What the IRS can do to collect a tax debt, the rights a taxpayer has at each step, and the programs that let a debt be paid over time, settled for less, or put on hold.
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When a tax return shows a balance due, or the IRS assesses additional tax after an audit, the debt becomes collectible and the IRS has powers no ordinary creditor has: it can file a federal tax lien against everything the taxpayer owns, levy bank accounts and wages, and seize property, all without first suing. Those powers come with procedural rights. Before the first levy and after filing a lien notice the IRS must send notice and offer a collection due process hearing with the IRS Independent Office of Appeals, where the taxpayer can propose alternatives, and the hearing's outcome can be appealed to the United States Tax Court. The IRS also has a limited time to collect after assessment, after which the debt generally expires, although several events extend that period.
The main relief programs are statutory. An installment agreement lets the taxpayer pay over time, and the IRS must accept one for smaller balances that meet the conditions in the statute. An offer in compromise settles the debt for less than the full amount where there is doubt about collectibility (the taxpayer cannot pay in full before the collection period ends), doubt about liability, or where full collection would be inequitable; the IRS applies published formulas to income and assets, and the offer must be paid as agreed and the taxpayer must stay compliant afterward or the full debt returns. Currently not collectible status pauses collection for a taxpayer who cannot pay basic living expenses. Innocent spouse relief can free a spouse from tax on a joint return that was caused by the other spouse's income or errors. Penalty abatement is available for reasonable cause and, once, under the first-time abatement administrative policy. Income tax debts can in some circumstances be discharged in bankruptcy, but only if they are old enough under the Bankruptcy Code's tests and the returns were filed; payroll trust-fund taxes and fraud penalties are not.
Two cautions. First, the trust fund recovery penalty makes owners, officers and others personally liable for the employee withholding a business failed to pay over, and it survives the business. Second, the market for "tax relief" is full of firms that charge large fees to file an offer in compromise the IRS was never going to accept; the IRS publishes the eligibility rules and a pre-qualifier tool, and a licensed representative (attorney, CPA or enrolled agent) is bound by Treasury Department practice rules. State tax agencies run their own collection and settlement programs under state law.
Open every IRS letter and note the deadline on it, because the collection due process rights expire if the request is late. File all missing returns first; the IRS will not consider an offer or most agreements for a taxpayer who is not current. A tax lawyer is the right choice when the debt is large, when a business owes payroll taxes, when fraud or an unfiled-return history is involved, or when the dispute may go to Tax Court; a CPA or enrolled agent can handle many collection matters. Low Income Taxpayer Clinics represent eligible taxpayers free of charge, and the Taxpayer Advocate Service helps when normal channels have failed. Be skeptical of anyone who promises a settlement before reviewing your finances.
Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.
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Other entries in the same area of law, each written from the same primary sources.