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How to Pay IRS Back Taxes Owed

Updated on January 7, 2012
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Keith Schroeder writes The Wealthy Accountant blog with 30 years experience in the tax field. He is the tax adviser of Mr. Money Mustache.

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It is important to address back taxes owed immediately. When you owe back taxes, the IRS will continue to add penalties and interest whenever they can. As time progresses, the IRS will become more aggressive in their collection efforts.

Ignoring an IRS letter is dangerous. You can be assessed a tax liability from an audit, filed tax return, unfiled estimated tax return, and letter audit. Many tax assessments are wrong. You need to determine if you really owe the tax. In this article we will discuss incorrect tax assessments and handling back taxes owed.

The IRS has a variety of tools to help resolve your tax problems. Ignoring the issue will lead to unpleasant collection efforts by the IRS whether you really owe the tax or not. Unchallenged tax assessments are considered valid taxes owed. After enough time elapses, your remedies expire. In other words, address the IRS demands or you may end up liable for a tax you don’t really owe.

I Don’t Owe This

The IRS sends thousands of letters a day demanding payment of taxes they think you owe. In reality, the IRS computer couldn’t match a number, so it sent you a letter demanding payment. The IRS assumes you owe the tax or you will challenge the assessment. In the mind of the IRS, ignoring a demand letter is the same as agreeing you owe the money.

If you get an IRS letter:

  • Determine if you owe the tax. Check your records to verify the demand the IRS has made.
  • Respond by the date the IRS requested. A response is expected. No response is considered an admission of guilt. The IRS will begin collection efforts after the date given in the demand letter.
  • If your records indicate ‘no taxes due,’ stick to your guns. Present your documentation proving you don’t owe the money. If the IRS insists, appeal. Consider tax court if the IRS persists.
  • You owe some, but not all, of the IRS assessment. Present your documents. Pay the amount you owe or set up an installment agreement.
  • You owe everything the IRS says you do. Oops. You missed some income or took a deduction you were not entitled to. It happens. Pay the tax as soon as possible to reduce interest and penalties. Consider abatement of all penalties when tax bill is paid. Use an installment agreement if necessary.

Dealing With the Balance Due

Paying a tax bill all at once is not always a choice. You can pay your tax with:

  • An Installment Agreement. File Form 9465 to set up an installment agreement. If you can pay in less than six months, forget the installment agreement and save the application fee. Just pay the back tax owed in the six month window.
  • Abatement. The IRS adds penalties onto the tax and interest owed. When you have paid in full, file Form 843 for abatement of the penalties. The IRS grants a large number of requests. Follow the instructions carefully. Your explanation should be listed in the instructions and stated in three or fewer sentences.
  • Offers in Compromise. If the tax bill is larger than you can ever pay, you may qualify for an Offer in Compromise. This is where you settle with the IRS for less than the full value. The IRS uses a formula for what they will accept for an offer: quick sale of assets (80% of full value) minus liabilities, plus 24 months of disposable income. See the instructions of Form 656 for details.

Final Notes

It must be repeated: never ignore an IRS letter for back taxes owed. When you owe back taxes, the best course is to take action resolving the issue. You can’t move beyond the tax problem until you address it. Consult a tax professional if you can’t manage the tax issue alone. Most IRS requests are scarier than they really are.


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