Behind on Taxes? 5 Options the IRS Won't Tell You About

A few years ago a small business owner came into my office with a shoebox of unopened IRS letters. He had stopped opening them three years earlier because every envelope felt like bad news. By the time he sat down with me, a $9,000 tax bill had grown to more than $16,000 with penalties and interest, and the IRS had already placed a levy on his business bank account.

Here's the part that still bothers me: he qualified for a payment plan the whole time. One phone call in year one would have saved him thousands of dollars and three years of stress.

If you're behind on taxes right now, you have more options than you think. The IRS won't call you to explain them. That's why I'm writing this.

Ignoring the IRS is the most expensive choice you can make

The IRS doesn't forget, and the bill doesn't stay the same size. Three things happen while you wait:

• Penalties stack up. The failure-to-pay penalty adds 0.5% of your balance every month, up to 25%. If you never filed the return, the failure-to-file penalty is ten times worse: 5% a month, up to 25%. Interest runs on top of both.
• Your refunds disappear. Any refund you're owed in future years gets taken and applied to the old debt before you ever see it.
• Collection gets aggressive. After enough notices, the IRS can file a lien against your property, levy your bank account, or garnish your paycheck. For business owners, a bank levy can freeze payroll in a single day.

The good news: every one of these can be stopped or avoided. You just have to make the first move.

Option 1: A payment plan (installment agreement)

This is the option most people don't know is easy to get. If you owe $50,000 or less and your returns are filed, the IRS will almost always approve a monthly payment plan, often online in about 15 minutes, with no financial paperwork.

You pick an amount you can afford, spread over up to 72 months. Once the plan is active, the IRS stops the levies and the garnishments. Penalties keep running, but at a lower rate, and the pressure is off.

Owe more than $50,000? You can still get a plan. It just takes more paperwork and usually a professional on your side to negotiate the monthly number.

Option 2: Currently Not Collectible status

If paying the IRS anything right now would mean you can't cover rent, food, or utilities, you can ask to be placed in "Currently Not Collectible" status. The IRS reviews your income and basic living expenses, and if the numbers show there's nothing left over, collection stops completely.

No payments. No levies. No garnishments. The debt is still there and interest keeps running, but the IRS leaves you alone until your situation improves. For a lot of people between jobs or recovering from an illness, this is the breathing room they need.

The IRS also has a 10-year clock to collect most tax debts. Time spent in this status counts against that clock.

Option 3: Offer in Compromise (and who really qualifies)

You've seen the ads: "Settle your tax debt for pennies on the dollar!" That's an Offer in Compromise, and yes, it's real. The IRS will sometimes accept less than you owe and wipe out the rest.

But here's the truth those ads leave out: the IRS accepts fewer than half of the offers it receives, and most of the rejected ones were never going to qualify. The IRS looks at your income, your expenses, and what your assets are worth. If the math says you could pay the full amount over time, they'll say no.

Who does qualify? People with low income, few assets, and a debt they realistically can't pay before the 10-year collection clock runs out. If that's you, an Offer in Compromise can be life-changing. If it's not, don't pay someone $5,000 to file an offer that was always going to be rejected. Ask for the numbers first.

Option 4: Penalty abatement (the one almost nobody asks for)

This is my favorite because it's free money most people leave on the table.

If you've had a clean record with the IRS for the past three years, you can ask for First-Time Abatement. The IRS will remove the failure-to-file and failure-to-pay penalties for one tax year, no questions asked. One phone call. I've seen this knock $2,000 to $4,000 off a bill in under 20 minutes.

Don't qualify for first-time abatement? There's also reasonable cause relief. If something outside your control caused the problem, like a serious illness, a death in the family, a natural disaster, or a bookkeeper who disappeared with your records, the IRS can waive penalties if you explain it and back it up.

Option 5: Appeal when the IRS gets it wrong

The IRS makes mistakes. A lot of them. I've seen bills based on income that was reported twice, 1099s that belonged to someone with a similar name, and returns the IRS "filed for you" that ignored every deduction you were entitled to.

You don't have to accept the number on the letter. Almost every IRS notice gives you a window to respond, usually 30 to 90 days, and you have the right to take your case to the IRS Office of Appeals, which is separate from the collection department. Appeals officers are trained to settle cases, not to squeeze you.

The catch is the deadline. Miss the window on the letter and your options shrink fast. This is the one place where opening the envelope the day it arrives can save you the whole bill.

What to do this week

You don't need to fix everything in seven days. You just need to stop the bleeding and find out where you stand.

1. Open every IRS letter. Put them in date order. The most recent one tells you what the IRS plans to do next and how long you have to respond.
2. Pull your IRS transcripts. Create an account at IRS.gov and download your account transcripts for every year you're behind. This shows exactly what the IRS thinks you owe, year by year, and whether any returns are missing.
3. File anything that isn't filed. You can't get a payment plan, an offer, or most penalty relief until your returns are in. Filing also stops the 5%-a-month penalty from growing.
4. Talk to someone before the IRS talks to you. A tax professional who handles IRS cases can usually tell you in one conversation which of these five options fits your situation. That first conversation is often free, and it's a lot cheaper than another year of silence.

The owner with the shoebox? We got him on a payment plan, had the penalties for one year removed, and released the bank levy within two weeks. He told me the hardest part was making the first call. It always is.