Tax debt affects millions of Americans each year. The IRS collected $68 billion through enforcement actions last year alone. Understanding your rights and options can mean the difference between losing your home and keeping it.
Most people facing tax debt have urgent questions about what the IRS can actually do. They search for tax debt FAQs to find clear answers about collection limits, payment alternatives, and legal protections. This guide delivers those answers, straight from what tax attorneys hear every day from clients facing IRS collection actions.
The IRS has extensive collection powers that go beyond what regular creditors can do. They can freeze bank accounts without a court order. They can take most of your paycheck through wage garnishment. They can seize property and retirement accounts. But they also have strict procedures they must follow and multiple programs that help taxpayers resolve debt for less than the full amount.
Knowing these rules helps you make better decisions. You might qualify for an Offer in Compromise that settles your debt for pennies on the dollar. You might be approaching the 10-year collection deadline that erases your debt completely. You might need to act immediately to prevent a wage garnishment that starts in 30 days.
Each answer below provides specific information you can use today. Whether you owe $5,000 or $500,000, these are the facts that determine your next steps.
What happens when you owe the IRS money you can't pay?
The IRS adds penalties and interest to your unpaid balance every month until you pay in full. Interest compounds daily at the federal short-term rate plus 3%, while failure-to-pay penalties add 0.5% monthly up to 25% of your total debt. The IRS can file a federal tax lien against your property, freeze bank accounts, and garnish wages without court approval. Your passport may be revoked or denied renewal if you owe more than $62,000. The IRS sends increasingly aggressive collection notices before assigning your case to revenue officers who have broad collection powers.
What happens to tax debt when someone dies?
Tax debt transfers to the deceased person’s estate and must be paid before beneficiaries receive distributions. The IRS has priority over most creditors except secured liens and funeral expenses. Surviving spouses remain liable for joint returns but can request innocent spouse relief for the deceased’s separate obligations. Life insurance proceeds paid directly to beneficiaries bypass the estate and cannot be seized for tax debt. The IRS must file a claim against the estate within the probate timeline or lose collection rights.
Does the IRS use private debt collectors?
The IRS assigns certain inactive tax accounts to four authorized private collection agencies. Private collectors cannot accept payments directly – all payments must go to the IRS. These agencies work cases under $100,000 where the IRS has not contacted taxpayers in over one year. Private collectors cannot initiate enforcement actions like liens, levies, or seizures. You can request your account be removed from private collection and returned to the IRS at any time.
How do partial payment installment agreements differ from regular plans?
Partial payment agreements let you pay less than the full tax debt over the collection period. The IRS reviews your finances every two years and can increase payments if your situation improves. You must provide updated Form 433-A at each review or risk default. These agreements require filing tax liens but may allow the 10-year statute to expire with remaining balance forgiven. Regular installment agreements require paying the full amount within 72 months regardless of the collection statute.
Can you travel internationally with tax debt?
The State Department denies or revokes passports for “seriously delinquent tax debt” exceeding $62,000 (adjusted annually for inflation). This includes penalties and interest but excludes debts in approved payment plans or pending collection appeals. The IRS must notify you 30 days before certifying debt to the State Department for passport action. Emergency passports for life-or-death situations may be issued despite tax debt certification. Paying below the threshold or entering an installment agreement reverses passport restrictions.
What protects retirement accounts from IRS seizure?
The IRS can levy 401(k)s, IRAs, and pension plans despite early withdrawal penalties you incur. ERISA protection does not prevent IRS seizure of retirement funds like it does for other creditors. The IRS typically takes only vested amounts you could withdraw yourself. Inherited IRAs receive no special protection from IRS levy actions. Required minimum distributions become easy targets for automated levy programs.
How long can the IRS collect tax debt from you?
The IRS has 10 years from the assessment date to collect tax debt through legal action. This Collection Statute Expiration Date (CSED) is absolute unless you take actions that extend it. Filing bankruptcy, requesting an Offer in Compromise, or living outside the country pauses the collection clock. Once the CSED passes, the IRS must write off the remaining debt and cannot pursue collection. State tax agencies have different limitation periods that vary by jurisdiction.
Can filing bankruptcy eliminate IRS tax debt?
Chapter 7 bankruptcy can discharge income tax debt that meets specific requirements. The tax debt must be at least three years old from the original due date. You must have filed the return at least two years before bankruptcy. The IRS must have assessed the tax at least 240 days before filing. Payroll taxes, trust fund penalties, and fraud penalties cannot be discharged through bankruptcy. Chapter 13 bankruptcy creates a payment plan but does not eliminate recent tax debt.
