What You Can Do When You Owe the IRS or Your State

If you owe back taxes, you have more options than paying the full amount at once. The IRS and most state tax agencies offer payment plans that let you pay over time, settlement programs that may reduce what you owe, and hardship relief if you cannot pay right now. Which option works depends on how much you owe, your income, and whether you have filed all your tax returns.

The fastest way forward is to contact the tax agency directly — the IRS has a collections department, and your state has a revenue or taxation office. Both can tell you in one conversation what payment methods are available to you and what documents you need to bring. Waiting makes the debt larger because penalties and interest keep adding.

Key Takeaways

  • A payment plan (called an installment agreement) lets you pay the IRS or your state in monthly amounts rather than a lump sum, though interest and penalties continue to accrue.
  • An Offer in Compromise may reduce the total amount you owe if you can show the IRS that paying the full debt would create genuine financial hardship.
  • Currently Not Collectible status pauses collection action for up to two years if you have no income or assets, though the debt remains and interest keeps growing.
  • You must file all missing tax returns before the IRS will discuss payment plans or settlements with you.
  • The IRS accepts payment by direct debit, credit card, check, and money order; state agencies vary in what they accept.

Payment Plans: Paying Monthly Instead of All at Once

A payment plan (formally called an installment agreement) is the most common way to handle tax debt. You and the tax agency agree on a monthly payment amount, and you pay that amount until the debt is gone. The IRS charges a setup fee (typically $31 to $225 depending on the method you choose) and continues to charge interest and penalties on the unpaid balance each month.

The IRS offers three types of payment plans. A short-term plan is for people who can pay off the debt in 120 days or less — there is no setup fee, but you still pay interest and penalties. A long-term installment agreement is for larger debts and can run for years; you pay the setup fee and interest continues to accrue. A streamlined installment agreement is available if you owe $50,000 or less and is faster to set up because the IRS does not verify your financial details as thoroughly.

To set up a payment plan with the IRS, call 1-800-829-1040 or go to IRS.gov and use the Online Payment Agreement tool. You will need your Social Security number, the tax year you owe for, and an idea of how much you can pay each month. State tax agencies have their own payment plan systems — contact your state's revenue office directly for the process.

Offer in Compromise: Settling for Less Than You Owe

An Offer in Compromise is a settlement where the IRS agrees to accept less money than the full tax debt. This is not forgiveness — it is a negotiated settlement based on your actual ability to pay. The IRS will only accept an offer if the amount you propose is genuinely what you can afford to pay, either as a lump sum or over a short period.

To may have access to, you must have filed all tax returns you are required to file and be current on estimated tax payments if you are self-employed. The IRS looks at your income, expenses, assets, and family size to determine what you can realistically pay. If you own a home or car with equity, the IRS will expect you to use some of that value toward the settlement.

You submit an Offer in Compromise using Form 656 and Form 433-A (for individuals) or Form 433-B (for businesses). The form asks detailed questions about your finances. You also pay a $225 application fee, though this fee is waived if your household income is below the federal poverty line. The IRS typically takes four to six months to respond, though complex cases can take longer.

State tax agencies sometimes offer similar settlement programs, but the rules and availability vary widely. Contact your state's revenue office to ask whether a settlement option exists and what the process is.

Currently Not Collectible Status: Pausing Collection When You Have No Income

Currently Not Collectible status is a temporary pause on collection action. If you have no income and no assets, you can ask the IRS to put your case on hold for up to two years. During this time, the IRS will not pursue wage garnishment, bank levies, or liens. The debt does not go away — interest and penalties keep adding — but collection activity stops.

After two years, the IRS will review your case. If your situation has not changed, you can request another two-year pause. This status is useful if you are unemployed, disabled, or in a temporary crisis and need breathing room. It does not reduce the debt, but it stops the immediate pressure of collection notices and wage garnishment.

To request Currently Not Collectible status, call the IRS at 1-800-829-1040 and explain your situation. The IRS may ask for financial documentation to verify that you truly have no income. Some state tax agencies offer a similar status, though the name and rules vary.

Bankruptcy: When Debt Is Too Large to Handle Any Other Way

If your tax debt is very large and you have other debts as well, bankruptcy may be an option. Chapter 7 bankruptcy can discharge (eliminate) certain tax debts if they meet specific conditions: the tax debt must be at least three years old, you must have filed the return at least two years before filing for bankruptcy, and the IRS must have assessed the tax at least 240 days before you file. Chapter 13 bankruptcy can include tax debt in a repayment plan that lasts three to five years.

Bankruptcy has serious consequences for your credit and finances, so it should only be considered after exploring payment plans, settlements, and hardship relief. If you are thinking about bankruptcy, speak with a bankruptcy attorney who can review your specific situation. Many offer free initial consultations.

What Happens If You Do Not Pay

If you owe taxes and do not set up a payment plan or settlement, the IRS and state tax agencies have legal tools to collect. The IRS can place a tax lien on your property, which gives the government a claim on your assets. It can also issue a wage garnishment that takes a portion of your paycheck, or a bank levy that freezes and withdraws money from your bank account.

These collection actions make the debt harder to manage because they reduce your income and can damage your credit. The sooner you contact the tax agency and set up a plan, the less likely you are to face these actions. If collection action has already started, you can still negotiate — contact the agency immediately and ask about a payment plan or hardship status.

Filing Missing Tax Returns First

Before the IRS will discuss a payment plan or settlement, you must file all tax returns you are required to file, even if you cannot pay what you owe. If you have not filed returns for multiple years, start with the most recent year and work backward. You can file old returns using the same forms you would use for a current year return.

If you need help preparing old returns, the IRS offers free tax preparation through the Volunteer Income Tax Assistance (VITA) program if your income is below a certain level. You can find a VITA site near you at IRS.gov. Some nonprofit organizations also help people file back returns for free or low cost.

Frequently Asked Questions

Can the IRS take my tax refund if I owe back taxes?

Yes. If you owe federal taxes, the IRS will keep any federal refund you are due and apply it to the debt. If you owe state taxes, the state will do the same with your state refund. This happens automatically — you do not have to do anything. If you are expecting a refund and owe taxes, it is a good reason to set up a payment plan before filing, so you know what to expect.

What if I cannot afford the monthly payment the IRS suggests?

Tell the IRS what you can actually afford to pay each month. The agency will work with you to set a lower payment, though this means the debt will take longer to pay off and interest will accrue for longer. If you truly cannot pay anything right now, ask about Currently Not Collectible status instead.

Do I have to pay the setup fee for a payment plan?

The IRS charges a setup fee for most payment plans (typically $31 to $225), but the fee can be added to your payment plan so you do not have to pay it upfront. Ask the IRS to include the fee in your monthly payments when you set up the plan.

How long does it take to get approved for an Offer in Compromise?

The IRS typically takes four to six months to review and respond to an Offer in Compromise, though some cases take longer. During this time, collection action is usually paused, but interest and penalties continue to accrue on the unpaid balance.

Can I get my tax debt forgiven?

Tax debt is not forgiven in the traditional sense, but it can be reduced through an Offer in Compromise or eliminated through bankruptcy if you meet specific conditions. Otherwise, you will need to pay it through a payment plan, settlement, or hardship status. The debt does not disappear on its own.