How Does the IRS Collect on Overdue Tax Debts?

How Does the IRS Collect on Overdue Tax Debts?

If you don’t pay your taxes in full when you file your return, the IRS will send you a bill for what you owe. This starts the collection process. The IRS has a few different ways to get the money you owe if you have overdue tax debt.

Payment Plans

If you can’t pay your tax debt all at once, you can set up a payment plan with the IRS to pay it off over time. This is called an installment agreement. To set one up, fill out Form 9465 and send it to the IRS with your tax return. On the form, say how much you can pay each month and when you want to make payments.

The IRS charges a $43 fee to set up an installment plan. You’ll also owe interest and a late payment penalty on the amount you still owe. The penalty is usually 0.5% per month. But if the IRS approves your payment plan, the rate drops to 0.25% if you filed your return on time.

The IRS has made it easier to get approved if you owe $25,000 or less and can pay it off within 5 years. Be sure to show your proposed monthly payment amount and date on Form 9465.

Offers in Compromise

If you really can’t pay your tax debt even with a payment plan, you can apply for an offer in compromise. This lets you settle your tax debt for less than you owe. The IRS looks at your finances and future income to decide if they’ll accept your offer.

To apply, fill out Form 656 and Form 433-A and send them to the IRS. Form 656 is the offer, and Form 433-A shows your financial situation.

Using Collection Agencies

The IRS is required to use private collection agencies to collect some inactive overdue tax debts. This started in 2021. The agencies help taxpayers settle their tax bills. They can set up payment plans or take offers in compromise too.

If the IRS assigns your account to a collection agency, they’ll send you a letter. The collection agencies have to follow the Fair Debt Collection Practices Act. This law protects people from harassment by debt collectors.

What to Do if You Can’t Pay

Even if you can’t pay everything you owe, still file your return by the deadline and pay as much as possible. Then take these steps:

• Request an installment agreement to pay monthly
• Apply for an offer in compromise to settle for less than you owe
• Work with the IRS or collection agency to make payment arrangements
• Avoid wage/asset levies by cooperating with the IRS

Communicate with the IRS so you can avoid harsh collection actions like liens and levies. They’ll work with you if you show you’re trying to pay.