IRS Tax Debt & Back Taxes: Understanding Your Options 

Owing money to the IRS can become increasingly difficult if the balance remains unresolved. Penalties and interest may continue to increase the amount owed, and prolonged nonpayment can eventually lead to IRS collection activity.

The good news is that owing back taxes does not necessarily mean the entire balance must be paid immediately. Depending on the taxpayer's financial circumstances, amount owed, filing history, and other factors, several IRS payment and resolution options may be available.

Understanding how much you owe, why you owe it, and where your account stands in the IRS collection process is an important first step.

What Are Back Taxes?

"Back taxes" generally refers to taxes from a prior period that remain unpaid.

A federal tax balance may result from:

• Filing a tax return without paying the full amount due

• Underwithholding from wages

• Insufficient estimated tax payments

• Self-employment income

• IRS adjustments to a previously filed return

• An IRS examination or audit

• Unreported or incorrectly reported income

• Penalties and interest

• Business or payroll tax liabilities

A taxpayer may owe for a single tax year or have balances covering several years.

Why Does IRS Tax Debt Increase Over Time?

An unpaid IRS balance may increase because of applicable penalties and interest.

Depending on the circumstances, the IRS may assess penalties related to:

• Failure to file

• Failure to pay

• Underpayment of estimated taxes

• Accuracy-related issues

• Certain other filing or payment failures

Interest generally accrues on unpaid federal tax liabilities as provided by law.

This means that ignoring a tax balance can make the problem more expensive over time.

How Do You Find Out How Much You Owe the IRS?

Before choosing a resolution strategy, determine the amount actually owed.

Taxpayers should review:

• Tax years with outstanding balances

• Original tax assessed

• Penalties

• Interest

• Payments and credits

• IRS adjustments

• Collection notices received

• Returns that may still be unfiled

IRS account information and tax transcripts can help identify how a balance developed and what activity has occurred on the account.

Is the IRS Balance Always Correct?

Not necessarily.

Before entering into a payment or settlement arrangement, taxpayers should confirm that the underlying liability is accurate.

Potential problems can include:

• Missing payments

• Payments applied to the wrong tax year

• Incorrect IRS adjustments

• Unprocessed amended returns

• Incorrect income information

• Identity theft

• Duplicate assessments

• Other account-processing issues

If the amount appears incorrect, the underlying problem may need to be addressed before selecting a collection alternative.

What Happens If You Owe the IRS?

When a federal tax balance remains unpaid, the IRS may begin its collection process.

Taxpayers may receive a series of notices requesting payment. If the liability remains unresolved, collection activity can potentially progress to:

• Additional collection notices

• Federal tax liens

• Notices of intent to levy

• Bank levies

• Wage levies

• Other enforcement actions

The specific collection process varies depending on the taxpayer's account and circumstances.

Resolving the problem earlier generally provides more time to evaluate available options.

What If You Cannot Pay Your IRS Tax Debt in Full?

Several alternatives may be available depending on eligibility.

IRS Payment Plan

An installment agreement allows qualifying taxpayers to make monthly payments toward their IRS balance.

Different types of installment agreements may be available depending on the amount owed and the taxpayer's financial circumstances.

Offer in Compromise

An Offer in Compromise (OIC) may allow certain taxpayers to settle an IRS liability for less than the full amount owed.

The IRS generally evaluates the taxpayer's ability to pay based on factors such as income, expenses, assets, and equity.

An Offer in Compromise is not available simply because a taxpayer would prefer to pay less.

Currently Not Collectible Status

Taxpayers experiencing significant financial hardship may potentially qualify for Currently Not Collectible (CNC) status.

When an account qualifies, the IRS generally suspends active collection while the taxpayer remains unable to pay without creating qualifying financial hardship.

The underlying debt remains, and interest and applicable penalties may continue to accrue.

Penalty Relief

Some taxpayers may qualify for relief from certain IRS penalties.

Possible relief may include:

• First Time Abatement

• Reasonable cause relief

• Correction of improperly assessed penalties

• Other available administrative relief

Penalty relief generally does not eliminate the underlying tax liability.

What If You Have Several Years of Back Taxes?

Multiple years of unpaid taxes require a broader review.

Before establishing many IRS collection arrangements, taxpayers generally need to address outstanding filing requirements.

