Working With the IRS When You Can’t Pay Your Taxes in Full

Use these links to jump to different sections:

• Three Steps in the Tax Collection Process
• 1. The IRS Sends You a Bill
• 2. The IRS Files a Tax Lien
• 3. The IRS Files a Tax Levy
• How to Avoid a Lien or Levy
• How an Accountant and Attorney Can Help
• Find Experienced Legal Help

Unfortunately, if you have difficulty paying your federal income taxes on time, ignoring a tax debt will not make it go away. And unlike most private creditors, the Internal Revenue Service (IRS) has a variety of legal tools at its disposal to collect on its debts.

“People sometimes think they can deal with the IRS like any other creditor,” says tax attorney William S. Manne. “They think with a doctor’s bill, ‘They have a lot of money. They won’t come after me for this $500 bill.’ Well, you can’t do that with the IRS. It will only make your problem worse. You can’t ignore them; you must try to affirmatively deal with it, because they are very powerful and are not going away.”

But contrary to what you might think, the IRS will not just show up at your door if you’re a week late in paying your taxes and seize your house. Even the IRS needs to follow certain rules and regulations with respect to collection. This process affords delinquent taxpayers several options to make good on what they owe.

Three Steps in the Tax Collection Process

Here is a brief overview of the tax collection process:

1. The IRS Sends You a Bill

Ideally, when you file your 1040 each year, the government owes you a tax refund. But if you owe taxes, the IRS will send you a tax bill. If you fail to pay the bill in full, the IRS will send a second bill. In fact, the IRS may send multiple bills before proceeding to the next step. But keep in mind: Federal law imposes penalties and interest for every day a balance remains unpaid. So each bill will be larger than the previous one.

2. The IRS Files a Tax Lien

A lien represents a claim against your property for unpaid tax debt, and, by law, it occurs automatically when you owe taxes. If you fail to pay your tax bills, the IRS will send you a “Notice of Federal Tax Lien,” which may also be filed with local or state authorities. The lien does not mean the IRS is taking your property; it only means that it has a valid claim against it and has priority over other creditors. If you pay your tax debt, the IRS will release the lien.

3. The IRS Files a Tax Levy

A tax levy represents a seizure of property to satisfy an outstanding debt. The IRS will only use a levy as a last resort after sending you a “Final Notice of Intent to Levy.” In most cases, the IRS must give you at least 30 days’ notice and afford you the right to a hearing before enforcing a levy.

How to Avoid a Lien or Levy

If you have received a tax bill and cannot pay the full amount by the due date, you can apply for an online payment agreement through the IRS website. If approved, you will receive up to 120 days to pay your bill. And if you think you might still need more time, you can ask for a monthly installment agreement. If you are not able to meet even a monthly installment agreement, you can ask the IRS for an “offer in compromise” (OIC). This is basically an agreement where the IRS accepts less than the full amount of tax owed.

“Generally, offers in compromise and monthly payment plans are available only if you don’t have the means to pay the bill,” Manne says. “All of the paperwork is meant to demonstrate that you don’t have the money to pay them.”

If you attempt to negotiate with the IRS, try to stay as even-keeled as possible. “A lot of people who work for the IRS are just like you or me,” Manne says. “It’s not that they don’t like you; they’re just doing their job, and collecting taxes is a tough job. Common decency and niceties go a long way. Yelling at the person on the other end isn’t going to get you anywhere but deeper in trouble.”

How an Accountant and Attorney Can Help

If you think you may need an OIC, you should speak with a licensed accountant and possibly a reputable tax attorney. Manne says a licensed CPA or tax professional will likely be efficient at manipulating the numbers efficiently, while a good attorney can best argue your compromise case to the IRS.

“Some people think of tax law as being absolutely black and white, but it’s full of grey areas and unknowns,” he adds. “So it is not infrequent that you disagree about the amount of tax or whether tax is owing, and you can have that debate, but in my view, you should be represented by a lawyer as soon as possible. What happens a lot is taxpayers argue with the agent, argue at the hearing, and lose, and then they want to go to court, but they’ve already created a record of what they’ve said and argued that the lawyer then has to deal with. The strategy of what the best argument is should be decided early on.”

Find Experienced Legal Help

If you’re concerned about the cost of an OIC, Manne says he has worked on cases where a client or accountant handles the paperwork side, “and then I deliver it and discuss it with the tax authority.”

He continues: “A lot of people have sleepless nights, worried that the IRS is going to come after them. Those people ought to avail themselves by working with them. People are really afraid when the IRS catches up with them, but you might be able to address it and sleep better at night if you become compliant taxpayers.”

If you want more information on this area of law, see our tax overview.