If you owe the IRS from previous tax years or because you failed to file a tax return, then don't ignore it. Being in debt to the IRS is not something that will go away.
Initially, the IRS will impose penalties and interest on late balances. However, if it continues to go unpaid for a significant amount of time, then the situation can escalate into more severe consequences such as having a lien placed against your property, your wages being garnished, and even your passport being canceled.
For these reasons, the approach is to do the right thing and pay the IRS what they are owed.
Apply for an Installment Agreement
When you're not able to pay your back taxes right away, the IRS will let you apply for an installment agreement. This is where the balance of what’s owed will be broken up into smaller monthly payments. To request a monthly installment plan, use Form 9465.
Withholding the Current Year's Refund
If you owe the IRS from previous years but you're expecting a refund after filing this year's tax return, then be aware that it may be involuntarily withheld by the IRS. This can occur even if you've entered into an installment agreement with the IRS since they will want the balance to be paid down as quickly as possible. If your refund is withheld, then you’ll receive a CP88 notice from the IRS.
Offer in Compromise
If you absolutely cannot pay the overdue taxes, even with an installment agreement, then the IRS may let you make an Offer in Compromise (OIC). This is where you and the IRS will agree to a reduced settlement.
Before an OIC can be considered, you must first:
- Have filed all tax returns
- Have received a bill for at least one tax debt included on the offer
- Made all required estimated tax payments for the current year
- Made all required federal tax deposits for the current quarter and the two preceding quarters if the taxpayer is a business owner with employees
For more information about paying past tax bills, please see IRS Topic No. 201 The Collection Process.