How to Find Tax Debt Relief: IRS Programs and Consolidation Options

No one looks forward to filing their taxes each year. But Tax Day (usually April 15) goes a lot more smoothly when you're not dealing with debt from past-due taxes.

It may sound surprising, but the best way to get relief from tax debt is to work with the IRS (Internal Revenue Service) directly. The IRS offers a variety of repayment options, including installment and settlement programs. 

Tip: Tax debt is not a candidate for the same kind of debt relief that some people seek for unsecured debts like credit cards and personal loans.

Working with the IRS, you can even consolidate multiple tax debts into one IRS installment agreement. Consolidating tax debt can simplify your repayment and make it easier to manage.

While the IRS is the best place to start, you also have private options for dealing with tax debt. This may include tax debt consolidation through a personal loan or other line of credit, as well as working with a professional tax relief company.

The best way to choose a tax debt relief strategy is to be well-informed about all of your options. Our guide will explore the different types of tax debt relief, including IRS programs and alternatives, as well as how to choose the right program and avoid scams.

What Is Tax Debt Relief?

Federal tax debt relief can be anything that helps you get caught up with the IRS. This could include more time to pay or a reduction in the amount that you owe.

The right tax debt relief can help clear up your back tax problems while minimizing the negative impact on your financial life.

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IRS Tax Debt Relief Programs

Believe it or not, the IRS understands that it can be difficult sometimes to come up with the money to pay your taxes. They still want you to pay, but they have a variety of ways to help you deal with your tax problems. 

Some examples are described below.

Filing extension

If you aren’t going to be able to get the information you need to file your taxes by the April 15 deadline, you can apply for an extension of time to file. 

Getting an extension gives you until October 15 to prepare your taxes without incurring penalties for late filing.

Note that filing for an extension doesn't get you out of paying without interest or penalties. You’re expected to estimate what you owe and pay your taxes by the tax deadline.

However, the penalty for failing to file a return is far more severe than the penalty for not paying on time. So even if you can’t afford to pay your back taxes, filing for an extension could help you minimize penalties and interest.

Pros:

• Avoid late filing penalties

• No fee to request extension

Cons:

• Only extends time to file, not time to pay

• Still owe taxes and could get late payment penalty

Short-term payment plan

You can apply for a short-term payment plan if you don't have the money to pay your taxes. This gives you an additional 180 days to pay. There’s no fee for this plan if the amount you owe is paid in full by the deadline.

Pros:

• Up to 180 days to repay

• No set-up fee

Cons:

• Must owe $100,000 or less

• Debt and credit card fees

Installment payment plans

If you don’t expect to be able to pay your taxes in full within 180 days, you can apply for an installment payment plan.

An IRS installment payment plan sets up a series of monthly payments over three to six years. There are costs, including a fee to set up the plan plus interest and penalties. 

Establishing a payment plan stops the IRS from garnishing your bank account or your wages, or seizing your assets. It also saves you from potentially steeper financial penalties and possible criminal prosecution. 

Application. You can apply for an IRS repayment plan online.

Pros:

• Pay off tax debt in small monthly payments

• Can consolidate multiple tax debts

• Avoid garnishment or levies

• Flexible terms

Cons:

• Interest and penalties may apply

• Payoff can take up to 6 years

• Missed payments can end agreement

• Does not reduce how much you owe

Offer in compromise (formerly IRS Fresh Start Program)

An offer in compromise (OIC) is an agreement to pay less than the full amount of tax debt that you owe. You have to file a request for an OIC, and the IRS has to approve your request for it to take effect. This option used to be known as the IRS Fresh Start Program.

With an offer in compromise, you file documents with the IRS comparing the amount you owe to the value of your assets. You also list your expected income over and above what you need for basic living expenses.

A formula based on that information determines how much of your debt you can reasonably be expected to pay. You’re given two years to pay that amount. If you meet that obligation on time and in full, the IRS forgives the remainder of your tax debt.

There’s an application fee for an OIC. You can ask the IRS to waive the fee if you qualify as a low-income taxpayer.

You’ll also need to submit an initial payment with your application. You can submit one of the following:

• Lump sum payment: You submit a payment of at least 20% with your application. If your offer is accepted, you must pay any remaining balance due on the offer in five or fewer installments.

• Periodic payment: A periodic offer lets you pay the amount you’re offering over six to 24 installment payments. In this arrangement, you submit the first payment with your application and continue making payments while the IRS reviews your offer.

Both types of payments are nonrefundable. The upfront payment requirement may be waived if the IRS considers you a low-income taxpayer.

Watch out for OIC mills, as the IRS calls them. These companies use aggressive marketing to create panic by claiming you have a limited time to resolve your tax debts. They often claim their services are necessary and charge steep fees without delivering results. Any claim of guaranteed results is a big red flag. 

