Owing money to the IRS can be one of the most stressful financial situations a taxpayer can face. A tax bill may result from an unexpected tax liability, an audit adjustment, self-employment income, penalties, investment income, or simply not having enough money available when taxes are due.
The good news is that having an IRS tax debt does not necessarily mean you must pay the entire balance immediately. Depending on your financial circumstances and the amount you owe, several options may be available.
The important thing is not to ignore the problem. Federal tax debt can continue to accumulate interest and penalties, and the IRS has significant collection powers. Understanding your options early can help you make better decisions and potentially avoid more serious collection problems.
What Happens If You Cannot Pay Your IRS Tax Bill?
If you owe federal taxes but cannot pay the full amount by the deadline, the unpaid balance can become subject to interest and applicable penalties.
The IRS generally expects taxpayers to pay their tax liability by the applicable due date. However, the agency offers several payment options for taxpayers who cannot immediately pay their entire balance.
Your options can depend on factors such as:
- How much you owe
- Your income
- Your expenses
- Your assets
- Whether you are an individual or business
- Your filing history
- Whether you have other unpaid tax years
- Your ability to make monthly payments
The longer a tax debt remains unresolved, the more important it can become to understand your available options.
Do Not Ignore IRS Collection Notices
One of the biggest mistakes a taxpayer can make is simply putting an IRS notice aside and hoping the problem disappears.
The IRS can take collection actions when taxpayers fail to resolve qualifying tax debts.
Depending on the circumstances, collection activity can eventually include a federal tax lien or levy.
A tax lien is generally a legal claim against property as security for a tax debt. A tax levy, on the other hand, is an actual seizure of property or rights to property to satisfy a tax liability.
These are serious collection tools.
If you receive a notice warning that the IRS intends to take collection action, pay close attention to the deadline and instructions.
Can You Set Up an IRS Payment Plan?
For many taxpayers, an installment agreement can be one of the most practical ways to deal with tax debt.
An installment agreement allows an eligible taxpayer to pay the balance over time rather than paying everything at once.
The exact terms depend on the taxpayer’s circumstances and the type and amount of tax debt involved.
Before agreeing to a payment plan, calculate whether the proposed monthly payment is realistically affordable.
A payment arrangement that looks manageable initially but becomes impossible after a few months can create additional problems.
You should also understand that interest and certain penalties may continue to apply while a tax balance remains unpaid.
What Is an Offer in Compromise?
An Offer in Compromise, commonly called an OIC, is a program that may allow certain eligible taxpayers to settle a tax debt for less than the full amount owed.
However, an OIC is not available to everyone.
The IRS generally evaluates whether the taxpayer can pay the liability and considers factors related to income, expenses, assets, and the taxpayer’s overall ability to satisfy the debt.
Taxpayers should be particularly careful with companies that advertise guaranteed tax settlements.
No legitimate professional can guarantee that the IRS will accept an offer in compromise.
The IRS provides eligibility information and an online pre-qualification tool that taxpayers can use to determine whether an offer may be worth exploring.
Beware of “Tax Debt Relief” Guarantees
People with IRS debt are often targeted by companies promising to eliminate thousands of dollars in taxes.
Some businesses legitimately provide tax-resolution services, but consumers should carefully evaluate any company before paying substantial fees.
Be cautious when a company:
- Guarantees that your tax debt will be eliminated
- Claims that you definitely qualify for an offer in compromise
- Demands a large upfront fee
- Uses aggressive sales tactics
- Says you must sign a contract immediately
- Refuses to explain its pricing
- Makes promises before reviewing your financial information
Tax resolution is highly dependent on individual circumstances.
A trustworthy professional should explain your potential options without promising an outcome that cannot be guaranteed.
Can the IRS Take Money From Your Bank Account?
In certain circumstances, the IRS can issue a levy against property or funds to collect an unpaid federal tax liability.
A bank levy can potentially affect funds held in a taxpayer’s bank account.
However, the IRS generally follows specific procedures before taking collection action, including sending required notices.
This is one reason why taxpayers should never ignore IRS correspondence.
If you receive a notice concerning a proposed levy, review it immediately and determine whether you have appeal or resolution options.
If a levy is imminent or has already occurred, professional advice may be valuable, particularly when the taxpayer depends on the affected funds for essential expenses.
Can the IRS Garnish Your Wages?
Under federal tax collection rules, the IRS may levy wages in certain circumstances.
Unlike an ordinary voluntary payment arrangement, a wage levy can take a portion of a taxpayer’s earnings to satisfy a tax debt.
This can create serious financial pressure.
If you receive a notice indicating that the IRS intends to levy your wages, do not wait until your paycheck has already been affected before looking into your options.
Depending on your circumstances, resolving the underlying tax debt or negotiating an appropriate arrangement may prevent or release collection action.
What Is a Federal Tax Lien?
A federal tax lien is different from a levy.
A lien generally represents the government’s legal claim against property because of an unpaid tax debt.
A levy involves actually taking property or rights to property.
A tax lien can complicate financial transactions involving property and may affect a taxpayer’s ability to resolve certain financial matters.
If you receive a notice about a federal tax lien, consider determining exactly what tax years and amounts are involved and whether the underlying liability is accurate.
What If You Cannot Afford Any Monthly Payment?
Some taxpayers have income and necessary expenses that leave little or no money available for tax payments.
In certain situations, the IRS may classify a taxpayer’s account as currently not collectible.
This does not necessarily erase the tax debt.
