Written by Chad ZollingerChad Allen Zollinger is a Content Management Specialist for Best Company. Majoring in Writing Studies, Chad is an avid reader, a lifelong writer, and once completed the Rubik's Cube in 34 seconds.
This article has been updated for 2019
You owe the IRS money and can't pay off your tax penalties.
So what happens now?
If you can't resolve your IRS tax debt, you can either ignore the debt completely (not recommended), submit an appeal to the IRS, arrange a payment plan with the IRS, or pursue penalty abatement by hiring a top tax relief company.
There are a ton of great options for tax debt forgiveness.
By the end of this article, you’ll know what happens when you ignore tax debt, how to appeal IRS tax debt, which tax relief companies are best, and what the experts are saying about penalty abatement options.
(This article is 1 of 15 chapters in The Definitive Guide to IRS Debt Forgiveness. Return to the guide to get the full explanation of IRS Debt Forgiveness.)
What happens when you ignore your tax debt?
The statute of limitations for IRS debt collection is ten years, which means the IRS can’t pursue collections on a debt that was assessed ten years prior.
Does this mean that you should ignore your income tax debt for ten years?
Most people find themselves being targeted by the IRS after neglecting to give proper attention to their tax liability, which is the amount of tax on your income. Some people choose to evade the IRS entirely. The first thing that will happen when you evade taxes is pretty minor but has major implications.
You’ll receive a few notices from the IRS. If you ignore the notices of your tax debt, you’ll receive a failure-to-pay penalty.
The IRS will force you to resolve your tax debt by implementing any of the following methods:
- Federal tax liens
- Wage garnishments
- Bank levy
- IRS Automated Collection System (ACS)
- Failure to pay penalty (.5 percent per month)
- Seizure of assets
- Passport restriction
- Sale of debt to collections
Most people avoid their tax debt because they think that, somehow, they’ll get in more trouble by contacting the IRS. If only they knew that you can actually seek IRS penalty abatement yourself if you can't resolve your debt.
The opposite is true. Much like paying off normal debt, the longer you avoid paying your taxes, the more severe the penalty will be. First, you’ll notice the debt increasing, then you’ll be subject to more aggressive collection techniques (like levies and liens).
Over time, your credit score will likely take a hit as a side effect of aggressive IRS penalties. You’ll find that you won’t be able to travel abroad and any business ventures will be stopped in their tracks.
The IRS has a law enforcement branch called IRS Criminal Investigation (CI) which investigates tax crime and fraud. The IRS will come after those who do not pay their taxes and seek legal action against those who willfully and consistently evade taxes.
It’s absolutely vital that you pay off your tax debt.
Can you go to jail for not paying taxes?
Even if you manage to evade the IRS for a time, it’s not likely you’ll be able to make it 10 years without a heavy penalty and even jail time.
Fines, penalties, and the amount of time you could spend in jail for tax crimes are different for each specific crime:
- Tax Evasion: Up to five years in prison and/or a $250,000 personal fine ($500,000 for companies)
- False Statements (Fraud): Up to three years in prison and/or a $250,000 personal fine ($500,000 for companies)
- Willful Failure to File or Pay Taxes: Up to one year in prison and/or a $100,000 personal fine ($200,000 for companies)
Beyond jail time and fines, additional consequences for not paying your income taxes include the following:
- Passport restriction
- IRS takes your tax refund
- Credit score decrease due to tax lien
- IRS tax debt penalty (+5 percent per late month up to 25 percent)
- Asset or property seizure
Of course, the IRS does much for those who are trying to be financially responsible and still can’t pay their IRS taxes; it doesn't just throw everyone in jail for not paying taxes.
There are IRS programs and opportunities designed specifically for those who want to pay back the IRS, but can’t afford it at the time.
Tax fraud usually happens because self-employed taxpayers operate their business with a “cash-only” policy. When you pay and accept cash, it’s much easier to report the wrong amount, either on purpose or accidentally.
