly freaking out. I struggled to get clear answers until I found https://taxr.ai which analyzed my specific situation and showed me exactly what options I qualified for. They ran my numbers through their system and showed me that in my case, a payment plan made more sense than an OIC since I had some assets. What I found super helpful was that they showed me exactly how much I'd pay in total with different scenarios (including using retirement funds vs not). The breakdown of interest and penalties over time really clarified which option was cheapest long-term. The tool actually projected my future cash flow with each option which made the decision way easier than trying to calculate everything myself.

I was initially skeptical of these online tax services but I gave taxr.ai a try after reading about it here. I had a $32k tax bill from selling some property and was panicking about how to handle it. The analysis was eye-opening - showed me that an OIC wouldn't work in my situation (which saved me from wasting time applying), but that I qualified for a partial payment installment agreement where I'd pay less than the full amount over time. I didn't even know that was an option! What really helped was seeing the total cost breakdown of all options. For me, setting up the payment plan and using just a small portion of my 401k to reduce the principal amount was the optimal choice mathematically. Been on the payment plan for 4 months now and it's much more manageable than I expected.

After spending literally DAYS trying to reach the IRS about my $40k tax bill (kept getting disconnected or waiting for hours), I found https://claimyr.com and used their service to get a callback from the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c Honestly didn't think it would work but I got a call from an actual IRS agent within 3 hours. The agent walked me through my payment options and helped me set up a plan based on what I could actually afford monthly. They were surprisingly helpful once I finally got through. With a tax bill your size and retirement funds involved, speaking directly with an IRS agent is really important - they can look at your specific situation and sometimes offer better terms than what's available online. Plus they answered questions about how my IRA would impact my options that I couldn't find clear answers to anywhere else.

I apologize for being so skeptical about Claimyr in my previous comment. I decided to try it after continuing to fail getting through to the IRS myself for another week. Got a callback in about 2 hours which was honestly shocking after my previous attempts. The IRS agent I spoke with reviewed my whole situation and suggested a streamlined installment agreement that I hadn't found on their website. The terms were much better than what I thought I'd qualify for. For anyone dealing with a large tax bill, being able to actually discuss your specific situation with a human makes a huge difference. They explained exactly how my retirement accounts would factor into different resolution options and gave me a clear picture of what I qualified for.

Speaking from experience, NEVER tap into retirement funds to pay the IRS if you can avoid it. I drained my IRA to pay a $22k tax bill three years ago and deeply regret it. Between the early withdrawal penalty (10%), the income tax on the distribution, and the lost growth over time, it ended up "costing" me way more than if I'd just set up a payment plan. Plus I lost years of tax-advantaged growth. The IRS interest rate on payment plans is actually fairly reasonable compared to other debt. Currently around 8% all-in when you factor in penalties. Most investment growth in retirement accounts will exceed that over time, especially considering the tax advantages.

Has anyone actually successfully gotten an Offer in Compromise accepted? I hear they reject like 60% of applications and the process takes forever.

I went through a similar situation last year with a $28k unexpected tax bill. Here's what I learned after talking to multiple tax professionals and the IRS directly: The payment plan is almost always your best bet when you have retirement funds available. The IRS considers your IRA as an asset you could access, which makes OIC approval very unlikely in your case. Even if you could qualify for an OIC, the application fee alone is $205 (non-refundable even if rejected), and the process typically takes 8-12 months during which interest and penalties continue accruing. For the payment plan, you can request up to 72 months as others mentioned. The key is to apply ASAP - the longer you wait, the more interest accumulates. You can apply online at irs.gov/payments if you owe less than $50k, which makes the process much faster. Regarding your IRA - only consider touching it as an absolute last resort. Even without early withdrawal penalties, you'd still owe income tax on any distribution, which could push you into a higher tax bracket for that year. Plus you lose all future tax-deferred growth on those funds. My advice: Set up the payment plan first, then reassess your financial situation in 6-12 months. If you find you're struggling with the payments, you can always modify the plan later or consider a partial IRA withdrawal at that point.