Tax Debt

Jim Buttonow, CPA CITP

Updated on:

Tax Debt Facts

The IRS has alternatives if you cannot pay your taxes.

There are four alternatives: extension to pay, installment agreement, and two hardship alternatives- currently not collectible status and the offer in compromise. Installment agreements make over 90% of all agreed collection alternatives between taxpayers and the IRS.

Penalties and interest accrue on outstanding balances owed.

Taxpayers face up to 25% failure to pay penalty plus interest. Taxpayers who enter into installment agreements can cut their failure to pay penalty in half. Taxpayers who qualify can also request abatement of their penalties if they qualify.

You can still look to lower the taxes and penalties owed.

Taxpayers can look to reduce the amount they owe or penalties assessed because the statute of limitations on years with balances are still open. If the amount owed is as a result of an audit or CP2000 notice that is not correct, the taxpayer can request audit or CP2000 reconsideration. If the tax owed is not correct, the taxpayer can file an amended return (or an original return if the IRS assessed the tax owed to a non filer on a substitute for return). Also, taxpayers who qualify for penalty abatement can request penalty relief. All will reduce the amount owed.

Paying the outstanding balance or getting into a collection alternative is the only way to avoid potential IRS collection enforcement.

Getting into “good standing” is key to avoiding enforcement. Full payment or entering into a payment plan, extension to pay, or one of the hardship agreements avoids IRS enforcement.

Act quickly to avoid enforced collection.

The best way to avoid IRS collection activity is to get into an agreement with the IRS. Once the IRS issues a levy, the only way to release it is to get into an agreement with the IRS.

If your circumstances change, you can renegotiate your agreement.

Can I renegotiate? Yes. For example, if you obtain a SLIA for $500 a month and then you lose your job, you can contact the IRS and provide new financial information to negotiate a lower ability to pay agreement or CNC status.

How long does it take to resolve?

Generally, tax debt issues can be resolved in as little as 1 day and longer than a year for complex situations with other compliance issues, such as payroll or non-filing issues. Solution time also depends on the collection alternative requested. Extensions to pay can be completed online or by phone in an hour. The most complicated option, the offer in compromise, can take over a year.

What are the likely causes of tax debt?

Most taxpayers likely have income that is not subject to withholding (like a small business owner or an investor) or they have a life event that has changed their normal filing/paying, such as a spike in income from selling a business.

Tax Debt Solutions

Pay, an extension to pay, or a streamlined installment agreement

Most taxpayers choose to not deal with the IRS and pay the amount. In fact, of the 29 million who file and owe, only about 5 million will ultimately request a collection alternative. Out of the four collection alternatives, taxpayers choose the streamlined installment agreement almost 9 out of 10 times. The streamlined agreement (SLIA) is available for taxpayers who owe $50,000 or less, and allows the taxpayer to pay over 72 months (or the collection statute of limitations, whichever is shorter). Also, a timely executed SLIA avoid a Notice of Federal Tax Lien fling. In 2024, only 31,876 taxpayer out of the over 24 million taxpayers who owed the IRS filed for an offer in compromise (with only 28% of the OIC applicants being approved for an OIC).

Extensions to Pay

Many taxpayers can ask the IRS for 180 days to obtain the funds to pay. This option does not cost the taxpayer a fee to request – but interest and the failure to pay penalty still accrue. Many taxpayers use the 180 extension to pay to pay under the $50,000 SLIA threshold – and then enter into a SLIA to avoid the filing of a tax lien.

Reduce the Liability

Use amended returns, audit/CP2000 reconsideration, and penalty abatement – if applicable – to lower the amount owed. It is always the best option to look first to lower the amount owed.

Full-Pay Non-Streamlined Payment Plan

The IRS offers payment plans for taxpayers who owe up to $250,000 to pay over the life of the IRS collection statute of limitations (10 years from the date the tax is assessed, plus any extensions). The one drawback is the IRS will file a Notice of Federal Tax Lien with the full pay non-streamlined plan.

Ability to Pay Installment Agreement

If the taxpayer cannot meet the terms of the SLIA or full pay, non-streamlined plan, they will need to compute their ability to pay. The IRS will first look for payment through assets (like funds in a bank or retirement account). Secondly, the IRS will want to know the taxpayer’s ability to pay with monthly installment payments (I.e. a payment plan). To calculate the ability to pay, the taxpayer will average their monthly income and their allowable necessary living expenses to determine if they have any monthly disposable income. Generally, the IRS will want the taxpayer to pay their monthly disposable income each month in a payment plan until the balance is paid, or the collection statute expires. Ability to pay plans can take some time to set up with the IRS. Often, there are disagreements between the IRS and the taxpayer on the components of monthly disposable income.