What is an Offer in Compromise with the IRS?
An Offer in Compromise allows you to settle tax debt for less than the full amount owed. The IRS accepts offers when your assets and income cannot reasonably pay the full debt. You must provide complete financial documentation including bank statements, pay stubs, and asset valuations. Application requires a $205 fee and initial payment unless you qualify for low-income status. The IRS accepts approximately 30% of offers submitted, with most rejections due to incomplete documentation or unrealistic offer amounts.
How do IRS payment plans work for tax debt?
Short-term payment plans give you 180 days to pay without a setup fee. Long-term installment agreements spread payments over 72 months with setup fees from $31 to $225 depending on payment method. You must owe less than $50,000 to qualify for automatic approval online. Monthly payments must cover the minimum (total debt divided by 72) plus current year taxes. Missing payments defaults the agreement and triggers aggressive collection actions.
When will the IRS garnish wages for unpaid taxes?
The IRS sends a Final Notice of Intent to Levy 30 days before wage garnishment begins. Wage garnishment takes most of your paycheck, leaving only a small exempt amount based on filing status and dependents. Your employer must comply with IRS garnishment orders or face penalties. Self-employed individuals face bank account levies instead of traditional wage garnishment. Garnishment continues until the debt is paid or you establish an alternative payment arrangement.
What assets can the IRS seize for tax debt?
The IRS can seize real estate, vehicles, bank accounts, investment accounts, and business assets to satisfy tax debt. Primary residences require additional approval and are typically last-resort seizures. Retirement accounts like 401(k)s and IRAs are subject to levy despite early withdrawal penalties. Life insurance cash values, rental income, and accounts receivable can be seized. Items necessary for work and basic household goods under $9,900 are generally exempt from seizure.
Should you hire a tax attorney or enrolled agent for IRS debt?
Tax attorneys provide attorney-client privilege and can represent you in Tax Court. Enrolled agents cost less than attorneys but cannot provide legal advice or court representation. CPAs can represent you before the IRS but may lack specialized collection defense experience. Choose an attorney for criminal tax issues, large debts over $100,000, or when facing asset seizure. Enrolled agents work well for installment agreements, offers in compromise, and routine collection matters.
How do tax liens affect your credit and property?
Federal tax liens attach to all current and future property once filed with local government offices. Tax liens appear on credit reports and typically drop scores by 50-100 points immediately. Property sales require paying the lien from proceeds before you receive any money. Refinancing becomes difficult or impossible with an active federal tax lien. The IRS may withdraw liens after establishing payment agreements or discharge specific property for sales that benefit both parties.
What is Form 433-A and when does the IRS require it?
Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) documents your complete financial situation for the IRS. The IRS requires this form for installment agreements over $50,000, all Offers in Compromise, and Currently Not Collectible status requests. You must list all income, expenses, assets, bank accounts, and monthly living costs with supporting documentation. False statements on Form 433-A constitute perjury and can trigger criminal prosecution. The IRS uses this information to calculate your reasonable collection potential and monthly payment capacity.
Can you get Currently Not Collectible status for IRS debt?
Currently Not Collectible (CNC) status stops IRS collection actions when paying would create economic hardship. You must prove that paying any amount toward tax debt would prevent you from meeting necessary living expenses. The IRS reviews your status annually through income monitoring and can restart collections if your finances improve. CNC status does not stop interest and penalties from accruing on your debt. The 10-year collection statute continues running while your account remains in CNC status.
How does innocent spouse relief work with Form 8857?
Form 8857 requests relief from tax debt created by your spouse or former spouse without your knowledge. You must file within two years of the first IRS collection attempt to qualify for equitable relief. The IRS considers factors like divorce, abuse, financial control, and whether you benefited from the unpaid taxes. Innocent spouse relief can eliminate your liability while leaving your spouse responsible for the entire debt. Community property state residents face additional requirements for proving lack of knowledge about tax understatements.
How does innocent spouse relief work with Form 8857?
Form 8857 requests relief from tax debt created by your spouse or former spouse without your knowledge. You must file within two years of the first IRS collection attempt to qualify for equitable relief. The IRS considers factors like divorce, abuse, financial control, and whether you benefited from the unpaid taxes. Innocent spouse relief can eliminate your liability while leaving your spouse responsible for the entire debt. Community property state residents face additional requirements for proving lack of knowledge about tax understatements.
What is Form 911 for taxpayer advocate assistance?
