What to Do If You Owe the IRS

A tax bill you cannot pay is stressful, but the IRS has formal programs for exactly this situation. Acting early keeps your options open and keeps penalties and interest from snowballing. Here is how the process works and which paths may apply to you.

First: Do Not Ignore It

Penalties and interest keep growing on unpaid balances. Unanswered notices escalate, and eventually the IRS can file a federal tax lien or levy wages and bank accounts. Almost every resolution option is easier to get before collection action starts.

Two moves help immediately:

• File every required return, even if you cannot pay. The penalty for failing to file is generally much larger than the penalty for failing to pay.
• Read each notice carefully. It states what you owe, why, and the deadline to respond.

Your Main Options

Payment Plans

The IRS offers short-term plans for balances you can pay within a few months, and long-term installment agreements for larger balances paid monthly. Many individuals and businesses can apply online without speaking to anyone. Interest and a reduced late-payment penalty continue while you pay, but a plan in good standing generally stops more serious collection action.

Offer in Compromise

An offer in compromise lets some taxpayers settle for less than the full amount owed. The IRS generally accepts an offer only when it believes the amount offered is the most it can reasonably expect to collect, based on your income, expenses, and assets. Many applications are rejected, so check eligibility carefully before paying application fees.

Currently Not Collectible Status

If paying anything would leave you unable to cover basic living expenses, the IRS may temporarily pause collection. The debt does not go away and interest continues, but active collection stops while your situation is reviewed.

Penalty Relief

You may be able to have penalties removed. First-time penalty abatement is available to many taxpayers with a clean recent history. Reasonable cause relief may apply if something outside your control, such as a serious illness or a disaster, kept you from filing or paying on time.

State Tax Debt

Most states have their own payment plans and, in some cases, settlement programs. Rules vary widely, so check your state revenue department or ask a professional who works in your state.

When to Get Professional Help

Consider a CPA, enrolled agent, or tax attorney if:

• You owe a large balance or several years of taxes
• You have received a notice of intent to levy or a lien has been filed
• You have unfiled returns
• You run a business that owes payroll taxes

Be cautious of anyone who guarantees a specific settlement before reviewing your finances, or who asks for large fees up front.

Not sure where you stand? See which tax relief options may apply to you.