Background

Many taxpayers and small-business owners end up with more than one type of tax liability: personal income tax, payroll (employment) taxes, and sometimes property or sales taxes. In my 15 years advising clients, I’ve seen the same pattern: untreated smaller balances compound with interest and penalties and one missed payroll return can trigger severe collection action. The IRS and state tax agencies can place liens, levy bank accounts, and pursue employment tax trust‑fund penalties for unpaid payroll taxes (IRS).

How it works — the practical sequence

  1. Inventory every tax debt. Pull federal account transcripts (IRS Online Account or by calling the IRS), state tax notices, and any municipal tax statements. Note the type, balance, date assessed, and whether a lien or levy is in place.
  2. Classify by legal and financial risk. Payroll (trust‑fund) taxes and recent assessed balances with active liens or levies belong at the top. Unpaid payroll taxes can carry employer trust‑fund penalties and faster collection steps.
  3. Contact the agency early. The IRS and most states accept installment agreements and other arrangements if you engage before enforcement escalates (IRS Payment Plans). Early contact preserves more options.
  4. Negotiate and implement. Use installment agreements, partial‑payment plans, or Offers in Compromise only when appropriate. Keep current filings and deposits up to date to maintain eligibility for most relief programs.

Real-world example

John, a self‑employed contractor, owed $25,000 in income taxes and $10,000 in unpaid payroll taxes. We prioritized resolving the payroll tax balance first because unpaid payroll taxes can lead to trust‑fund penalties and possible personal liability for the responsible person. After setting up a payroll tax payment plan and catching up payroll deposits, John used an installment agreement for the remaining income tax balance, preserving his business cash flow.

Who is affected

Individuals, sole proprietors, and small to mid‑sized businesses commonly face multiple tax debts. High‑cash‑flow seasonal businesses and employers who fall behind on payroll deposits are especially vulnerable to urgent collection action.

Prioritization and payment strategies (actionable steps)

  • Prioritize by consequence: payroll/trust‑fund taxes and debts with liens/levies come first. Address taxes that can trigger criminal or personal liability before noncriminal income tax balances.
  • Confirm collection status: a tax assessed but not yet collected may allow more negotiation room than an active levy or lien.
  • Use IRS payment plans: long‑term installment agreements or partial‑payment installment agreements can spread the burden. Compare options and ask for a Direct Debit Installment Agreement to reduce default risk (IRS payment options).
  • Evaluate an Offer in Compromise (OIC) only if you cannot pay full liabilities and you meet strict IRS criteria; preparing accurate financial statements is critical. For guidance, see our resources on filing an OIC and when it’s likely to be approved (FinHelp internal guides: filing an Offer in Compromise online; when an Offer in Compromise is likely to be approved).
  • Consider securing debt strategically: if you have equity you can liquidate cheaply (retirement accounts generally are poor choices), use that analysis to decide whether to pay down a high‑priority tax first.
  • Protect current compliance: always file and pay current tax deposits and returns. Falling behind on new obligations limits options.

When to call a professional

Hire a CPA or tax attorney when payroll tax trust‑fund issues, potential criminal exposure, or complex negotiations (Offers in Compromise, appeals) arise. In my practice, professional representation sped resolution and preserved client businesses in many cases.

Common mistakes and misconceptions

  • Mistake: Treating all tax debts the same. Payroll taxes, state withholding, and recent assessed balances can carry much faster and harsher consequences than an older income tax balance.
  • Mistake: Waiting to contact the IRS or state agency. Early communication preserves more relief options.
  • Misconception: Bankruptcy always clears tax debt. Bankruptcy can discharge certain tax debts only under narrow conditions and won’t remove many recent unpaid taxes.

Frequently asked questions

  • What should I pay first? Generally, prioritize payroll/trust‑fund taxes, liens, and any debt with imminent levy action. Then address high‑interest balances and recently assessed amounts.
  • Can I negotiate with the IRS? Yes — the IRS offers installment agreements, partial‑payment plans, and Offer in Compromise in limited situations (see IRS guidance and FinHelp’s OIC resources).
  • Will a payment plan stop penalties and interest? Payment plans stop some collection actions but do not stop interest and most penalties; a plan reduces enforcement risk and spreads payments.

Practical checklist to get started

  1. Gather notices and account transcripts for every taxing authority. 2. Prioritize debts by legal risk and current enforcement action. 3. Contact agencies to request installment agreements or discuss options before levies start. 4. Document cash flow, assets, and monthly budgets in case an OIC or negotiated adjustment is needed. 5. Engage a tax professional if payroll penalties, liens, or criminal exposure are present.

Interlinks (FinHelp)

Professional disclaimer

This article is educational and does not replace personalized tax advice. Tax situations are unique; consult a qualified CPA, enrolled agent, or tax attorney before making decisions.

Authoritative sources

In my experience, disciplined prioritization, early engagement with taxing authorities, and accurate documentation are the fastest path from multiple tax debts to a manageable plan and restored financial stability.