In recent years, the Internal Revenue Service (IRS) has been more amenable to working out late tax payments (usually by installment agreements). But you have to address the problem upfront, be proactive in how you negotiate, and not keep Uncle Sam waiting on his money. Here are your options, and the steps you can take.

key takeaways

  • Under its Fresh Start program, the IRS offers several options for repaying back taxes.
  • Taxpayers have three options: an installment-payment plan, an offer in compromise, and a temporary delay in collection.
  • Being proactive in resolving your back-tax issues, and never missing repayments (if you choose an installment plan) are key.

A Fresh Start for Tardy Taxpayers

Back in 2011, the IRS rolled out its Fresh Start program, geared toward giving late-paying Americans a path back to paying off their tax liabilities.

 “We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start,” IRS Commissioner Doug Shulman said at the time. “These steps are good for people facing tough times, and they reflect a responsible approach for the tax system.”

The IRS particularly focused on the following changes:

  • Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
  • Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
  • Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
  • Creating easier access to installment agreements for more struggling small businesses.
  • Expanding a streamlined Offer in Compromise program to cover more taxpayers.

Always File Your Return

Helpful as it is for the IRS to offer more options for struggling taxpayers, you have to do your bit too.

First of all: If, come April 15, you owe the IRS an amount that you cannot pay in one lump sum, it is important to file the return anyway, says Lawrence Brown, an attorney in the office of Brown P.C. in Fort Worth, Texas.

“This will reduce some of the penalties,” he explains. “Occasionally clients tell us that they did not file a return because they were unable to pay the tax due. This usually causes them to pay penalties that are significantly greater than they would have paid had they at least filed the return.”

How the IRS Proceeds with Late Payments

“The IRS will not immediately pursue you for delinquent tax penalties and interest,” Brown notes. “In many cases, it will take months before the IRS begins collection efforts.”

But begin they will. At first, collection efforts can seem benign, consisting of just computer-generated letters. At some point, however, the IRS will begin very aggressive collection tactics, including wage levies in which the government contacts your employer advising that you have delinquent tax liabilities and that any wages that would be paid to you should be paid to the IRS. “In short, once the IRS begins aggressive collection activity, your reputation can be damaged and you can be crippled financially,” Brown says.

Options for Late Payers

So don't let things get to that point. Respond as soon as you get the first notice.

Basically, taxpayers have three options for paying back taxes:

  1. Under an installment agreement, a taxpayer pays the amount due over a period of time.
  2. An offer in compromise involves the taxpayer paying one lump sum in an amount that is less than the amount actually owed.
  3. Request that the IRS temporarily delay collection until the taxpayer's financial situation improves.

Bear in mind that a temporary delay in collection will cause your tax debt to increase because penalties and interest are charged until you pay the full amount.

The IRS is usually quite amenable to any of the above. Whether it will accept an installment agreement request, or an offer and compromise, or a collection delay depends largely on your financial condition, however. You will have to fill out forms attesting to all your assets and liabilities, your sources of income and your debts. If you have the money or means to pay your tax bill, the IRS probably will not compromise much.

Go For an Installment Agreement

Setting up a payment plan is probably the best way to go, resulting in the least cost and detriment to you. Note that when you submit a request to the IRS for an installment agreement, you will have a better chance of success if you:

  • Let the IRS know you’ll pay the debt off within five years—but ideally within two years.
  • Aim high. The monthly payment you offer should be equal to or higher than what the IRS believes it can garner from you from a negotiated agreement that it initiates.
  • The regular (usually monthly) tax payment you introduce to the IRS should be tied to existing IRS criteria. For example, you should subtract household expenses from your total income. Then cut a check for the difference to the IRS.

Bear in mind that, even with an agreed-upon payment plan, penalties and interest accrue until the back-tax balance is paid in full.

Stick to Your Payments

Do not fail to make your payments on time to the IRS. If you violate the terms of your arrangement, the IRS will attach and seize property that you own, including bank accounts and even the mortgage on your home.

$0-$149

The amount in set-up fees for IRS payment plans, depending on how long you take to repay

However, in the event that you are having problems making your installments, speak to them. You should be able to work through it. Being upfront with the IRS is the key—they do not like surprises.

Obtaining Professional Help

A professional tax representative can usually be of significant help in negotiating the most favorable possible compromise or installment agreement. That said, beware of the “pennies on the dollar” firms or 1-800 number firms that advertise on late-night television, Brown says. “In many instances, these firms will simply take a client’s money and perform no or minimal services,” he explains. “Many of these firms have been prosecuted in their states of origin for unlawful and deceptive business practices.”

"If you are interested in obtaining representation, interview two or three potential firms in your city,” he advises. Make sure that IRS tax controversy and IRS collection resolutions are the backbones of their practices. Many attorneys and Certified Public Accountants (CPAs) do tax planning but rarely interface with the IRS. It’s important that your representative has deep experience negotiating with the IRS in back-tax payment cases.

The Bottom Line

Nobody is saying that the federal government is getting all warm and fuzzy about tardy payments. However, the IRS does offer programs for Americans to get back on track with their taxes. The key is to act quickly and work out a resolution as soon as possible.