Managing tax debt can be challenging, but the IRS offers a range of programs to help taxpayers settle their tax liabilities in manageable ways. These options can reduce the financial burden and prevent severe collection actions.
Understanding Your Tax Debt
Tax debt arises when you owe taxes that have not been paid by the due date. Reasons include underpayment throughout the year, unexpected income, or errors. Knowing the exact amount owed is essential—this can be found via IRS notices or by accessing your IRS online account.
Why Resolving Tax Debt Is Crucial
Ignoring tax debt only leads to growing penalties and interest. The IRS may eventually take collection actions such as wage garnishments, bank levies, or filing federal tax liens, which can affect your credit and finances. Prompt resolution stops additional charges and limits IRS enforcement.
Common IRS Options to Resolve Tax Debt
The IRS facilitates several ways to address unpaid taxes:
1. Short-Term Payment Plan
If you can pay the full balance within 180 days, a short-term payment plan offers temporary relief by spreading payments without long-term commitments. Interest and penalties still accrue, but this plan avoids more severe collection steps.
2. Installment Agreement
Installment agreements let you pay your tax debt in monthly installments over up to 72 months. To qualify, you generally need to owe $50,000 or less in combined tax, penalties, and interest, and have all required returns filed. You can easily apply online or using Form 9465. This option provides predictable monthly payments while stopping collections.
Learn more about various types of installment agreements on FinHelp.io’s Installment Agreement page.
3. Offer in Compromise (OIC)
An Offer in Compromise enables taxpayers with financial hardship to settle for less than the full amount owed. The IRS evaluates your ability to pay by reviewing your income, assets, expenses, and overall financial situation. There are three types of OICs: doubt as to liability, doubt as to collectibility, and effective tax administration.
Applying requires submitting Form 656 with supporting documentation and having all returns filed. OIC approval is not guaranteed and can be a lengthy process.
For detailed guidance, see FinHelp.io’s Offer in Compromise (OIC) article.
4. Penalty Abatement
If penalties were due to reasonable cause—such as serious illness, natural disaster, or IRS errors—you can request a penalty abatement to remove added charges. Use Form 843 for this request. Providing thorough and honest explanations improves your chances of approval.
Explore various abatement options on FinHelp.io’s Penalty Abatement page.
5. Currently Not Collectible (CNC) Status
If you cannot pay any amount without severe financial hardship, the IRS may designate your account as Currently Not Collectible temporarily. During CNC status, collection efforts pause, but penalties and interest continue to accrue. The IRS can reverse CNC status if your financial situation improves.
Learn more about this on FinHelp.io’s Currently Not Collectible (CNC) page.
Choosing the Right Option
Your best choice depends on your financial circumstances:
| Situation | Recommended Option |
|---|---|
| Can pay full debt within 180 days | Short-Term Payment Plan |
| Can make regular monthly payments | Installment Agreement |
| Facing financial hardship, can’t pay full amount | Offer in Compromise |
| Incurred penalties due to valid reasons | Penalty Abatement |
| Unable to pay anything due to hardship | Currently Not Collectible Status |
Always consider consulting a tax professional for personalized advice.
Tips to Successfully Resolve Tax Debt
- Take action immediately to avoid escalating penalties.
- File all tax returns, even if unable to pay in full.
- Provide accurate and complete information when applying.
- Keep thorough records of all correspondence and payments.
- Seek professional help if overwhelmed.
Avoid Common Pitfalls
- Ignoring IRS notices can escalate issues.
- Not filing returns can increase penalties.
- Submitting incomplete applications delays resolution.
- Assuming CNC status forgives debt is incorrect — interest and penalties still apply.
Frequently Asked Questions
Can I resolve large tax debts? Yes. The IRS offers installment agreements and offers in compromise to manage large debts based on your ability to pay.
What if I ignore my tax debt? The IRS can impose liens, levies, and wage garnishments, and your debt will grow due to penalties and interest.
Do I need a tax professional? While not required, professional help can simplify the process and improve outcomes.
How do installment agreements differ from offers in compromise? Installment agreements pay your full tax debt over time; offers in compromise settle for less than the full debt but require proving financial hardship.
Sources
- IRS Payment Options
- IRS Installment Agreements
- IRS Offer in Compromise
- FinHelp.io Installment Agreement
- FinHelp.io Offer in Compromise (OIC)
For authoritative guidance, visit IRS.gov.