What Are Your Options If You Owe Back Taxes?

Owing back taxes can be stressful, but it’s a manageable situation with various resolution options. Many individuals face this due to unforeseen circumstances, financial hardships, or oversights. Understanding the options available from tax authorities, particularly the Internal Revenue Service (IRS), is a crucial first step toward regaining financial stability. This article guides you through navigating tax debt, outlining how to assess your situation and the paths to address your obligations proactively.

Understanding Your Tax Account and Notices

Confirming the exact amount and nature of your tax debt is the initial step. The IRS offers tools to verify your tax account information, including the IRS online account for records, amounts owed, payment history, and key documents. You can also request tax transcripts, such as a Wage and Income Transcript or an Account Transcript, which summarize reported information and account activity. Many state tax authorities offer similar online portals for state-level tax debt.

Taxpayers often receive various notices from the IRS regarding tax debt. Common CP notices are computer-generated communications addressing different situations. For instance, a CP14 indicates an unpaid balance, while CP501 and CP503 are reminders. A CP2000 suggests a discrepancy between reported income and IRS records. Each notice typically explains the issue, the amount due, and provides a response deadline, making it important to read them carefully.

Preparing for Resolution: Information and Documentation

Before engaging with tax authorities to resolve a debt, gathering comprehensive financial information and documentation is essential. This preparation provides a clear understanding of your financial standing, necessary for any negotiation or application. Accurate records streamline the resolution process and demonstrate your financial situation to the tax agency.

Collect verifiable proof of your income, such as recent pay stubs, W-2 forms, 1099 forms, and bank statements showing deposited funds. Document living expenses, including housing, utilities, food, transportation, and medical costs. These records establish your ability to pay.

Also necessary are details regarding your assets and liabilities. For assets, compile information on bank account balances, investment statements, real estate values, and vehicle details, including outstanding loans. For liabilities, gather statements for mortgages, car loans, student loans, and credit card debts. This detailed financial picture forms the basis for any proposed resolution plan.

Exploring Available Resolution Options

Several resolution options are available for back taxes, each with specific eligibility criteria and procedural requirements. Understanding these options is crucial for selecting the most appropriate path based on your financial circumstances. The information gathered during preparation will be instrumental in determining eligibility and completing necessary forms.

Installment Agreement

An Installment Agreement allows taxpayers to make monthly payments to the IRS, typically over up to 72 months. This option is generally available to individuals owing up to $50,000, or businesses owing up to $25,000, in combined tax, penalties, and interest. To qualify, you must be current with all filing requirements, meaning all past tax returns must be filed.

Request an Installment Agreement using Form 9465. This form requires basic information about the amount owed and your proposed monthly payment. A user fee applies, around $130 for a standard agreement, or $31 for direct debit payments. For low-income taxpayers, this fee can be reduced to $43, or waived/reimbursed under certain conditions. Penalties and interest continue to accrue, though the failure-to-pay penalty may be reduced.

Offer in Compromise (OIC)

An Offer in Compromise (OIC) allows certain taxpayers to settle their tax debt with the IRS for a lower amount than what they originally owe. This option is considered when there is “doubt as to collectibility” (IRS believes you cannot pay the full amount) or “effective tax administration” (paying the full amount would cause significant economic hardship). Eligibility requires filing all required tax returns and making estimated tax payments.

To apply for an OIC, submit Form 656, along with detailed financial information on Form 433-A (individuals) or Form 433-B (businesses). These forms require extensive data on income, expenses, assets, and liabilities to help the IRS calculate your Reasonable Collection Potential (RCP). A non-refundable $205 application fee is generally required, though it may be waived for low-income taxpayers. An initial payment is also needed: 20% of the offer for a lump-sum option, or the first month’s payment for a periodic option. If accepted, you must adhere to payment terms and remain compliant with future tax obligations for typically five years.

Currently Not Collectible (CNC) Status

Currently Not Collectible (CNC) status is an option for taxpayers experiencing severe financial hardship, unable to pay tax debt or basic living expenses. When the IRS designates an account as CNC, it temporarily stops collection efforts like levies or garnishments. This status is not debt forgiveness; interest and penalties continue to accrue. The IRS periodically reviews your financial situation, often every one to two years, to determine if your ability to pay has improved.

No specific form requests CNC status; it’s determined through an IRS financial analysis, typically reviewing information similar to Form 433-F or Form 433-A/B. You must demonstrate that paying your tax debt would prevent meeting necessary living expenses. While in CNC status, file all future tax returns on time and comply with other tax obligations to avoid further collection actions.

Submitting Your Chosen Resolution Plan

After identifying the most suitable resolution option and preparing documentation, formally submit your plan to the IRS. This process requires careful attention to detail for correct and efficient application processing. Submission methods vary depending on the resolution plan chosen.

For an Installment Agreement, Form 9465 can be submitted with your tax return or mailed to the appropriate IRS service center. General instructions are on the IRS website. For an Offer in Compromise, Form 656, detailed financial statements (Form 433-A or 433-B), and any required initial payments or fees must be mailed to the designated IRS Offer in Compromise processing center. Send all submissions via certified mail with a return receipt requested for proof of mailing and delivery.

While some payment options are available online through IRS Direct Pay, full resolution applications like an Offer in Compromise typically require mail delivery. After submission, anticipate a confirmation notice from the IRS. Processing times vary; an Installment Agreement request might process in weeks, while an OIC can take six months to over a year due to detailed financial review. During this period, the IRS may request additional information or clarification. Respond promptly to avoid delays or rejection. Continue to file all future tax returns on time and make required payments for current tax obligations to maintain compliance. Always keep copies of everything submitted to the IRS.

Responding to Enforcement Actions

If the IRS has initiated collection enforcement actions, understand how to respond to mitigate their impact. Common actions include federal tax liens, wage levies, and bank levies, which are serious steps taken by the IRS to secure or collect outstanding tax debt. Addressing these often involves establishing one of the previously discussed resolution plans.

A Federal Tax Lien is the government’s legal claim against your property, including real estate and financial assets, to secure tax debt. This public record can affect your credit and ability to sell assets. To address a lien, request its withdrawal using Form 12277. Withdrawal may be granted if the lien was filed prematurely, if you enter an Installment Agreement, or if it’s in the best interest of both you and the government. A lien withdrawal removes the public notice, distinct from a lien release that occurs automatically once the debt is fully satisfied.

A Wage Levy or Bank Levy involves the IRS seizing a portion of your wages or funds from your bank account. These direct collection actions require immediate steps to halt them. To get a levy released, contact the IRS promptly to resolve your tax liability and establish a payment plan, such as an Installment Agreement or an Offer in Compromise. The IRS may release a levy if it determines it causes immediate economic hardship, preventing you from meeting basic living expenses. Providing financial information, typically on Form 433-A or 433-F, demonstrates hardship.

Taxpayers have Collection Due Process (CDP) rights, allowing them to appeal certain collection actions, such as a Federal Tax Lien or a Notice of Intent to Levy. Request a CDP hearing by filing Form 12153 within 30 days of the notice date. This hearing provides an opportunity to discuss collection alternatives with the IRS Office of Appeals. If the 30-day window is missed, an Equivalent Hearing may still be available, though it does not automatically pause collection activities.