Instead, collection activity may be temporarily suspended under qualifying circumstances.
Interest and penalties may continue to accrue, and the IRS may periodically review the taxpayer’s financial situation.
Whether this option is available depends on the taxpayer’s circumstances and the IRS’s assessment of the account.
What If You Have Not Filed All of Your Tax Returns?
Tax debt can become much more complicated when a taxpayer has unfiled tax returns.
Before focusing solely on payment arrangements, determine whether all required returns have been filed.
The IRS may require taxpayers to become compliant with filing obligations before approving certain collection alternatives.
If you have multiple years of unfiled returns, the situation can become difficult to manage without professional assistance.
A tax attorney, CPA, or enrolled agent can help you determine what returns may need to be filed and how to approach the outstanding tax liabilities.
Can Tax Debt Be Reduced Because of Financial Hardship?
Financial hardship can be relevant to certain IRS collection decisions.
The IRS may evaluate a taxpayer’s financial circumstances, including income, allowable expenses, assets, and other obligations.
However, financial hardship does not automatically eliminate a tax debt.
If you believe paying the full amount would prevent you from meeting basic living expenses, carefully document your financial situation.
This may include maintaining records of:
- Housing expenses
- Utilities
- Transportation
- Food
- Insurance
- Medical costs
- Child-related expenses
- Debt obligations
- Income
- Assets
Accurate documentation can be important when discussing collection alternatives.
Should You Hire an IRS Tax Attorney?
You do not necessarily need an attorney for every IRS balance.
For a relatively simple tax bill that you can pay or resolve through a straightforward payment arrangement, professional representation may not be necessary.
However, an experienced tax professional may be valuable when:
- You owe a substantial amount
- The IRS has threatened a levy
- Your wages or bank account are subject to collection action
- You have multiple years of tax debt
- You have unfiled returns
- You operate a business
- You are dealing with payroll tax liabilities
- You are considering an Offer in Compromise
- You believe the IRS calculated your liability incorrectly
- You are concerned about penalties
- You are facing potential tax fraud allegations
A tax attorney can also communicate with the IRS on your behalf in appropriate circumstances.
Tax Attorney vs. CPA vs. Enrolled Agent
There are several types of professionals who may assist with IRS tax problems.
A tax attorney is a lawyer who specializes in tax law and can provide legal advice concerning tax disputes and other legal issues.
A CPA can provide accounting, tax preparation, planning, and other financial services within the scope of their professional authorization.
An enrolled agent is federally authorized to represent taxpayers before the IRS.
The appropriate professional depends on your specific circumstances.
If you are dealing with potential legal exposure, allegations of fraud, or a complicated dispute with the government, a tax attorney may be particularly appropriate.
What Should You Do If You Receive a Final Collection Notice?
A final collection notice should never be ignored.
Read the notice carefully and determine:
- The amount the IRS says you owe.
- Which tax years are involved.
- Whether penalties and interest are included.
- The deadline for responding.
- Whether the notice provides appeal or collection-rights information.
- What action the IRS says it may take.
If you disagree with the amount, gather your records and determine whether the liability can be challenged.
If the amount is correct but you cannot afford to pay, investigate available payment or collection alternatives.
Keep Your Tax Records Organized
Tax debt problems can become much easier to manage when records are organized.
Keep copies of:
- Tax returns
- IRS notices
- Payment confirmations
- Bank records
- Income documentation
- Expense records
- Prior correspondence
- Agreements with the IRS
- Documentation submitted to the IRS
If you hire a professional, provide them with a complete collection of relevant records.
Missing documents can make it harder to understand how the tax liability was calculated and what options may be available.
Avoid Taking Out Expensive Debt Without Understanding Your Options
A taxpayer facing a large IRS balance may consider using a credit card, personal loan, home equity loan, or other financing method to pay the government.
That may sometimes be appropriate, but it should not be an automatic decision.
Compare the interest rate, fees, repayment terms, and risks associated with the financing against the costs and consequences of leaving the IRS balance unresolved.
Depending on the circumstances, an IRS payment arrangement or another tax-resolution option may be more appropriate.
Consider obtaining professional advice before taking on expensive debt simply because an IRS deadline is approaching.
Create a Plan Before the Debt Gets Worse
The most effective response to tax debt is usually a structured plan.
Start by determining exactly how much you owe.
Then identify whether all required tax returns have been filed.
Next, review your monthly income and necessary expenses to determine what you can realistically afford.
After that, investigate the IRS collection options that may apply to your circumstances.
If the tax debt is large or complicated, consider speaking with a qualified tax professional before making a major financial decision.
Final Thoughts
IRS tax debt can be intimidating, but taxpayers may have several potential ways to address an unpaid federal tax balance.
Depending on your circumstances, you may be able to use an installment agreement, an Offer in Compromise, a temporary collection-status arrangement, or another IRS resolution option.
The key is to take action rather than ignore IRS notices.
A tax debt can become more difficult to resolve when penalties, interest, liens, levies, or additional unfiled tax returns become involved.
If you have received an IRS collection notice, carefully review the document, verify the amount owed, understand your deadlines, and investigate your available options.
For complicated situations involving significant debt, business taxes, multiple years, potential penalties, or collection actions, consulting a qualified tax attorney, CPA, or enrolled agent can help you understand the situation before making an important financial decision.
Tax rules and IRS procedures can change, and eligibility for specific programs depends on individual circumstances. This article is intended for general educational purposes and should not be considered individualized legal, tax, or financial advice.