A review may therefore involve determining:

• Which tax returns have been filed

• Which returns remain unfiled

• The balance for each tax period

• Whether IRS substitute returns were prepared

• Whether prior assessments are accurate

• The taxpayer's current ability to pay

Once the account is understood, an appropriate resolution strategy can be evaluated.

What If You Have Unfiled Tax Returns?

Unfiled returns and unpaid taxes frequently occur together.

If required tax returns have not been filed, addressing those filing obligations is often an important part of becoming compliant and obtaining a long-term collection resolution.

Taxpayers should generally avoid guessing at what they owe based only on IRS collection notices. Preparing missing returns may significantly change the overall account picture.

Business and Payroll Tax Debt

Business tax liabilities can involve additional collection concerns.

Examples include:

• Payroll taxes

• Employment taxes

• Business income taxes

• Penalties

• Certain trust fund liabilities

Payroll tax debt can be particularly serious because the IRS may investigate whether individuals responsible for collecting and paying employment taxes can be held personally liable for certain unpaid trust fund taxes.

Business owners facing payroll or employment tax liabilities should address the issue promptly.

Can IRS Tax Debt Expire?

Federal tax collection is subject to statutory time limitations.

The IRS generally has a limited period to collect an assessed tax liability, but calculating the applicable collection expiration date can be complicated.

Certain events can suspend or extend the collection period.

For this reason, taxpayers should not assume that a tax debt will simply disappear after a specific number of years without reviewing the account history.

Should You Pay the IRS or Consider Another Resolution Option?

The appropriate approach depends on the taxpayer's financial situation.

Someone who can reasonably pay the liability may have different options from someone who cannot meet necessary living expenses while paying the IRS.

A proper evaluation may consider:

• Total IRS debt

• Monthly income

• Necessary living expenses

• Bank balances

• Real estate equity

• Vehicles

• Investments

• Retirement assets

• Business interests

• Other liabilities

• Remaining IRS collection period

These factors can affect whether a payment plan, Offer in Compromise, Currently Not Collectible status, or another strategy may be appropriate.

Be Careful With "Pennies on the Dollar" Tax Debt Claims

Advertisements sometimes suggest that taxpayers can automatically settle IRS debt for a small percentage of what they owe.

IRS settlement programs do exist, including the Offer in Compromise program, but qualification is based on specific financial and legal criteria.

No legitimate tax professional can determine that a taxpayer qualifies for a particular settlement amount without reviewing the relevant facts.

Taxpayers should understand the requirements before paying a company promising unrealistic tax debt reductions.

When May Professional Tax Representation Be Helpful?

Professional assistance may be appropriate when:

• A substantial amount is owed

• Several tax years are involved

• Tax returns remain unfiled

• The IRS balance appears incorrect

• A lien or levy has been threatened

• A bank or wage levy has occurred

• Business or payroll taxes are involved

• The taxpayer cannot afford the IRS's proposed payment

• An Offer in Compromise is being considered

• Previous attempts to resolve the account have failed

An authorized tax professional may be able to review IRS account records, communicate with the IRS, evaluate collection alternatives, and represent the taxpayer in qualifying matters.

Learn More About IRS Tax Debt Resolution

Our IRS Tax Debt & Back Taxes Resource Center provides educational guides covering:

• Understanding IRS Tax Debt

• Checking IRS Account Balances

• IRS Payment Plans

• Installment Agreements

• Offer in Compromise

• Currently Not Collectible Status

• IRS Penalty Abatement

• IRS Tax Liens

• IRS Levies

• Unfiled Tax Returns

• IRS Collection Statute of Limitations

• Business and Payroll Tax Debt

The right solution depends on the taxpayer's particular tax liability, financial circumstances, filing compliance, and stage of IRS collection.

Related IRS Tax Resolution Resources

You may also find these resources helpful:

• IRS Notice Resources

• Balance Due & Tax Debt Notice Resources

• IRS Collection Notices, Liens & Levies

• IRS Payment Plan Resources

• Offer in Compromise Resources

• Currently Not Collectible Resources

• IRS Penalty Abatement Resources

• Unfiled Tax Return Resources

• IRS Audit Resources

This article is provided for educational purposes only and should not be considered legal or tax advice. IRS collection procedures and tax debt resolution options depend on each taxpayer's individual facts, financial circumstances, filing compliance, and applicable tax law.