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The only way to get the tax reduced would be if you qualified under the offer in compromise program. If you have a decent income - even if it is SS and unemployment or you have assets - even if they are retirement plan assets it is likely that the IRS is not going to accept an offer in compromise. They generally accept only if they feel there is not sufficient income to pay the tax over an extended period of time (this is generally 15 years or more).
The penalties and interest are going to continue to accumulate until the amount is paid in full. If you have a good credit score you would probably be better off if you get a loan from a bank or credit union and paid the IRS off. Or if you have a relative or friend who would loan you interest at a reasonable rate that would work too. Do you cash available on a life insurance policy that you could use? Do you have things you could sell on e bay or Craig's list to pull in some cash. Even if you cannot find a full time job once your unemployment ran out you might consider a part-time job to pay the bill off sooner.
With the penalties and interest for IRS it is a total of about 11% in penalties and interest so if you can borrow money cheaper than that you would be better off.
If you cannot borrow then the key is to pay IRS off as quick as you can. Even though you requested a monthly installment of $100 you can always send more to get it paid off quicker. Even though IRS has not accepted your installment agreement yet you can start and should start sending payments in as soon as you can. Sending in smaller payments more often will greatly effect the penalties and interest since the principal will be going down much faster.
If you want to see about the offer in compromise you can go to irs.gov and read about it - just type "offer in compromise" in the search box and it will bring up the info. Note - to file an offer you would have to pay a $150 application fee unless you qualified under the hardship rules.
I wish you luck. Unfortunately you are in the same position as many others.
If there is a specific question I can answer please hit the need info button and ask. Otherwise please hit the accept button to close out the question.
With you on unemployment IRS might want to wait a few years before they would be willing to do an offer in compromise to see if you found work. And of course continue to accrue penalties and interest in the meantime.
Is there a local IRS office near you? If you could walk in and talk with someone you might be able to get an answer specific to your situation as to whether or not they think they would accept an offer in compromise. I would not recommend trying that on the telephone since you are not likely to find someone willing to take the time to understand your situation.
Also - with that low amount I would say that you would qualify for the hardship rules to not have to pay the application fee if you file an offer in compromise. So - you could consider filing one just to see if they would accept.
I will tell you that it is not an easy document to complete and you may find yourself in need of an accountant to help fill it out which means you really would want to be fairly sure it would be accepted before you pay the fees to prepare it.
If you want to take a look to see if you could complete it yourself, go to irs.gov and search for offer in compromise to bring up the form and take a look at it.
Good luck and I hope it works out. IRS overall is being kinder in these situations but sometimes it does just depend on who you get.