Application. Your offer in compromise application should include:

• IRS Form 656 (Offer in Compromise)

• IRS Form 433-A (OIC)(Individuals) or 433-B (OIC)(Businesses) and supporting documents

• $205 application fee

• Initial offer payment

Make sure your forms are completed and signed. The fee and initial offer payment may be waived if you meet Low-Income Certification Guidelines.

You can use the IRS Offer In Compromise Pre-Qualifier tool online to check your eligibility.

Pros:

• Could reduce how much you owe

• Can choose lump-sum or periodic payment

• Back to a clean slate when agreement is finalized

Cons:

• Strict requirements to qualify

• Process requires full financial disclosures

• $205 application fee

Bankruptcy

It’s possible to get your tax debt forgiven if you file bankruptcy, but this isn’t guaranteed. You may be able to have tax debts discharged in Chapter 7 if they’re more than three years old—as long as you filed your tax returns on time. In some cases, you may be able to get tax penalties waived through bankruptcy, but not the original taxes you owed.

Consult with an attorney to discuss whether bankruptcy could provide you with tax debt relief.

Pros:

• Could eliminate eligible tax debt

• Filing bankruptcy temporarily stops collections 

Cons:

• Only certain tax debts are eligible

• Requires that you’re current on your tax returns

Currently Not Collectible (CNC) status request

Financial hardship can hit anyone, and the IRS understands that sometimes your taxes have to get put on the back burner. Currently Not Collectible (CNC) is a status assigned by the IRS that temporarily stops IRS tax debt collection activities.

Eligibility. You must be in severe financial hardship that prevents you from affording both your tax payments and basic necessities. You'll need to be able to provide documentation of your financial situation, including income, assets, expenses, and existing debts.

Application process. You can request CNC status by contacting the IRS. You can do this by phone: 

• Individual taxpayers: 800-829-1040 (or TTY/TDD 800-829-4059)

• Business taxpayers: 800-829-4933

Documents. The IRS may require you to fill out Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals), Form 433-F (Collection Information Statement), and/or Form 433-B (Collection Information Statement for Businesses). The IRS may also request additional documents to confirm information on your form.

Additionally, you need to file your prior year tax return even if you can't pay all of your taxes right now. You may be eligible for a free return preparation through a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site.

Pros: 

• No tax debt payments required while CNC status is active

• IRS tax debt collection activities stop temporarily

• Can give you extra time to become financial stable

Cons:

• Must prove financial hardship through documentation

• Interest and penalties can still accrue

• Annual review of income may end CNC status

Innocent spouse relief

Joint filing can benefit both spouses when done correctly, but it can also penalize both when mistakes are made. Innocent spouse relief can help you avoid tax debt incurred by your spouse due to underreporting or other issues with the return, provided you did not know about the problem.

Eligibility. You may be eligible for innocent spouse relief if:

• You're married and filed a joint tax return.

• Your taxes were understated due to incorrectly reported income, deductions, credits, or asset valuations.

• You didn't know that your joint tax return contained errors. (You may still be eligible even with knowledge if you were a victim of domestic abuse.)

Application. You can request innocent spouse relief within two years of being notified of taxes due and/or an audit. You'll need to file Form 8857 (Request for Innocent Spouse Relief).

Pros:

• May reduce or eliminate your liability for your spouse's debt

• May protect your assets from being used to pay your spouse's tax debt

Cons: 

• Application process can be complex and require detailed documentation

• Can be denied if court finds you had knowledge of the issue

How Does Tax Debt Relief Work?

Government debt relief programs, including those at the IRS, don’t kick in automatically. You have to apply for them and be accepted.

If the IRS accepts your application for tax debt relief, it will suspend any other collection efforts as long as you continue to meet the terms of the program. If you satisfy those terms completely, there should be no further consequences. 

However, that only applies to tax debts you acknowledged in applying for the program. It’s not a broad amnesty from all tax debt.

Who Needs IRS Tax Debt Relief?

If you need tax debt relief, you’re far from alone. Millions of Americans are in the same boat. 

IRS statistics show that in 2023, there were about 11.3 million delinquent tax accounts. 

However, it should be noted that at the same time, repayment plans had been set up for millions of delinquent taxpayers. The system is set up to help you pay your taxes if you’re willing to try. 

How to Get Tax Debt Relief

You can apply for any of the IRS tax debt relief programs online at www.irs.gov. 

To apply, submit your tax debt information and financial resources. Then (hopefully) the IRS approves a payment plan according to the terms of the program. 

There’s one other important requirement. You have to be up to date in your tax filings in order to qualify for one of these tax relief programs. 