Worried the IRS is going to send you to jail? It’s highly unlikely that you will be put in jail without first willfully evading income taxes.
But if you have a legitimate fear of IRS retribution, consider hiring a tax relief company. Tax relief experts are able to help taxpayers avoid penalties and pay off their tax debt.
How do you get your tax penalties waived by the IRS?
There are several options when seeking IRS debt forgiveness through the IRS Fresh Start program (the IRS's penalty relief program):
- Offer in Compromise
- Application for Withdrawal (Tax Lien Removal)
- Installment Agreement
Offer in Compromise
An Offer in Compromise (OIC) is the IRS's method for settling a taxpayer's tax debt for less than the full amount. If you have the financial means to pay the amount in full, you likely will not qualify for an Offer in Compromise.
To file for an Offer in Compromise, you need to fill out Form 656 with the Internal Revenue Service (IRS).
You should be careful though. The point of using a tax relief service to fight your tax penalties is because they know the other options, can counsel you to make the perfect decision for your situation and can save you more money than you likely could on your own.
There is also the added benefit of the entire weight of debt being completely lifted off of your shoulders.
Application for Withdrawal
Another option is the removal of a tax lien or an Application for Withdrawal.
The IRS Fresh Start program raised the general minimum debt amount to $10,000 for a taxpayer to receive a tax lien. While this helps reduce the number of people who need tax debt forgiveness, it doesn't really help those who already have a tax lien.
To file an Application for Withdrawal, taxpayers should fill out Form 12777. Taxpayers can increase their chances of having their tax liens removed by beginning the process of paying off debt through the Direct Debit installment agreement.
Since a tax lien can hurt your credit, it's important to also move to get tax liens removed from your credit report.
For tax lien removal from a credit report, follow these four steps:
- Fill out IRS form 12777
- Send IRS form 1277 to IRS
- Qualify for IRS Tax Lien Removal through form 12777
- Dispute your tax lien with Equifax, Experian, or TransUnion
The credit reporting agencies will ensure that you have successfully removed the tax lien by contacting the courthouse where it was issued. After they have confirmed the removal of your lien, they will remove the record of your tax lien from your credit report.
Taxpayers who owe no more than $50,000 can make monthly payments through the Internal Revenue Service's direct debit payment plan for up to six years.
To sign up for an Installment Agreement, you may need to provide some financial information to the IRS. Simply go to the IRS's Online Payment Tool to apply. If you do not have access to the Online Payment Tool, you may use the more traditional means of applying by filling out Form 9465.
Taxpayers with over $50,000 in tax debt will have to submit additional financial information to the IRS before qualifying.
Dealing with the IRS is stressful and time-consuming. If you would like some much-needed help in dealing with your IRS tax debt, understanding IRS tax law, and negotiating with the IRS, consider a trusted tax professional to counsel you on obtaining IRS debt forgiveness.
Do IRS payment plans affect your credit?
An IRS payment plan itself does not affect your credit score at all. But your credit score will be negatively impacted if the IRS files a lien against you.
The IRS will generally file a Notice of Federal Tax Lien as soon as you accrue $10,000 in tax debt, but it doesn't have to wait until you have $10,000 in tax debt.
The IRS can file a lien before you hit $10,000 if it wants. Payment plans with the IRS last up to six years or however long it takes you to pay off your debt.
An IRS payment plan has an interest rate of 0.5 percent of your total tax debt per month that you do not pay.
So if you fail to pay two months in a row, your interest rate increases to 1 percent. The interest rate will continue to increase up to 25 percent if you fail to pay.
There are alternatives to paying off IRS tax debt, but generally, the IRS payment options are pretty fair. You could get a personal loan to pay off a tax debt, but you would likely have higher interest rates depending on the amount.
How long does an IRS tax lien last?