Currently Not Collectible Status (CNC)

CNC means that the taxpayer cannot pay based on their current circumstances – either with a lump sum payment from their assets (like a savings account) or through monthly payments (I.e. a payment plan). Taxpayers must provide financial information to the IRS (IRS Form 433 and supporting documentation) to prove their inability to pay.

Offer in Compromise- Doubt as to Collectibility

Taxpayers who in financial hardship with no hopes of paying the IRS through assets or monthly payments before the collection statute of limitations (10 years from when the tax was assessed) may qualify to settle their taxes through an offer in compromise- doubt as to collectibility (OIC). The OIC is a rarely used option and requires that the taxpayer offer their “reasonable collection potential” to the IRS as a settlement amount (called the “offer amount”). OICs require technical computations on the taxpayer’s ability to pay (i.e. qualify for an OIC) and the reasonable collection potential (offer amount). Only 28% of OICs were accepted in 2024, largely due to errors in calculating the ability to pay and reasonable collection potential.

Resolving Tax Debt Issues Requires taking the Following Steps:

1. 1. Get your IRS account information and collection status from the IRS: There are 3 items to get from the IRS: balance owed information, collection enforcement status and deadlines, and compliance status. It helps to obtain your IRS account transcripts which show the assessments, penalties assessed, balances owed, and some account activity. However, it is usually necessary to contact the IRS and get specific information about enforcement activity and deadlines. Also, if you are not sure that you have filed all of your required past year’s tax returns, you will need to ask the IRS.
  2. Evaluate whether you have enough time to avoid collection enforcement: If enforcement is imminent, it may be best to request an extension if there are other time-consuming steps involved in obtaining a collection agreement (like filing past due returns or evaluating options to pay). You can contact the IRS directly and request a collection hold or an extension to pay. If the taxpayer is already under a levy or garnishment, they will want to ask for a levy release in exchange for a deadline to comply. If enforcement relief is denied, the taxpayer will want to consider appealing the decision or moving quickly to get into an agreement so that the levy is released.
  3. Fix any immediate noncompliance issues: Taxpayers cannot proceed to obtaining a collection agreement without being both in filing and payment compliance. Filing compliance means that you have filed all required tax returns (for individuals, that is usually the current and past 6 years of returns). For payment compliance, the taxpayer will need to have enough withholding and/or estimated tax payments so that they will not owe again for the next filed tax return. The taxpayer will need to correct any compliance deficiencies before moving forward to a collection agreement.
  4. Evaluate best collection alternative based on your circumstances: Several factors come into consideration including the taxpayer’s ability to pay, the amount owed (which will determine which options may not be available), and avoidance of collection enforcement. Taxpayers will need to evaluate their financial information in relation to the alternatives available.
  5. Select your collection alternative – and complete the steps to obtaining the agreement: Simple agreements like the extension to pay, SLIA, and the full-pay non-streamlined plan can be executed quickly with very few IRS forms to complete. In many circumstances, the extension to pay and SLIA can be done online in less than an hour. Ability to pay alternatives such as the ability to pay installment agreement, currently not collectible, and the offer in compromise require financial disclosure to the IRS. The taxpayer will need to prepare Collection Information Statements (Form 433 series) and other required documents to request these solutions. Likely, there will be multiple interactions with the IRS to answer questions and negotiate the final terms. Taxpayers will need to respond timely in this step to avoid enforced collection (I.e. a levy).
  6. Finalize terms of the agreement and appeal any disagreements: The taxpayer will need to confirm (by IRS notice or by reviewing their IRS account transcripts) that the agreement was reached. If there are disagreements with the terms of the agreement, collection enforcement actions, or rejected OIC, the taxpayer may need to appeal to get a second review of their circumstances and proposed solution terms.
  7. Complete the terms of the agreement: If the agreement is an extension to pay- pay before the due date or get into another collection alternative. If the agreement is a payment plan, make the payments each month. If the agreement is an OIC, complete the terms of payment and stay in compliance for the next five years. CNC status requires no further activity. If you have a levy in place, make sure the levy was released if that was in the terms of the agreement.
  8. Stay in compliance and monitor future notices for action: Be sure not to file/owe/not pay in future years. Any new unpaid balance will default an existing installment agreement. Unpaid balances in the next five years will also default any approved OIC. Taxpayers who owe will always get an annual notice from the IRS outlining payments made and the outstanding balance owed. Any other notices will need to be addressed immediately to avoid default and possible enforced collection activity.

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