These programs aren't intended to be a substitute for filing your taxes. Only by keeping up to date with your tax filings can the full amount of your tax debt be established. The payment plans are then based on that amount. 

Tax Debt Consolidation Alternatives to IRS Programs

If you don't want to work with the IRS directly, you can choose a private option. Here are some common strategies.

Professional tax relief companies

This may be an option if you're confused about your options and want a helping hand. A reputable tax relief company can provide assistance in applying for IRS tax debt relief programs.

Anything a tax debt relief company can do for you, you can do on your own. Tax debt relief companies can't make your tax debt magically go away. Any company promising to reduce or eliminate your tax debt is likely a scam.

Pros:

• Can provide guidance and advice

• May provide other services like tax prep

• May help you lower tax debt liability through IRS programs

Cons:

• Typically charge high fees for services

• No guarantee of success

• You can apply for the same IRS programs on your own

Tax debt consolidation with a personal loan

You can use a personal loan to consolidate many kinds of debt, including tax debt. Tax debt consolidation lets you pay off your back taxes and set you to rights with the IRS, ending collection efforts.

Personal loans usually require at least fair credit to get approved, though you'll want good to excellent credit for the lowest interest rates. You'll also need a reliable income, with a higher income needed for a larger loan.

Whether a personal loan is better than an IRS repayment plan will depend on your situation. Consider loans only if you can't get a more affordable offer from the IRS directly.

Pros:

• Can consolidate multiple debts with one loan

• Paying off your tax debt can end collections

• Interest fees may be lower than tax penalties

Cons:

• Fair to good credit typically required

• Origination or other fees may apply

• Monthly payments may be higher than IRS payment plan

Consolidation via home equity loans or line of credit (HELOC)

Another common option for consolidating date is a home equity loan or home equity line of credit (HELOC). If you own your own home and have built equity (if the home is worth more than you owe), you could potentially use that equity as collateral for a loan or credit line.

Home equity loans typically have lower interest rates than personal loans or credit cards, so they can be useful for larger debts that you need to repay over time. However, the loan is guaranteed by your home. You could lose your home if you can't repay the loan. 

Only consider using a home equity loan or HELOC to pay off tax debt if you can't get a better deal from the IRS directly.

Pros:

• HELOC typically have low interest rates

• Loans can be large depending on home equity

• Could take up to 30 years to repay the loan, meaning a lower monthly payment compared to faster payoff options

Cons: 

• Your home is on the line if you default

• Closing costs and/or other fees typically apply

• Loan process can take several months

Intro 0% APR credit card

Many credit card issuers allow you to make tax payments with your credit card, and the IRS accepts credit card payments for a fee. Generally, the very high interest rates on credit cards make them a poor option for paying your taxes.

The exception is if you have good to excellent credit and can qualify for a credit card with a 0% APR offer on new purchases. These deals typically give you six to 18 months of 0% APR on purchases, which would include tax payments in most cases. 

You'll need to make at least the minimum payment every month to maintain your account in good standing. Once the promotion expires, the go-to APR will apply to any remaining balance, so pay in full before then to avoid costly fees.

Pros: 

• Temporarily offers interest-free financing

• Low minimum monthly payments

• Could potentially earn rewards on tax payments

Cons: 

• Requires good to excellent credit to qualify

• High interest when the promotional APR ends

• Carrying a high card balance can hurt your credit score

• Your tax burden may exceed your credit limit

• Processing fee for card payments

Warning Signs of Tax Relief Scams

It's not uncommon for scammers to use debt to scare worried people into parting with their cash. They may impersonate the IRS or pretend to be a legitimate tax debt relief company. 

Here are some warning signs you may be at risk of a tax relief scam:

• Calls or emails about your tax debt. The IRS doesn't usually make phone calls or send emails. Initial contact about your tax debt will be sent through the regular mail. The IRS will only call if you contact them first. When the IRS calls, the agent should provide a name and badge number.

• Over-the-top promises or guarantees. No company can promise to eliminate your tax debt or guarantee a specific outcome with the IRS. These types of claims are a red flag.

• High upfront costs or fees. Use caution with companies that charge large upfront fees before they've even provided any services. Reputable companies will typically deliver results before charging fees.

• Pressure or fear tactics. Avoid any company that uses threats, intimidation, or other pressure tactics to get you to sign up for services you don't want.

• Lack of transparency. Be wary if representatives can't or won't answer key questions about fees, services, and qualifications.

You can check any tax preparers credentials through the Directory of Federal Tax Return Preparers. It's also a good idea to look for membership in professional tax preparer organizations.

You can report suspected scams or fraud to the IRS online.

