Back Taxes, Tax Debts, and Your Legal Options

If you owe substantial amounts to the IRS in unpaid taxes, you may worry about your ability to emerge from these burdens and restore your financial health. Some taxpayers consider filing for bankruptcy, but often a less extreme solution can resolve the issue. One simple alternative to consider in some cases involves filing an amended tax return. This can reduce a taxpayer’s liability if it was overstated on the initial return, or if the IRS filed a substitute return when the taxpayer failed to file a return. (Substitute returns often do not apply the full range of deductions and credits for which a taxpayer may be eligible.) Filing an amended tax return can avoid or minimize any penalties and interest that may be charged due to filing a late return or failing to file a return.

Installment Payment Plans

If filing an amended tax return does not adequately address the issue, you may want to consider proposing an installment payment plan to the IRS. This provides relief to a broad range of taxpayers. If the IRS agrees to an installment payment plan, it will stop collection efforts and consider the taxpayer compliant. These plans are available virtually automatically to taxpayers who owe $50,000 or less to the IRS and can pay off the debt within six years. If you do not fit within that category, you still may be able to propose an installment payment plan, but the IRS will conduct a more thorough review, and approval is not guaranteed.

Installment payment plans may not work if the taxpayer does not have sufficient resources to make adequate payments. Interest will continue to accrue on the tax debt during the course of the plan. However, it still can be used as a temporary strategy to slow the accumulation of tax debt while the taxpayer pursues other options.

Offers in Compromise

The concept of an offer in compromise appeals to many taxpayers because it is often presented as paying the IRS “pennies on the dollar” for back taxes that are owed. However, it is not available to everyone. An offer in compromise involves agreeing to pay the IRS a certain amount of the owed debt, while the rest is forgiven. If a taxpayer owes a substantial amount of debt and is unlikely to be able to pay it for the foreseeable future, an offer in compromise may make sense. You must not have failed to file tax returns and must have kept up with any estimated tax payments. The payment period for an offer in compromise can extend for up to two years.

Statute of Limitations Defense

The IRS generally has 10 years to collect on a tax debt after it assesses the tax liability. If this period expires, the IRS no longer has a legal right to collect the taxes. Certain exceptions may pause or extend the statute of limitations, such as when a taxpayer files for bankruptcy or makes an offer in compromise. A taxpayer generally should not rely only on the statute of limitations defense, unless they have no assets on which the IRS can place a lien or a levy. If it does succeed, it can wipe out an obligation to pay tax debt entirely, but most people find this strategy too risky and stressful.

Last reviewed October 2024