An IRS tax lien lasts ten years according to the Internal Revenue Code Section 6502. After the ten years pass, the tax lien becomes void. It is highly unlikely that you will be able to avoid paying the IRS for ten years, so it is recommended you take advantage of an IRS payment plan or an Application for Withdrawal of your tax lien.
The IRS has the right to file a federal tax lien at any time but generally will not do so until you have around $10,000 in tax debt.
A tax lien also stays on your credit report. How long does a federal tax lien remain on your credit report? An unpaid tax lien stays on your credit report forever, marring your credit history. But if you pay off and remove the tax lien, the credit agency must remove the tax lien for your credit report no later than seven years after the date it was filed.
You can also request to remove a tax lien manually by disputing the tax lien, but only after you have paid your tax debt and the IRS has removed the tax lien. The credit agency will then check with the courthouse that you have settled your tax issues and will remove it from your credit history.
Which tax debt relief companies are best?
Penalty relief and tax relief companies help customers avoid IRS debt by seeking penalty abatement options.
BestCompany.com ranks and reviews companies according to customer satisfaction, company experience, and pricing information, along with a few other criteria.
As of August 2018, the top ten penalty relief companies are listed as follows:
- Tax Defense Network
- Victory Tax Lawyers
- Community Tax
- Anthem Tax Services
- BC Tax
- Optima Tax Relief
- Defense Tax Group
- Clean Slate Tax
- Tax Defense Partners
We'll provide a short summary of the top three companies, so you can know which are the best of the best tax relief companies.
Tax Defense Network
Tax Defense Network has an overall score of 9.0 out of 10 and a 4-star rating with over 850 customer reviews (as of August 2018).
The company has a dedicated and professional team of tax experts, thousands of positive customer reviews, nationwide availability, and a competitive price for tax relief services. The company helps customers achieve the best possible penalty abatement options.
Tax Defense Network usually charges between $2,500 and $3,000 for tax services.
Victory Tax Lawyers
With an 8.4 overall score, Victory Tax Lawyers has a perfect 5-star rating (as of August 2018).
Most law firms operate on hourly rates instead of a range of prices due to services offered. As it stands, it's impossible to know what Victory Tax Lawyers charges for its tax relief services without first having a consultation.
Victory Tax Lawyers does not have a minimum tax debt requirement, is available in all 50 states, and only employs lawyers with at least five years of experience.
Great customer reviews prove that Victory Tax Lawyers is one of the best tax relief companies. The reviews speak highly of the company's dedication to customers.
Community Tax has an overall score of 7.9. It also has a 4.6-star rating with over 100 customer reviews (as of August 2018).
The company offers personalized debt reduction solutions, has been in business since 2010, and provides a variety of tax resolution services.
The approximate cost for Community Tax's service is between $2,500 and $4,500.
Ask the Experts: What's the biggest mistake people make when seeking IRS debt forgiveness?
"Thinking there is a quick fix to making tax debt go away. Tax debt is unique because it's the federal government you owe and you will not be able to walk away from it with a snap of your fingers.
There are several ways that a taxpayer may not pay the entire amount they owe, some may be quick and others may require being patient. This is where a tax professional can assist by looking at your goals and ensuring the resolution you pursue is in your best interests – not the IRS."
– Catharine O'Connor, Tax Attorney, Tax Defense Network
Ask the Experts: What's the best way to resolve tax debt?
"Make sure you file every tax return, even if you can't pay the balance due. Timely filing will greatly reduce penalties and interest.
And shows good faith as well. The next step is to contact the IRS or a tax professional, to negotiate a payment arrangement.
Don't agree to any deal unless you are sure you can keep up with it; to set it up and have it default makes more trouble for you with the IRS, and it can be harder to get a new agreement."
– Abby Eisenkraft, Enrolled Agent and CEO of Choice Tax Solutions.
"The best way to resolve tax debt is as quickly after you receive notice of the tax debt as possible since you incur penalties and interest on both the debt and the penalties. This typically requires hiring a tax accountant and possibly an attorney that has experience resolving tax debt with the IRS."
