What Do You Do If You Owe Back Taxes?

Facing an outstanding tax debt can be stressful. Many feel overwhelmed, unsure of the next steps. This situation is common, and various options exist to address and resolve tax liabilities. This article guides you through understanding your tax debt and exploring available payment and resolution options.

Understanding Your Tax Debt

The first step is determining the precise amount owed and the specific tax periods involved. The Internal Revenue Service (IRS) communicates tax account issues through notices, such as CP14 for an unpaid balance or CP504 for an intent to levy. Reviewing these notices is a crucial starting point for understanding your situation.

You can also access your IRS online account to view tax records. Alternatively, request tax transcripts directly from the IRS. A Tax Account Transcript shows basic data, payments, and any changes after your original return was filed. A Tax Return Transcript displays most line items from your original filed return, including forms and schedules.

To request these transcripts, use the IRS’s “Get Transcript” service online to view, print, or download them. If online access is not feasible, order transcripts by mail using Form 4506-T or by calling 800-908-9946. Mail requests take 5 to 10 business days. Gathering this information, including the tax year(s), notice numbers, and your Social Security number, provides a clear picture of your obligations.

Exploring Payment and Resolution Options

Once you understand your tax debt, the IRS offers several pathways to resolve the outstanding amount. The most suitable option depends on your ability to pay the debt in full or over time. Each approach has specific requirements and benefits.

Paying the full amount owed is a straightforward option. This can be done online, by phone, or through mail. Settling the debt prevents further penalties and interest from accruing, providing immediate resolution to the tax liability.

If paying the entire balance immediately is not feasible, a short-term payment plan allows taxpayers up to 180 additional days to pay their full tax liability, including penalties and interest. Individuals who owe less than $100,000 in combined tax, penalties, and interest and have filed all required returns are generally eligible. Interest and penalties continue to accrue until the debt is fully paid.

For those needing more time, an installment agreement allows monthly payments, typically up to 72 months. Set this up through the IRS’s Online Payment Agreement tool or by submitting Form 9465. Individuals owing $50,000 or less in combined tax, penalties, and interest, and who have filed all required returns, may qualify for an online installment agreement. A guaranteed installment agreement is available for those who owe $10,000 or less and agree to pay it within three years, provided they have met all filing and payment requirements for the past five years. User fees apply to set up an installment agreement, and may be reduced or waived for low-income taxpayers.

An Offer in Compromise (OIC) allows taxpayers to resolve their tax liability for a lower amount than owed. This program is considered when there is doubt as to collectibility (you cannot pay the full amount), doubt as to liability (the amount owed is questioned), or effective tax administration (collecting the full amount would cause significant economic hardship). To apply for an OIC, taxpayers generally need to be current with all filing and payment requirements. The application process involves submitting Form 656, along with detailed financial information on Form 433-A (for individuals) or Form 433-B (for businesses), and often an application fee.

If your financial situation makes payments impossible without significant hardship, you may qualify for Currently Not Collectible (CNC) status. This status temporarily pauses IRS collection efforts like wage garnishments or bank levies. To qualify, you must demonstrate that your monthly expenses exceed your income, or that your income barely covers your basic living costs. The IRS evaluates your financial information, often requiring a Collection Information Statement (Form 433-A or 433-F). While in CNC status, interest and penalties continue to accrue, and the IRS may periodically review your financial situation.

Consequences of Unaddressed Tax Debt

Ignoring an outstanding tax debt can lead to severe financial repercussions from the IRS. These consequences can significantly impact your financial stability and future. Understanding these potential actions underscores the importance of proactive resolution.

Unpaid taxes accrue penalties and interest. A failure-to-pay penalty is typically 0.5% of the unpaid tax per month, up to 25%. This rate can increase to 1% if the tax remains unpaid 10 days after an IRS notice of intent to levy. If you enter an installment agreement, the penalty rate may decrease to 0.25% per month. Interest is also charged on unpaid taxes, compounding daily, at the federal short-term rate plus 3%.

The IRS may file a Federal Tax Lien. This is a public notice that the government has a legal claim to your property, including assets acquired after the lien is filed. While a lien does not immediately seize assets, it can limit your ability to obtain credit or sell property, as it establishes the IRS’s priority claim. The lien remains in effect until the tax, penalties, and interest are paid in full, and can be released within 30 days of full payment.

If payment is not made, the IRS can proceed with a Levy, the legal seizure of your property. This can include wage garnishments (where a portion of your paycheck is sent to the IRS) or bank levies (where funds are seized from your bank accounts). The IRS does not need a court order to issue a levy. Before a levy, the IRS typically sends a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, like a CP504 notice, providing a 30-day response window. For bank levies, funds are typically frozen for 21 days before being sent to the IRS.

For seriously delinquent tax debt, which includes assessed tax, penalties, and interest totaling more than $64,000 for 2025 (adjusted annually for inflation), the IRS can certify this debt to the State Department. This can lead to the denial or revocation of your passport, significantly restricting international travel. This measure is generally applied after the IRS has exhausted other collection efforts, such as filing a tax lien or attempting a levy.

Working with the IRS and Seeking Professional Assistance

Engaging directly with the IRS is an important part of resolving tax debt. When communicating with the agency, maintain clear records of all correspondence, including dates, names of representatives, and summaries of discussions. Responding promptly to notices and providing requested information facilitates the resolution process.

Navigating tax laws and IRS procedures can be daunting. Seeking professional assistance from qualified tax professionals, such as Enrolled Agents, CPAs, or tax attorneys, offers advantages. These professionals have in-depth knowledge of tax regulations and resolution programs. They can analyze your financial situation, identify appropriate resolution options, and develop a tailored strategy.

Tax professionals can act as your representative, handling communication and negotiations with the IRS. This can reduce stress and ensure your rights are protected. They can assist in preparing necessary documentation, such as financial statements for an Offer in Compromise or Currently Not Collectible status, and ensure accurate submission. Engaging professional help early can lead to more favorable outcomes, potentially reducing penalties, establishing manageable payment plans, or settling the debt for a lower amount.