What Are Your Legal Options for Resolving Tax Debt With the IRS?
Owing back taxes is one of the most stressful financial situations an individual or business can face. The IRS has extensive collection powers, including the ability to garnish wages, levy bank accounts, seize assets, and place liens on property. Fortunately, if you're dealing with tax debt, you have several legal options to resolve it.
At the Hoke Law Firm, we help clients struggling with tax debt move toward financial freedom. Here, we’ll outline the main legal strategies available for resolving tax debt with the IRS, so you can better understand your rights and make informed decisions about your next steps.
The Basics of Tax Debt
Tax debt occurs when you owe money to the IRS and either fail to pay on time or don’t pay in full. This can happen for a variety of reasons, including unfiled returns, underreported income, unexpected tax bills, business payroll issues, or being unable to afford the amount due. Once the IRS records a delinquent tax balance, it adds penalties and interest that grow over time.
When you owe the IRS, you’re not just dealing with a creditor; you’re dealing with a federal agency with powerful tools to collect. Fortunately, the law provides multiple methods for taxpayers to resolve their debts legally, many of which are based on their ability to pay, financial hardship, and cooperation with IRS procedures.
Installment Agreements
One of the most common and accessible options for resolving tax debt is an Installment Agreement. This is a formal payment plan that allows you to pay your tax bill over time in monthly installments. There are several types of Installment Agreements available for you to use:
Guaranteed installment agreements: If you owe less than $10,000 (not including penalties and interest), have filed all returns, and haven’t entered into an installment plan in the last five years, you likely qualify for this simplified option.
Streamlined installment agreements: For taxpayers who owe $50,000 or less. These don’t require a full financial disclosure and are generally easier to obtain.
Regular or non-streamlined agreements: If you owe more than $50,000, the IRS will typically require a detailed review of your finances, including income, expenses, and assets.
Once you’re on an approved plan, the IRS suspends most collection activities, as long as you stay current with your payments and filing obligations. An Installment Agreement can provide much-needed breathing room while helping you avoid more severe enforcement actions like wage garnishments or bank levies.
Offer in Compromise (OIC)
The Offer in Compromise is one of the most powerful tools for resolving tax debt, but it's also one of the most difficult to qualify for. This program allows you to settle your tax debt for less than the full amount you owe if you can demonstrate that paying the full balance would cause serious financial hardship. To determine eligibility, the IRS evaluates:
Your current income
Your expenses
Your asset equity
Your future earning potential
If your financial situation suggests that you’ll never be able to pay the full amount within a reasonable time, the IRS may accept an Offer in Compromise. Because this process requires extensive documentation and careful negotiation, working with a tax attorney or experienced debt relief professional significantly increases your chances of success.
Currently Not Collectible Status
If your financial situation is dire, such as being unemployed, disabled, or dealing with significant medical expenses, you may be able to request that the IRS classify your account as "Currently Not Collectible" (CNC). When the IRS agrees to this status, they suspend all collection actions, including wage garnishments and bank levies.
To qualify, you’ll need to submit a Collection Information Statement (such as Form 433-A or 433-F) along with documentation showing your inability to pay. While the IRS won’t attempt to collect during this period, your debt continues to accrue interest and penalties, and the IRS may revisit your case in the future if your financial situation improves.
Even though CNC status doesn’t eliminate your tax debt, it gives you crucial breathing room, and in some cases, the debt may eventually expire due to the statute of limitations. To confirm whether this is an option for you, it’s essential to work with an experienced tax debt relief attorney. Contact Hoke Law Firm today to discuss your options.
Penalty Abatement
Penalties can make up a significant portion of your total tax debt. The IRS charges failure-to-file and failure-to-pay penalties, in addition to daily interest. If you have a valid reason for falling behind, you may qualify for penalty relief through a process called penalty abatement. There are three primary types of penalty abatement:
First-time penalty abatement: Available if you’ve been compliant in prior years.
Reasonable cause relief: Requires documentation of special circumstances that made it impossible to comply.
Statutory exception: Based on official IRS errors or misinformation.
While penalty abatement won’t eliminate your base tax debt, it can significantly reduce the total amount owed. Successfully reducing penalties can make repayment more manageable and lessen the long-term financial impact. Because approval often depends on how well you present your case, working with a tax professional can greatly improve your chances of securing relief.
Innocent Spouse Relief
Sometimes a person ends up with tax debt because of their spouse or ex-spouse’s actions. If you filed a joint tax return and later discover that your partner underreported income or claimed false deductions, you may be eligible for Innocent Spouse Relief. There are three types of relief you may qualify for:
Innocent spouse relief: You must prove that you didn’t know (and had no reason to know) about the understatement.
Separation of liability relief: Available for divorced or separated individuals.
Equitable relief: If you don’t qualify for the above but it would be unfair to hold you responsible, the IRS may still grant relief.
Each of these programs has strict eligibility criteria and filing deadlines, so speaking with a tax attorney is essential. The application process can be complicated, and the IRS carefully scrutinizes claims to prevent abuse of the system. With professional guidance, you can build a stronger case and improve your chances of obtaining relief.
Bankruptcy
Contrary to popular belief, certain types of tax debt can be discharged in bankruptcy. If your tax debt is older than three years, the return was filed at least two years ago, and the IRS assessed the debt at least 240 days before your bankruptcy filing, you may be eligible for discharge. There are two main types of consumer bankruptcy:
Chapter 7 bankruptcy: Can wipe out qualifying tax debt entirely, along with other unsecured debts like credit cards and medical bills.
Chapter 13 bankruptcy: Allows you to create a court-approved repayment plan over three to five years. Certain tax debts may be partially repaid or discharged at the end of the plan.
Bankruptcy has long-term financial consequences and should never be taken lightly, but in the right circumstances, it can be an effective tool for managing or eliminating tax-related obligations. Determining whether your tax debt qualifies for discharge requires a careful review of your tax history and filing timelines.
Speak With a Tax Debt Attorney Today
Tax debt is serious, but it’s not insurmountable. The key is to act early, stay informed, and work with professionals who understand how to deal with the IRS. At the Hoke Law Firm, we help clients with tax debt in Baton Rouge, Louisiana, as well as the neighboring areas of New Orleans and Lafayette. Contact us today for guidance toward an effective solution for your financial circumstances.