How to get out of tax debt

By Aaron Crowe

Reviewed by Gideon Sandford

Jul 09, 2023

Read time: 4 min

Shot of a young couple going over their finances together at home

Key takeaways:

  • Installment payment plans can help make taxes easier to pay.

  • Free tax software from the IRS can help you complete tax forms.

  • The IRS might accept an offer to pay less than you owe

Owing a tax debt to the IRS doesn’t have to be intimidating.

Al Capone famously went to prison for tax evasion, but that’s very rare. The Internal Revenue Service would rather have you pay up than get locked up. Even if you can’t afford to pay in full, there are a few ways to resolve tax debt.

Understanding your tax debt: how to determine what you owe

The first thing to do is file your federal income tax return. If you haven’t done that yet, then you won’t know how much you owe in taxes. When you have overwhelming debt, the first step is to figure out what you’re dealing with. It’s always better to know.

If you haven’t paid and filed your taxes by the regular due date (usually April 15), you can get more time. Extensions are free, but not automatic. You have to submit an extension request. Your new deadline will be October 15. That new date only applies to the tax return. Your taxes are still due by the regular due date (April 15). You can make a partial or full payment when you file for an extension. 

If your taxes are too difficult to prepare and file by yourself, you can either hire a professional tax preparer to do it, or the IRS has free software to help you do it yourself at home.

Negotiating with the IRS: how to resolve your tax debt

If you’re really strapped, you can work with the IRS to settle your tax debt for less than the full amount you owe. It’s called making an offer in compromise (OIC). To be eligible, you'll have to show that you can’t afford to pay your tax debt—or that doing so would create a financial hardship. But first, you should have explored all other payment options.

The IRS has an online tool where you can prequalify and create a preliminary proposal. 

You’re eligible to apply if you:

  • Filed all required tax returns and made all required estimated payments.

  • Aren’t in an open bankruptcy proceeding.

  • Have a valid extension for a current tax year return if you’re applying for the current year.

  • Are an employer and made tax deposits for the current and past two quarters before you apply.

Before you can make an offer in compromise, you have to file a tax return and make your estimated tax payments. 

If the IRS decides you can’t pay off your tax bill, it'll offer you personalized relief options. They’ll generally accept whatever they think is the most they can collect from you within a reasonable amount of time. The IRS will rarely forgive your tax debt outright.

You’ll hurt your negotiating position if you ignore letters from the IRS, so be sure to open your mail and pay attention to any deadlines for responding.

Creating a payment plan: how to set up a realistic schedule

The IRS has installment payment plans that can help you get caught up. Long-term payment plans lasting up to 72 months are available on request for tax debts under $50,000. If you owe more than $50,000 and you can’t repay it within 120 days, you'll need to negotiate a custom repayment plan with the IRS.

Once a payment plan is approved, the IRS is strict about staying on track. If you miss a payment on either plan, the entire amount becomes due immediately as a lump sum, plus interest and penalties.

When to get professional help

If you’re unsure how to complete your tax return or make a payment, or you need help figuring out your best options for paying back taxes, consider talking to a tax professional or an attorney.

Taxes are complicated, but there are people whose job it is to understand what to do and how to do it. Life events such as divorce, retirement, having children, and adding multiple sources of income can all level up the complexity of your tax situation and warrant professional help.

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Other ways to deal with debt

If you are struggling with other debt in addition to tax debt, your situation may feel more overwhelming. You might be juggling other debts such as credit card debt, medical debt, personal loan debt, or other financial hardships. If you can resolve these debts, that could free up cash to put toward your tax debt. 

If you can’t afford to repay these other debts, one option to consider is debt resolution (negotiating with your creditors to accept less than the full amount you owe). Debt resolution is an option for unsecured debts like credit cards, but not for tax debt.

Anyone can try to negotiate with their creditors, but it’s normal to feel intimidated by the process. You might have better luck working with an experienced professional debt resolution company. Not only do they have established relationships with many creditors, they can also relieve you of the stress of handling it on your own. You can get a free debt evaluation to find out whether debt resolution might be appropriate for your situation.

Related: 5 ways to pay off credit card debt

Aaron Crowe

Aaron Crowe is an Achieve contributor. He is a freelance journalist who specializes in writing about personal finances. He has worked as a reporter and editor at newspapers and websites for his entire career.

Gideon Sandford

Gideon is a financial expert who writes about financial planning, access to credit, and debt strategies. He has over a decade of experience helping readers manage their money and use debt responsibly.

Frequently asked questions

Yes, an offer in compromise, or OIC, is one way to negotiate with the IRS. To be eligible to apply, you’ll first need to be up to date on your tax returns and estimated payments.

A payment plan or an offer in compromise (OIC) are the main options for repaying tax debt if you can’t pay all of what you owe when it’s due. 

Tax debt can’t be discharged in a bankruptcy or negotiated by a professional debt resolution company.

The IRS’s goal is to collect the taxes you owe. Ideally that means paying on time and in full. But if that’s not possible, the IRS offers options to help you get caught up.

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