How to Handle Back Taxes: Payment Plans and Offers in Compromise

Aug 14, 2025By S&N Accountancy

SA

Understanding Back Taxes

Dealing with back taxes can be a daunting experience, but it's important to address them promptly to avoid further complications. Back taxes are simply taxes that were not paid in the year they were due. Ignoring them can lead to penalties and interest that accumulate over time, making it even more difficult to resolve the situation.

Fortunately, the IRS offers several options for taxpayers who find themselves in this predicament. These options are designed to accommodate different financial situations, allowing you to pay off your tax debt without undue hardship.

tax paperwork

IRS Payment Plans

One of the most common solutions for handling back taxes is to set up a payment plan with the IRS. This option allows you to pay off your tax debt over time in manageable installments. There are two main types of payment plans available:

Short-Term Payment Plans

If you can pay off your tax debt within 180 days, a short-term payment plan might be the best option. This plan doesn't have a setup fee, though interest and penalties will continue to accrue until the balance is paid in full. It's a suitable choice for those who can quickly gather the necessary funds.

Long-Term Payment Plans

For those needing more time, a long-term payment plan, also known as an installment agreement, allows you to spread payments over several months or years. This plan does require a setup fee, and the amount depends on your method of payment. Direct debit from your bank account is usually the most cost-effective choice.

installment agreement

Offers in Compromise

An Offer in Compromise (OIC) is another option that might be available if you're unable to pay your full tax liability or doing so would create financial hardship. This program allows taxpayers to settle their tax debt for less than the full amount owed. The IRS considers various factors when evaluating an OIC application, such as your ability to pay, income, expenses, and asset equity.

Eligibility Criteria

To qualify for an OIC, you must meet certain eligibility criteria. Generally, all required tax returns must be filed before applying, and you cannot be in an open bankruptcy proceeding. Additionally, you need to demonstrate that paying your full tax debt would cause substantial financial distress.

financial distress

Steps to Take

Whether you opt for a payment plan or an offer in compromise, it's crucial to take action sooner rather than later. Here’s a step-by-step approach to help you get started:

  1. Gather all relevant tax documents and records.
  2. Assess your current financial situation thoroughly.
  3. Contact the IRS or consult with a tax professional for advice.
  4. Submit your application for a payment plan or offer in compromise.
  5. Follow through with your agreed-upon payment terms.

Consulting Professionals

If navigating back taxes feels overwhelming, consider seeking help from a tax professional. They can provide guidance tailored to your specific situation and assist with negotiations with the IRS. A professional's expertise can be invaluable in securing a favorable outcome.

Tackling back taxes head-on with knowledge and a structured approach can alleviate stress and prevent future financial burdens. By understanding your options and taking decisive steps, you'll be well on your way to resolving your tax issues efficiently.