– Lou Haverty, CFA at FinancialAnalystInsider.com
“The best way to resolve tax debt is to create a budget that prioritizes paying your tax debt as quickly as possible. Not all tax debts are damaging to your finances, especially if you take the time to resolve the debt with the IRS.”
Ask the Experts: What's the first step to take after receiving a notice of IRS debt?
"First, don’t ignore it! Second, take the time to really read the notice and be sure what the IRS is asking for. The IRS sends out [thousands] of notices a day – they all look threatening but many are not. If you are unsure of what is being asked of you by the IRS or feel threatened it is time to seek the help of a tax professional.
When you work with a tax professional you can be sure they know what that notice means and also what the IRS can and cannot do."
– Catharine O'Connor, Tax Attorney, Tax Defense Network
Ask the Experts: What's the worst consequence of tax debt?
"Most people automatically think jail is the worst consequence of tax debt – and it can be if your tax debt is criminal. However, for most people, the worst consequence of tax debt is the added stress to your life.
The IRS has the power to take your wages, freeze your bank accounts, seize assets that hold equity, and ruin your credit by filing liens for the debt you owe. Plus now, the IRS recently recruited outside debt collectors to contact taxpayers on overaged tax debt – it all can be extremely stressful and that kind of stress usually cost most taxpayers more than the debt they owe."
– Shan-Nel D. Simmons, Enrolled Agent, NelsTaxHelp.com
Ask the Experts: What are my options when looking to pay off IRS debt?
"To avoid having these collection actions taken against them, taxpayers have many options to handle the outstanding tax liability. You can set up a repayment plan on your balance to pay it off over the course of 6 years. This agreement is set up as a monthly amount, however penalties and interest will continue to accrue over that 6-year time frame.
This agreement is also for most taxpayers who have under $50,000 worth of debt. Since the IRS only has 10 years to collect on any given balance (other factors may extend this time) the 6-year repayment plan is only for those balances that have more than 6 years before they expire."
– Arthur Rosatti, Tax Attorney, Ashley F. Morgan Law
"I think your only realistic option is to work with a qualified tax accountant who is experienced in IRS tax debt. An experienced tax accountant will be well-versed in the various options you have.
One important aspect is that the IRS will sometimes make accommodations for situations that were out of your control like natural disasters and other extenuating circumstances. The IRS won’t tell you about these considerations and you really need to rely on a professional to help you navigate the best approach in your situation."
– Lou Haverty, CFA at FinancialAnalystInsider.com
"If the total debt for all tax years owed is under $25,000, taxpayers can set up a streamlined installment agreement via IRS.gov/opa where they will have up to 72 months to pay back the balance. If your total debt is more than $25,000, you will need to complete Form 9465 for an Installment Agreement Request but you will still have up to 72 months to pay back the balance.
The great thing about installment agreements is if you are due a refund in later years but still have an outstanding balance for your installment agreement, the IRS will apply that refund to the tax debt. You will not get a refund back that year but your outstanding tax balance will be lower so you can try to pay off the balance sooner.
Another option is becoming “currently not collectible” which is a status assigned by the IRS will temporarily stop the IRS’ collection efforts against the taxpayer. But the interest and penalties will still accrue on the tax debt and the IRS can (and usually do) file a lien against you which can harm your credit.
However, it will allow you some time to hopefully be a better financial position later to start paying back the IRS. Also, the IRS allows you to request an “offer in compromise” which is an agreement between the IRS and the taxpayer to settle the tax debt for less than what the taxpayer owes.
Both the currently not collectible status and the offer in compromise are best handled by tax professionals as the IRS has very specific calculations and documentation requests that must be followed to increase the chances of a favorable resolution for the taxpayer."
– Shan-Nel D. Simmons, Enrolled Agent, NelsTaxHelp.com