Form 911 (Request for Taxpayer Advocate Service Assistance) triggers intervention when IRS actions cause significant hardship. Economic hardship includes situations where you cannot afford housing, utilities, or medical treatment due to IRS collections. The Taxpayer Advocate can issue Taxpayer Assistance Orders that stop levies, releases liens, or return seized property. You receive a dedicated advocate who works your case independently from regular IRS collections. Filing Form 911 does not stop the collection statute or guarantee relief but provides an alternative resolution path.
When does the IRS file a Substitute for Return (SFR)?
The IRS creates an SFR when you fail to file required tax returns after multiple notices. SFRs calculate your tax using single filing status with standard deduction only, maximizing your tax liability. The IRS uses W-2s, 1099s, and third-party reporting to construct these returns without your input. You can still file an accurate return to replace the SFR and potentially reduce your debt significantly. SFR assessments start the 10-year collection clock even though you never filed a return.
How do Trust Fund Recovery Penalties work with Form 4180?
Trust Fund Recovery Penalties make business owners personally liable for unpaid payroll taxes through IRS Form 4180 investigation. The IRS interviews responsible parties to determine who had authority to pay employment taxes but chose to pay other creditors instead. Penalties equal 100% of the unpaid employee withholdings, Social Security, and Medicare taxes. Multiple responsible parties can be assessed the full amount, though the IRS only collects once. These penalties survive business bankruptcy and cannot be discharged through personal bankruptcy.
What happens at the Collection Due Process hearing after Form 12153?
Form 12153 requests a Collection Due Process hearing within 30 days of receiving a levy or lien notice. The hearing with an Appeals Officer lets you dispute the underlying tax liability if you never received a deficiency notice. You can propose collection alternatives like installment agreements or Offers in Compromise during the hearing. The IRS cannot proceed with collection actions while your CDP hearing is pending. You can appeal unfavorable CDP determinations to Tax Court, further delaying collection activities.
How does Form 656 work for submitting an Offer in Compromise?
Form 656 initiates an Offer in Compromise with required documentation and payment unless you qualify for low-income exception. You must choose between lump sum (20% down) or periodic payment (first month’s payment) offers when submitting. The IRS has 24 months to review your offer while you must remain current on all tax obligations. Rejected offers can be appealed to the IRS Appeals Office within 30 days using Form 13711. Accepted offers require five years of tax compliance or the IRS reinstates the original debt.
Can state tax debt prevent federal refunds through TOP?
The Treasury Offset Program (TOP) intercepts federal refunds for state tax debt once states certify delinquent accounts. States must send pre-offset notices 60 days before submitting your debt for federal refund seizure. Your entire federal refund goes toward state debt regardless of the amount owed. Injured spouse claims on Form 8379 can protect the non-liable spouse’s portion of joint refunds. Bankruptcy does not stop TOP offsets unless the automatic stay specifically covers the tax year being offset.
What triggers criminal prosecution instead of civil collection?
Criminal prosecution occurs when the IRS finds evidence of willful tax evasion or fraud beyond simple inability to pay. Patterns like using multiple Social Security numbers, hiding assets offshore, or destroying records trigger Criminal Investigation Division review. Lying to revenue officers during collection or on financial statements constitutes separate criminal acts. Owing taxes without fraudulent behavior remains a civil matter regardless of the amount owed. Criminal convictions result in prison time plus civil penalties and interest on top of the original tax debt.
Take Action Now: Get Answers to Your Tax Debt FAQs and Resolve Your Situation
Every day without professional representation costs you money. The IRS adds $50-100 in penalties and interest to a $10,000 debt each month. By the time you try handling it yourself and fail, you owe thousands more than necessary.
We know which resolution works for your exact situation. We’ve filed hundreds of Offers in Compromise that settled debts for 10-20% of what clients owed. We’ve stopped wage garnishments within 24 hours of being hired. We’ve gotten Collection Due Process hearings that delayed seizures for months while negotiating better terms.
Our tax attorneys here at Silver Tax Group provide you with attorney-client privilege the IRS can’t breach. We know which financial statements get Currently Not Collectible status approved. We understand why one Form 656 gets accepted while another gets rejected. We’ve negotiated with the same revenue officers who are calling you right now.
The IRS counts on taxpayers trying to handle tax debt alone. They know you’ll make mistakes on forms, miss deadlines, and accept worse terms than necessary. Meanwhile, penalties compound and collection actions escalate.
Book a consultation with one of our tax attorneys here at Silver Tax Group and we’ll discuss your tax debt options. We’ll review your transcripts, calculate your resolution options, and explain exactly what we can do. Stop letting interest build while you research solutions online. Get answers from tax attorneys who resolve IRS debt every day.
