Have Tax Debt? Here’s What to Do

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Updated on Wednesday, February 13, 2019

Some people are fearful of the IRS. But if you are someone who owes tax debt to the IRS, you need more than a little bit of healthy fear to get you through — you need a plan. Here’s what you can do to pay off tax debt.

7 steps to pay off tax debt

Make an initial payment.

If you can’t pay your tax bill, one strategy — according to the IRS — is to make an initial payment based on how much you can afford, then work to determine a plan for paying down the rest of your debt.

Determine how much you can pay.

When faced with what seems like a staggering tax bill, don’t panic. The important thing is that you don’t ignore the IRS. One of your first steps should be to determine how much of your tax bill you can afford to pay. And keep in mind that whatever you don’t pay will be subject to accruing interest and penalty fees.

Choose a payment option.

Once you have settled on how much of a payment you can make, you have to make that payment. These are the main options for payments: using the electronic federal tax payment system, which is free, but is most suitable for businesses or large payments and requires enrollment; electronic funds withdrawal (which can be done during e-filing) straight from your bank account or from the IRS mobile app, same-day wiring (which may carry bank fees), a check or money order, or cash at a retail partner.

Ask for an installment agreement.

If you know you can’t make your payment in full, you can apply online for a payment plan through the IRS. Your eligibility for a payment option will depend on your individual tax situation.

To apply for an installment agreement, you have to fill out an application online that will include information such as your Social Security number, your most recent tax return filing date and your basic personal information. There are three options for a payment plan: a full payment, a short-term payment plan that will require paying in less than 120 days and a long-term installment agreement to pay over more than 120 days. In general, you are eligible to apply online for the installment agreement if you owe $50,000 or less in combined tax, penalties and interest fees and you have filed all your tax returns. The Federal Trade Commission also notes that the IRS usually can’t deny an installment agreement if you owe less than $10,000.

Ask for an offer in compromise.

Contrary to what you may think, the IRS is willing to work with you if you have tax debt and can’t pay what you owe. According to the IRS, it will consider what it calls an offer in compromise if you can’t pay your bills — and if doing so will cause a financial hardship to you.

An offer in compromise is something that can be considered after you have exhausted other options. It is based on several factors that the IRS will assess, including:

  • Your ability to pay
  • Your current income
  • Your total debt and expense obligation
  • Your assets and equity

If you can put together a reasonable offer in compromise, the IRS notes that it is generally able to accept the offer if it represents the most it can expect to collect within a “reasonable amount of time.”

There are some qualifications that you have to meet to be considered for an offer in compromise, which is detailed on the IRS website. When you submit your offer, you will have to choose one of two payment options to show the IRS your offer is serious: a lump sum or a periodic payment. The lump-sum offer consists of you including 20% of the total offer amount. If the IRS takes your offer, it will keep that 20% payment and you will pay the rest in up to five payments. If you go the periodic payment route, you’ll still submit an initial payment with your offer application, but you’ll make monthly installments while you wait to hear back from the IRS. If it does accept your application, you’ll pay monthly until your offer is paid off.

In some cases, if you meet certain low-income qualifications, your application fee, initial payment and monthly installments will be waived while your offer is considered. While the IRS considers your offer, you are required to make any associated payments with your offer, and any other collection activities will be suspended. If you don’t hear back from the IRS within two years of your offer, it is considered accepted.

Ask for “Currently Not Collectible” status.

Depending on your financial state, the IRS may determine that your account is not collectible at the moment and temporarily pause collection until your status changes. To be eligible for the status, you may have to complete a Collection Information Statement and submit proof of your finances, such as your monthly income and assets. Even if the IRS determines that you are in a not-collectible status, your debt will still be susceptible to penalties and interests until the full amount is paid. To request a delay in the collection process, you have to call the IRS.

Work with a professional.

Although it might seem counterproductive, it may be helpful to hire a tax professional who can help you sort through your options and make a plan. The IRS recommends that if you choose to work with a tax professional, you make sure you vet their credentials. There are certain rules pertaining to debt collection, and you always have the right to work directly with the IRS instead of a debt collector.

What you should know about tax debt

Tax debt can occur in large or small amounts. Essentially, as soon as you fail to pay what you owe the IRS, you have tax debt. Here’s what you should know about tax debt.

IRS collection practices. The official collection practice for tax debt begins after you have received your tax bill from the IRS and failed to make your payment in full. After you receive your first tax bill, the IRS will send you one more bill before enacting collection actions. But, in the meantime, the amount you owe will continue to accrue interest and possible penalties.

Once the IRS has sent your final tax bill, it will move to collection actions, which can range from using any future tax refunds to seizing your property and assets or showing up at your home or business.

Statute of limitations. In general, the statute of limitations on a tax liability for the IRS is 10 years. After the statute of limitations expires, the government no longer has the right to pursue collecting that liability.

Always file your taxes. One of the best ways to be proactive against tax debt is to make sure that you always file your taxes by the IRS deadline and work to make any type of payment that you can. Delaying, either with filing or with debt, never pays off. It’s always best to work with a tax professional to file your return to make sure that you reduce your chance of an error.

Don’t ignore notices from the IRS. As tempting as it may be to think that ignoring notices from the IRS will make them forget about any debt you owe, it doesn’t exactly work that way. In fact, the longer the IRS doesn’t hear from you or is unable to reach you, the more it may increase its efforts. For instance, the IRS could turn to seizing property, your bank account and your possessions, or issuing you a summons.

The bottom line

If you find yourself in a situation where you have tax debt, you have options. You can work directly with the IRS and submit details of your financial status to come up with some sort of payment plan or even temporary deferment depending on your specific situation.

The most important thing you can do is communicate with the IRS and take steps to show it you are serious about making some form of payment.