Help With IRS Problems: Solutions for Tax Issues

Dealing with IRS problems can be stressful, but ignoring them often makes things worse. Whether it’s a missed payment, an unexpected audit, or a tax debt you can’t afford to pay, the IRS has processes in place to address these issues. Understanding your options and acting quickly can help minimize penalties and financial strain.

There are several ways to resolve tax problems, from setting up payment plans to negotiating settlements. Knowing what steps to take can make the process more manageable and improve your chances of a favorable outcome.

IRS Notices and Correspondence

Receiving a letter from the IRS can be unsettling, but these notices serve specific purposes and provide instructions on what to do next. The IRS sends different types of correspondence, from reminders to serious collection actions. Understanding the notice helps determine the appropriate response.

Each notice includes a unique number, typically in the upper right-hand corner. A CP2000 notice indicates a discrepancy between reported income and third-party records, such as employer-reported W-2s or 1099s. A CP14 notice is the first alert of an unpaid balance, while a CP504 warns of possible collection actions if the debt remains unresolved.

Ignoring these notices can lead to additional penalties and interest. The IRS typically sets a response deadline of 30 to 90 days. If a taxpayer disagrees with a notice, they can appeal or request reconsideration by providing supporting documentation, such as bank statements or corrected tax forms.

Some notices request additional information to verify deductions or credits. A CP75 notice, for example, signals a review of eligibility for the Earned Income Tax Credit or other refundable credits. Responding promptly prevents delays in refunds or adjustments. If more time is needed, taxpayers can request an extension by contacting the IRS.

Payment Arrangements

When taxpayers cannot pay their full tax bill immediately, the IRS offers options to manage the debt through structured payment plans or settlements. Choosing the right approach depends on financial circumstances and eligibility requirements.

Installment Plans

An installment agreement allows taxpayers to pay their debt in monthly payments rather than a lump sum. The IRS offers different plans based on the amount owed and the time needed to pay it off.

Individuals owing $50,000 or less in combined tax, penalties, and interest can qualify for a streamlined installment agreement, which allows repayment over up to 72 months without requiring detailed financial disclosure. Businesses owing $25,000 or less in payroll taxes may also qualify.

For larger debts, the IRS may require a full financial disclosure using Form 433-F or Form 433-A. Interest and penalties continue to accrue until the balance is paid. As of 2024, the interest rate for individuals is 8%, based on the federal short-term rate plus 3%.

Missing a payment can result in default, leading to enforcement actions such as tax liens or levies. Taxpayers experiencing financial hardship should contact the IRS immediately to modify their agreement.

Offer in Compromise

An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the full amount owed if they can demonstrate financial hardship. The IRS evaluates income, expenses, asset equity, and future earning potential when reviewing an offer.

To apply, taxpayers must submit Form 656 and a detailed financial statement (Form 433-A for individuals or Form 433-B for businesses). A non-refundable $205 application fee is required, though low-income applicants may qualify for a waiver. An initial payment must also be included unless the taxpayer qualifies for a hardship exception.

The IRS typically takes several months to review an OIC, during which collection efforts are temporarily suspended. If accepted, the taxpayer must comply with all future tax filing and payment obligations for five years. Failure to do so can reinstate the original debt. If rejected, the taxpayer has 30 days to appeal.

Penalty Relief

The IRS may reduce or remove penalties in certain situations through penalty abatement programs. Common penalties include failure-to-file (5% per month, up to 25% of the unpaid tax) and failure-to-pay (0.5% per month, up to 25%). Interest on unpaid taxes continues to accrue even if penalties are waived.

First-time penalty abatement is available for taxpayers with a clean compliance history for the past three years who have filed all required returns. Reasonable cause relief may be granted if circumstances beyond the taxpayer’s control—such as serious illness, natural disasters, or reliance on incorrect tax advice—prevented timely filing or payment.

To request penalty relief, taxpayers can call the IRS or submit a written explanation. If denied, they may appeal through the IRS Independent Office of Appeals.

Tax Liens and Levies

Failing to address outstanding tax debt can lead to serious consequences, including tax liens and levies. These enforcement actions secure payment and give the IRS priority over other creditors.

A federal tax lien is a legal claim against a taxpayer’s assets, including real estate, vehicles, and financial accounts. It arises automatically when the IRS assesses a tax liability and sends a notice demanding payment, but the debt remains unpaid. Though tax liens no longer appear on consumer credit reports, they can still affect loan approvals and business financing.

If the debt remains unresolved, the IRS can issue a tax levy, which involves seizing assets to satisfy the liability. Levies can include wage garnishments, bank account freezes, or property seizures. Wage garnishments continue until the debt is paid or another arrangement is made. Bank levies result in an immediate freeze on available funds, with the bank holding the assets for 21 days before remitting them to the IRS. This waiting period allows taxpayers to contest the levy or negotiate alternative resolutions.

Taxpayers can take steps to prevent or remove liens and levies, but timing is critical. Paying the balance in full is the most straightforward way to release a lien, but alternatives such as a lien withdrawal or discharge may be available. A withdrawal removes the public record of the lien, while a discharge eliminates the lien from specific property, allowing for its sale or transfer. In some cases, the IRS may also agree to subordinate the lien, giving other creditors priority.

Audits and Document Requests

An IRS audit can range from a simple mail request for supporting documents to an in-person examination of financial records. Audits are often triggered by discrepancies, unreported earnings, or unusually high deductions, but some are conducted randomly based on statistical formulas. The IRS uses the Discriminant Function System (DIF) and Unreported Income Discriminant Index Formula (UIDIF) to evaluate returns for potential errors.

When selected for an audit, a taxpayer typically receives a Letter 2205 or similar notice specifying the tax year under review. Common audit topics include business expense deductions, charitable contributions, and foreign asset disclosures. If discrepancies are found, the IRS may propose adjustments, leading to additional tax liability, penalties, and interest.

Audits can expand beyond the initial scope if new concerns arise. If an audit of a 2021 return uncovers substantial underreported income, the IRS may extend its review to prior years under the six-year statute of limitations. Maintaining detailed records—such as receipts, invoices, mileage logs, and bank statements—is essential to substantiating deductions and income reporting.

Representation Options

Navigating IRS issues can be complex, and having proper representation can make a significant difference in the outcome.

Enrolled Agents, CPAs, and Tax Attorneys

Three primary professionals can represent taxpayers before the IRS: enrolled agents (EAs), certified public accountants (CPAs), and tax attorneys. Enrolled agents specialize in tax matters, CPAs focus on accounting and financial planning but can also handle tax disputes, and tax attorneys provide legal expertise, particularly in cases involving fraud allegations or criminal investigations. Attorneys also offer attorney-client privilege, which can be beneficial in sensitive cases.

Power of Attorney and Third-Party Authorization

To allow a representative to act on their behalf, taxpayers must submit Form 2848, Power of Attorney and Declaration of Representative. For less formal assistance, such as discussing account details, taxpayers can authorize a third party using Form 8821, Tax Information Authorization.