At the end of 2023, there were 24 million individuals and business taxpayers who owed the IRS back taxes. When a taxpayer owes the IRS, they must get into an agreement or face possible IRS collection enforcement in the forms of liens, levies, and wage garnishments. High tax debtors can also face passport restrictions (owe >$62,000) or even asset seizures in egregious circumstances.

The IRS has options to avoid collection enforcement. These options include:

• Extension of time to pay
• Payment plans (IRS calls them “installment agreements”)
• Financial hardship options:
  • Partial pay installment agreements
  • Currently not collectible status
  • Offer in compromise (settlement)

Background on tax debt:

How many owe the IRS

Every year, millions of taxpayers end up owing the IRS. Many pay off their balance, but some enter payment plans. 

As of 9/30/2024, over 24 million individuals and businesses owed the IRS back taxes.   3.7 million were in payment plans.  Another 508,000 were in hardship status (not collectible, partial pay installment agreement, or received an offer in compromise).  Almost 20 million are not in an agreement with the IRS and face possible liens, levies, and passport restrictions.

Time to resolve

Depending on the option chosen, resolving tax debt can take anywhere from one day to several months.  The easiest options (extensions to pay, streamlined installment agreements) can be done instantly, and online.  All other options require interaction with the IRS by mail or by phone.

Common causes of tax debt

Most incur a balance due because they do not have enough tax withheld from their paycheck (W-2 employees), don’t make estimated tax payments when required (business owners, gig economy workers, retirees, investors), or they have an additional tax assessment (from an audit or CP2000 underreporter notice).  Tax debt often arises from self-employed income or major life changes like selling a business.

What you need to know about tax debt and options

Payment alternatives

You have four main options: getting an extension to pay, setting up an installment agreement (payment plan), or qualifying for hardship programs like the temporary Currently Not Collectible status or an Offer in Compromise. Installment agreements are the most common choice. Currently 88% of all agreements with the IRS are payment plans.

Penalties and interest

Unpaid taxes come with penalties and interest, but you can sometimes reduce penalties. For example, entering into an installment plan can cut your failure to pay penalty in half.  The interest can also add up.  IRS interest rates have been as high as 8%.

Amount owed

You can challenge the amount you owe if you think it’s incorrect. This could involve requesting a review of an audit or CP2000 notice, filing an amended return, or asking for penalty relief.

Avoiding enforcement

To prevent IRS actions like liens or levies, it’s crucial to act promptly. Most IRS collection letters are automated, leading to enforcement if ignored.  The only way to avoid a levy is to get into an agreement with the IRS.  If you owe more than $62,000, you need to be in an agreement with the IRS to avoid passport restrictions.  You can avoid a Notice of Federal Tax Lien if you owe less than $50,000 and enter into an IRS payment plan that is paid in 72 months or less before a lien is filed.

IRS collection statute of limitations

The IRS has 10 years from the date the tax is assessed to collect on a back tax debt.   The IRS always wants a taxpayer to pay before the collection statute expiration date (CSED).  Taxpayers who propose not to pay or to pay less than the total amount owed before the CSED will have to provide the IRS financial documents to prove their ability to pay an their hardship.

Most likely tax debt solutions

Payment plans

Most taxpayers opt for payment plans (IRS calls payment plans “installment agreements”), with a streamlined installment agreement (SLIA) available for debts under $50,000. SLIA balances can be paid over 72 months, or the collection statute, whichever is shorter.

Extensions to pay

Extensions to pay are another popular choice.  Asking for a 180-day extension can buy time to pay or qualify for a streamlined plan.

Other potential solutions

Currently not collectible status

If you are experiencing financial hardship and are unable to meet your basic living expenses, you can request Currently Not Collectible status.  This temporary status is often used by those who are unemployed or facing a hardship in which their necessary living expenses are unusually high (like medical bills).

Longer payment plans

If you owe less than $250,000, you can qualify for a full pay non-streamlined installment agreement.  This agreement allows you to pay the amount of the debt until the collection statute expiration date (10 years from the date of assessment).  One catch with this plan, the IRS will file a tax lien if you owe more than $10,000.

Ability to pay payment plans

If you can’t meet the terms of other plans, you’ll need to prove your ability to pay based on your assets, income, and expenses.  You will negotiate how much you can pay with your current assets and how much you can pay monthly. Included in the ability to pay plans is the “partial pay installment agreement” (PPIA). A PPIA is a two-year plan in which the taxpayer is not projected to pay off the full balance before the collection statute expires.

Offer in compromise

This rare option allows you to settle for less than you owe if you can’t pay within the collection statute period.  This program also requires you to prove your ability to pay through assets and monthly disposable income.

Steps to resolve tax debt

There are several steps to resolving a tax debt situation and getting into an agreement with the IRS to avoid enforced collection:

• Get IRS information: Understand what you owe, your collection status, and any deadlines.
• Assess your timeframe: If enforcement is imminent, consider requesting an extension or appealing for more time.
• Ensure filing and payment compliance: Make sure you’ve filed all necessary returns and are up to date on payments for your current tax year.
• Choose the best collection alternative option: Consider your financial situation and pick the right payment plan or hardship program.  You will need to consider the effect of receiving a Notice of Federal Tax Lien on your finances.  Only executing an extension to pay or a streamlined installment agreement before a lien is filed will avoid the tax lien if the amount owed is greater than $10,000.
• Apply for an agreement:  apply online for extensions to pay up to $100,000 or the streamlined installment agreement.  All other agreements require you contact the IRS.  If you are entering into one of the hardship agreements, you will need to file financial statements and provided documentation proving your ability to pay.  The IRS has Forms 433 for this purpose.
• Finalize agreement terms: Once agreed, ensure all terms are clear and address any disagreements.  If you do not agree with the IRS’ determination on what you can pay or the terms, you can appeal the findings.
• Fulfill agreement terms: Stick to your payment plan or program requirements.  Breaking an agreement, such as missing a monthly payment on a payment plan, will cause the agreement to default.  If the agreement defaults, you are back to the beginning of the process.
• Stay compliant: Avoid new tax debts and address any IRS notices promptly.