How to Choose Between Tax Debt Relief Options

Generally, the best options for dealing with tax debt will come from working directly with the IRS. This may not be the right move for everyone, however. Here's what to consider when comparing all of your options:

• Eligibility. Many tax debt relief programs have strict eligibility requirements.

• Cost. Consider all of the potential costs, including interest fees and penalties.

• Timeline. Some options can take much longer than others.

• Type of tax debt. You may need a different solution for personal vs. business debt.

• Credit impacts. Some tax relief options may have long-lasting impacts to your credit.

Check out this table for a quick comparison of tax debt relief strategies:

What if You Don't Pay Your Taxes?

If filing back taxes and applying for one of these tax debt relief programs seems like a lot of trouble, consider the alternatives. The consequences are even worse if you don’t file your taxes and don’t come to terms with your tax debt.

Some of those potential consequences are outlined below. 

Interest and penalties

If you’re late paying your taxes, you’re likely to face some extra costs in the form of interest and penalties even if you do establish a formal payment plan with the IRS.

However, the penalties are even stiffer if you don’t file and don’t establish a plan to pay your back taxes. 

Also, the sooner you begin paying off your debt, the less interest you’ll pay overall. Otherwise, your tax debt problem will just continue to grow at an increasingly fast pace.

Tax lien

A tax lien is a legal claim on your assets as security against payment of a debt. A tax lien can make your property subject to being forfeited to the IRS. In the meantime, it can severely restrict your ability to get new credit or sell your property.

Wage garnishment

Wage garnishment is when the IRS can legally require your employer to send a portion of your wages to pay off your tax debts. The money is taken out of your wages before you're paid, and it goes straight to the IRS. 

The IRS will send you a notice of levy in the mail before garnishing your paycheck. If you don't respond, the IRS can garnish up to 25% of your disposable income. Wage garnishment can continue every paycheck until you've repaid all of your tax debt or made other arrangements with the IRS.

Bank levies

A bank levy is when the IRS takes money directly from your bank accounts to pay your back taxes. This is typically a last-ditch effort by the IRS to collect tax debt. 

As with garnishment, the IRS will send a notice of intent before the levy is executed. If you don't respond, the IRS can require your bank to move money from your account to pay your tax debt. The IRS can continue to levy your bank account until the tax debt is fully paid or you've worked out another repayment plan.

Private collection activity

It may surprise you to know that the IRS uses private collection agencies for some delinquent taxes. These collection agencies are used to track down people who have not been in contact with the IRS about their tax debt for at least a year.

While some private collection agencies legitimately work on behalf of the IRS, be wary of scams involving people posing as IRS tax collectors. 

Here are three basic tips to help you guard against these scams:

• The IRS will notify you directly in writing before a private collection agency contacts you. 

• A list of the private collection agencies contracted by the IRS is available on the IRS website. If someone contacts you, make sure their firm is on this list. Reach out to the collection agency at the phone number on the IRS site and verify that the person calling you is a legitimate representative.

• Always make any tax payments directly to the IRS and not to any third-party representative.

Possible criminal prosecution

Most penalties for non-payment of taxes are financial, but you may face criminal prosecution if the IRS believes you have deliberately tried to evade taxes. This usually only occurs if you’ve intentionally committed fraud by hiding income on your tax returns over several years, or if you provided false information during an audit. The IRS is highly unlikely to prosecute you simply because you owe money.

Don’t Just Wait for Your Tax Debt Problem to Go Away

If you owe back taxes, the best course is to deal with the problem as quickly as possible. 

If you don’t, the interest and penalties on your back taxes continue to grow and increase your balance. Over time, you could also face collection activities or claims on your income and assets.

Also, don’t assume that the problem will just go away in time. The statute of limitations for non-payment of taxes is as long as 10 years. 

The statute of limitations period starts when you file your taxes, so if you’re late filing, the clock doesn’t start ticking until that point.

Also, the statute of limitations doesn’t help if you have fraudulently tried to evade taxation.

A formal tax relief program from the IRS is the best course if you have tax debt. Take the first step by figuring out which tax debt relief program is best for you and file an application for that program with the IRS.

Dealing With Debt To Make Your Bills More Affordable

When there are must-pay bills that you can’t afford to cover, it might help to get rid of other debts that reduce your available cash. Debt relief means negotiating with your creditor to accept less than the full amount you owe and forgive the rest. It’s possible to get significant debt reduction this way, which could help you put those debts behind you faster than by making minimum payments for an untold number of years. 

Debt settlement is for unsecured debts like credit card bills, personal loans, medical bills, and payday loans. Putting those behind you could free up cash in your monthly budget to direct toward housing, food, taxes, insurance and other critical expenses. You can negotiate your debts on your own or hire a professional debt settlement company to work on your behalf.