Owing money to the IRS creates significant stress and financial pressure that compounds over time as penalties and interest accumulate. Whether you have unfiled returns, unpaid taxes, or are facing an audit, understanding your options for resolving IRS problems is essential. The IRS offers multiple programs and procedures for taxpayers who cannot immediately pay their full tax liability, and knowing these options helps you find a path forward that protects your financial future.
Understanding Your Tax Debt
Before addressing IRS problems, you need a clear picture of what you owe and why. Request a transcript of your tax account from the IRS to see the assessed taxes, payments, penalties, and interest for each tax year. Tax debt includes the original tax liability plus penalties for failure to file, failure to pay, and interest that compounds daily on the unpaid balance.
Failure-to-file penalties are particularly severe, accruing at five percent of the unpaid taxes per month up to a maximum of 25 percent. Failure-to-pay penalties add another 0.5 percent per month. Combined with interest charges, a modest tax debt can grow substantially if left unaddressed. Understanding this growth emphasizes the importance of taking action sooner rather than later.
Options for Resolving Tax Debt
The IRS provides several options for taxpayers who cannot pay their full tax liability immediately. Payment plans allow you to pay over time, while offers in compromise may reduce the total amount owed. Currently not collectible status provides temporary relief when you truly cannot pay anything. Understanding which options apply to your situation helps you pursue the most appropriate resolution.
The right option depends on factors including the amount you owe, your current income and expenses, your assets, and your future ability to pay. Someone with steady income but temporary cash flow problems might do well with a payment plan, while someone with minimal income and assets might qualify for an offer in compromise or currently not collectible status.
Dealing With Unfiled Returns
If you have unfiled tax returns, addressing them should be your first priority. The IRS cannot accurately assess what you owe without filed returns, and unfiled returns prevent you from accessing most resolution options. The IRS typically requires all returns to be filed before approving installment agreements or offers in compromise.
When you have not filed for multiple years, the IRS may file substitute returns on your behalf. These substitute returns typically do not include deductions and credits you might be entitled to, resulting in higher assessed taxes than you actually owe. Filing accurate returns, even late, establishes your correct liability and may significantly reduce your debt.
IRS Audits and Examinations
If you receive notice that the IRS is auditing your return, understanding the process helps you respond appropriately. Audits can be conducted through correspondence, at an IRS office, or through field visits to your home or business. You have rights during the audit process, including the right to representation, the right to understand why the IRS is requesting information, and the right to appeal unfavorable decisions.
Responding promptly and completely to audit requests prevents unnecessary delays and additional scrutiny. Gather documentation supporting the items on your return that the IRS is questioning. If you disagree with proposed changes, you can request a meeting with the auditor's supervisor or pursue formal appeals through the IRS Office of Appeals.
Collection Actions
When tax debts remain unpaid, the IRS has powerful collection tools including levies on bank accounts and wages, seizure of property, and filing of federal tax liens that damage your credit. Tax liens attach to all your property and make it difficult to sell assets or obtain credit. Levies actually take your property or money to satisfy the debt.
Before the IRS can levy your property, it must send a final notice of intent to levy and notify you of your right to a Collection Due Process hearing. Requesting this hearing stops collection activity while your case is under review. Understanding these procedures helps you protect your assets while working toward resolution.
Penalty Abatement
In some circumstances, the IRS will remove or reduce penalties that have been assessed. Reasonable cause penalty abatement is available when you can show that failure to file or pay resulted from circumstances beyond your control, such as serious illness, natural disaster, or inability to obtain necessary records. First-time penalty abatement may be available if you have a clean compliance history.
Requesting penalty abatement can significantly reduce your tax debt since penalties often constitute a substantial portion of what you owe. Submit a written request explaining the circumstances that prevented compliance and providing any documentation that supports your claim. If the initial request is denied, you can appeal to the IRS Office of Appeals.
Working With a Tax Professional
Resolving IRS problems often benefits from professional assistance. Tax attorneys, certified public accountants, and enrolled agents can represent you before the IRS and navigate complex procedures on your behalf. These professionals understand IRS processes and can often achieve better outcomes than taxpayers attempting to resolve issues on their own.
Professional fees vary widely depending on the complexity of your situation and the professional's experience. For large debts or complicated circumstances, professional help is usually worth the investment. For simpler situations, you may be able to handle resolution yourself using IRS resources and guidance. Many professionals offer free consultations to assess your situation and explain your options.
Statute of Limitations
Understanding applicable time limits affects your strategy for resolving IRS problems. The IRS generally has three years from the date you filed a return to assess additional taxes and ten years from assessment to collect. If you never filed a return, there is no statute of limitations on assessment, which is another reason unfiled returns should be prioritized.
The collection statute expiration date represents the date after which the IRS can no longer collect a tax debt. Strategic planning around this date can sometimes result in significant debt reduction, though actions like filing for bankruptcy or submitting an offer in compromise can extend the collection period. Understanding how your actions affect these deadlines helps you make informed decisions.