How To Resolve Your IRS Back Taxes

If you owe back taxes to the Internal Revenue Service (IRS), you’ve already run through the horror stories in your head. These can include penalties, wage garnishment, and even the threat of jail time. Unless you’re a career tax evader, the IRS will be satisfied if you get up to date on paying your taxes. There are ways to admit your tax debt, agree to pay the balance due, and even avoid paying the full amount of penalties and interest owed.

Ignoring the issue will make things worse, as the IRS will continue to assess interest and late payment penalties each year you fail to pay on time. The sooner you reach an agreement with the IRS, the more likely you are to reach a resolution you can afford and be able to pay off your back taxes.

Time, Liens, and Levies

The IRS has a 10-year statute of limitations to collect your unpaid taxes. That 10-year period starts running from the time they processed your federal tax assessment. The IRS can do a tax assessment within three years of when they receive your tax return or when it is due. In other words, if you hoped that it was too late for them to collect your taxes, it probably isn’t. If you last filed taxes in 2024, the IRS can try to collect taxes until 2034.

The IRS has many ways to collect your taxes until then. The most common step is simply applying next year’s tax refund payment to last year’s overdue taxes. You’ll receive a notice explaining that you did not receive an expected refund because the IRS used it to offset your back taxes.

If you owe more, the IRS takes other steps:

Short-Term Solutions

The IRS can label your account “currently not collectible.” This means they will not resume collections until your financial status improves. The IRS can make this decision while it reviews your installment agreement request.

Tax Liens

A federal tax lien is a legal claim against your property or assets. The claim can include real estate, personal property, and future property or judgments. Failure to pay the tax owed after you receive your first tax bill automatically creates a tax lien. You will receive a notice of federal tax lien once the IRS files it.

Tax Levies

A tax levy is the execution of a tax lien. The government has a claim on your property, which it seizes to pay off your tax debt. The IRS can seize a wide range of property using a levy, including:

• Houses and real estate
• Cars, boats, and physical property
• Wages and other income (wage garnishment)
• Bank accounts and other financial accounts
• Federal payments, Social Security benefits, and some federal pensions

The IRS will not seize necessary personal property, such as clothing and household goods. It will not take your primary personal residence without court approval. Child support and disability payments are exempt by federal law.

The IRS also won’t seize your property if you have a current or pending installment agreement or offer in compromise (OIC). If you can show that paying your tax bill would cause severe financial hardship, you could avoid a levy or lien completely. Any seized property can be sold.

Solutions: Installment Plans and OICs

If you can pay your back tax liability in smaller amounts over time, the IRS will let you set up an installment agreement. As a simple payment plan, an installment agreement lets the taxpayer make regular monthly payments over a specified period of time. Certain requirements must be met to qualify for an installment agreement. You must have paid all your taxes for the previous five years, and agree to file all your regular tax returns during the repayment period.

The installment agreement is ideal for those with less than $50,000 in back taxes. If your back taxes are higher than that, you may still be able to work out an installment plan. Given the complexity, you might want to consult with a tax attorney to assist in the negotiations.

A partial payment installment plan is available for those who cannot pay taxes during the 10-year collections period and who do not qualify for a loan or any other form of relief. The requirements for this payment plan are strict, which may require meeting with a tax professional to determine whether you qualify.

Offer in Compromise

If you cannot pay your taxes in full and have no assets to sell or borrow against, consider an offer in compromise. This alternative takes some negotiation with the IRS, so you may need help from an experienced tax attorney.

An offer in compromise (OIC) is an offer to pay a lump sum less than your tax liability to settle your debt in full. OICs are common in civil law, when debtors offer to pay such sums to settle contracts and loans.

To make an OIC for a tax bill, you must show that either:

• The debt is uncollectible: You must show you do not have funds or assets to pay the bill in monthly installments and still pay your monthly living expenses, which requires evidence to prove you are in a low-income situation, since the IRS bases your income on your estimated tax
• You do not owe the tax debt as shown: Based on your evidence, you do not owe the estimated tax payment, but you are willing to pay an alternative sum to settle the dispute
• The debt would be financially crippling: Paying the full amount in monthly installments would create a significant financial hardship or be unfair for other reasons

These alternatives pause or “toll” the statute of limitations for collecting your taxes. The IRS cannot collect your taxes while you are making a payment agreement or while an OIC is in negotiation. If you fail to keep up your payment plan or your OIC is rejected, the IRS can resume collection actions.

Penalty Abatement

If you tried to pay your taxes but were unable to do so, or were on a payment plan and could not make your monthly payments, you can request IRS penalty relief. There are several types of penalty abatement, depending on your circumstances.

First-Time Abate

An administrative waiver is available if you have not missed any other tax payments, and your penalty is due to any of these issues:

• Failure to file tax returns, partnership returns, or S corp returns
• Failure to pay by the due date shown on the return
• Failure to deposit taxes by the due date

Reasonable Cause

If there was a reasonable cause for your failure to file or failure to pay, you can request a penalty abatement for that reason. This abatement depends on circumstances, so you may need to provide additional proof of the cause. Valid reasons for a failure to file can include:

• Natural disaster or civil disturbance
• Death or serious illness of the taxpayer or someone in the immediate family
• Inability to obtain essential records to file the income tax return
• Systems issues that prevented a timely online payment

Reasonable causes do not include errors, lack of funds, or reliance on a tax professional who gave you bad advice.

Statutory Relief

You can receive relief from a penalty by law if you fall into these categories:

• You acted on written advice from the IRS, in response to a written request (keep copies of your request and the IRS response)
• You mailed or e-filed the return in a timely manner, but received a penalty anyway (as long as your filing met deadlines according to the IRS website)
• If you resided in a federally designated disaster zone at the time the return was due or were serving overseas in a combat area, you may be eligible for a penalty abatement

Whenever you attempt these alternative payments, you should consult a tax attorney or other tax pro. The IRS is willing to work with most taxpayers to arrange payments, but you should have a lawyer review your forms and documents before filing to ensure you have included everything.

Get Legal Advice From a Local Tax Attorney

The IRS offers payment options to help you pay down your tax debt and reduce the penalties you owe. An experienced local tax attorney can help work out IRS payment plans, get tax penalties reduced or waived, reduce your tax liabilities with an OIC, and prevent future unpaid tax bills. Remember that unpaid taxes may affect your state taxes as well. A conversation with an experienced tax attorney can help you get started on paying off your tax liability.