Immediate steps to take (day 1–30)

  1. Don’t ignore notices. The IRS typically initiates contact by mail and will outline what you owe and any penalties. Ignoring notices only increases interest and collection risk (IRS, Notice and Correspondence guidance: https://www.irs.gov/).
  2. Get current account details. Use the IRS Online Account to view balances, payments, and notices. If you can’t access the account, order tax transcripts (IRS Form 4506-T process) or call the IRS collections unit listed on the notice.
  3. File any missing returns now. If taxes are unpaid because you didn’t file, file the returns immediately. The failure-to-file penalty can be higher than the failure-to-pay penalty.
  4. Gather documentation. Collect pay stubs, recent bank statements, mortgage/rent payments, monthly bills, and copies of tax returns—this information will be needed for any collection alternative.

Sources: IRS Online Account and transcripts (https://www.irs.gov/individuals/get-transcript).

How the IRS treats unpaid taxes (brief primer)

  • Interest accrues on unpaid tax from the original due date until paid in full. Interest compounds daily and is set quarterly by statute.
  • Penalties apply for failure to file and failure to pay. Reasonable-cause penalty abatement may be available if you can show circumstances beyond your control.
  • The IRS can file a federal tax lien, levy bank accounts or wages, and pursue enforced collection. However, these are generally preceded by notices and opportunities to resolve the debt.
  • The IRS’s ability to collect ends when the Collection Statute Expiration Date (CSED) passes—generally 10 years from assessment—though there are exceptions (see IRS CSED guidance).

Source: IRS, Interest and Penalty information and Collection Statute (https://www.irs.gov/).

Primary resolution options and when to use them

  1. Installment Agreement (monthly payment plan)
  • Best when you can pay the tax in full over time. The IRS offers short-term and long-term installment agreements, and you can apply online for many balances (see IRS Online Payment Agreements).
  • Expect setup fees for longer-term plans unless you qualify for a low-income waiver. Interest and penalties continue to accrue until paid.
  • Use when your household budget supports steady monthly payments and you want to stop collection escalation.
  1. Offer in Compromise (OIC)
  • An OIC lets you settle federal tax debt for less than the full amount when you prove that paying the full amount would create financial hardship or would be unfair under the law. The IRS evaluates income, assets, allowable expenses, and future income (Form 656 and financial statement forms such as Form 433-A/B).
  • OICs are selective and require detailed documentation. Many applications are rejected for incomplete or unrealistic offers.
  • For detailed help on qualifying and preparing a strong package, see our guide: Offer in Compromise: Qualifying, Applying, and Pitfalls.
  1. Currently Not Collectible (CNC) status
  • CNC is a short- to medium-term option if your necessary living expenses leave no ability to pay. While in CNC status, the IRS generally suspends collection actions; interest and penalties usually continue to accrue.
  • CNC is not forgiveness. The IRS reviews status periodically and may return the account to active collection if your situation improves.
  1. Penalty Abatement (Reasonable Cause)
  • You can request the IRS remove penalties if you have a reasonable cause (serious illness, natural disaster, death in the family, reliance on erroneous professional advice). Documentation is critical.
  1. Other options: bankruptcy, bankruptcy-related protections, and hardship programs
  • Some tax liabilities may be dischargeable in bankruptcy in narrow circumstances (priority tax debt vs. nonpriority). Discuss with a bankruptcy attorney before assuming this route.
  • If a levy or lien is in place, you can sometimes arrange a lien discharge or subordinate lien as part of negotiation or sale of an asset.

For help comparing payment options, see: Choosing Between an Installment Agreement and Offer in Compromise.

How to decide which route is best

  • Start with a realistic budget. Calculate your Reasonably Collectible Income (RCI): income after allowable monthly living expenses. The IRS uses RCI to decide OIC eligibility and whether an installment plan is practical.
  • If RCI is clearly negative or zero and you have no collectable equity, CNC or an OIC may be appropriate.
  • If you can reorganize finances to free up monthly cash, an installment plan is often the quickest way to stop escalating collection actions.
  • Seek professional advice for OICs, as improper valuations or missing documents are the most common reasons for denial.

IRS tools and worksheets, plus our article on reasonable collectible income, are useful when making this assessment.

Practical negotiation and documentation tips

  • Prove your case with current documentation: paystubs, retirement statements, bank statements, medical bills, and any proof of job loss. For OICs and CNC claims, the IRS will expect thorough records.
  • When negotiating, propose a payment amount you can sustain. If the IRS accepts, defaulting can make future deals harder.
  • Keep all correspondence. If you call the IRS, note the date, time, agent’s name, and confirmation numbers.
  • If a notice includes a deadline to respond, don’t miss it. Missing a deadline can move the case to enforced collection (levy) more quickly.

How professionals can help (and when to hire one)

  • Certified public accountants (CPAs), enrolled agents (EAs), and tax attorneys can file offers, negotiate installment agreements, and represent you in Collection Due Process (CDP) hearings.
  • Hire a pro if your situation involves: large balances, potential criminal exposure, complex business taxes, or if you receive a Notice of Federal Tax Lien or levy.
  • Reasonable fees are often offset by better outcomes — for example, correctly preparing an OIC can save tens of thousands compared with a rejected application.

In my practice, clients who brought accurate budget worksheets and complete bank statements saw faster approvals for CNC or payment plans. For OICs, assembling a clean financial package and realistic offer increased acceptance rates.

What to expect after you set an agreement

  • Installment Agreement: stay current with future tax filings and payments; defaulting may lead to revocation, additional penalties, and enforced collection.
  • Offer in Compromise: the IRS may require an initial payment and will monitor compliance for a set period. If you default or fail to file returns for five years, the OIC can be revoked.
  • CNC: periodic reviews and potential reactivation if your finances improve.

Always continue to file timely tax returns, even if you can’t pay. Failure to file can complicate or void negotiated agreements.

Common mistakes to avoid

  • Waiting until a levy is imminent to contact the IRS.
  • Submitting incomplete OIC packages or unrealistic offers.
  • Ignoring future tax filings because you’re in a repayment plan—keep filing and paying current taxes.
  • Using predatory tax resolution companies that promise guaranteed results; verify credentials (CPA, EA, or attorney) and check for upfront fee practices.

Quick checklist you can follow

  • File missing returns immediately.
  • Request an IRS transcript and confirm total balance and assessment dates.
  • Create a written monthly budget showing income and expenses.
  • Contact the IRS to discuss options or apply online for a payment plan.
  • Compile documentation for OIC or CNC if applicable.
  • Consult a qualified tax professional if you owe a large amount or face liens/levies.

When you need emergency help

If the IRS served a bank levy or wage levy, contact a tax professional immediately and request a “collection due process” appeal if eligible. You can also request a temporary delay (CNC) while arranging representation.

Authoritative resources

Professional disclaimer

This article is educational and does not constitute personalized tax advice. Tax law and IRS processes change; consult a qualified CPA, enrolled agent, or tax attorney for guidance tailored to your situation.