What happens when I owe back taxes?

Taxes are a funny thing. For the majority of people, all that they know is that they have an obligation to pay their taxes every April. They don't know that the IRS will always contact you by letter first, that there are a number of different strategies for dealing with a tax problem, or that there is an expiration date for the IRS to collect. Instead, those are the kinds of things that you learn when you have a tax problem or want to help someone resolve their debt. Understanding the different ways that the IRS operates and what dealing with a tax problem looks like can be a crucial step in resolving a current debt or preventing a future one.


What I want to do is show you what dealing with the IRS looks like. It's important to know what the IRS does when you owe them money, what most people do wrong when trying to resolve their debt, and how to not make the same mistakes others have made (and continue to make). So, without further ado, "What happens when I owe the IRS back taxes?"


So you owe a little money?


When you owe the IRS back taxes and file your returns, they will unleash something they call a "notice stream," which is a series of letters that start off with a rather neutral tone. The point of these initial letters is to inform you that you have a balance due, but they quickly escalate to a Notice of Levy, followed by a Final Notice of Intent to Levy. 30 days after the date of the Notice of Intent to Levy, the IRS can begin enforced collections, which allows them to take money from your bank account and send levy notices to your employer or accounts receivable.


There's a substantial number of people who simply don't file when they owe back taxes, and that will certainly "buy you some time." But inevitably, the IRS will prepare a "Substitute Filed Return" based off of W-2s, 1099Ss, K1s, and whatever other forms that they receive. Unfortunately for you, these forms will likely show that you owe more than what you would if you had filed your return through the proper channels from the start. And, if you fail to respond to the IRS's proposed assessment, the notice stream above kicks into full swing.


What most people do wrong when they owe back taxes


  1. They fail to fix whatever it was that caused them to run up the debt in the first place. And, without fixing the problem that started it all, these same people are getting further in the hole with the IRS.
  2. They ignore the IRS's notices. By ignoring communication from the IRS, taxpayers lose valuable appeal rights, and they wind up reacting to the IRS as opposed to being proactive about resolving their situation.
  3. They call the IRS in desperation. They wait for the IRS to levy and will agree to anything to get their levied money back, including a repayment plan that isn't realistic. As soon as the reality of an unfeasible payment plan kicks into place, the situation becomes even more stacked against the individual.
  4. They internalize a tax problem as something wrong with them. When someone has a tax issue, there can be an overwhelming sense of anxiety, humiliation, and fear that comes packaged with debt.

Not pictured: any actual IRS notices


Right choices when you owe the IRS money


  1. Fix whatever it was that caused you to have the debt in the first place. Make sure your withholdings are correct and that you are keeping out enough money for taxes or setting enough aside for estimated tax payments. When hiring representation, make sure to find someone who will help you fix the initial problem so that it never happens again. If they just want to remove the problem at hand, they're not the best representation for you.
  2. Don't ignore IRS notices. Look, I get it. No one wants to get mail from the IRS (unless it's a refund check!). If you can't stomach opening it, then get a friend to open it for you, and have them tell you what it says. The IRS is not looking to arrest you (well, they do arrest people… perhaps 0.15% of the time, a number I was able to calculate by dividing the estimated two million US persons with tax problems by the underwhelming 3,000 criminal tax indictments per year).
  3. Get a real plan. Find out exactly what it is you're being charged with, find your Realistic Collection Potential, see what your options are and how you can use them effectively (it's not a bad idea to keep in mind a few tips before calling the IRS for a payment plan), and then take action.


A tax problem is not a death sentence on your future. It might seem overwhelming, and that's because oftentimes these problems can be just that – too much to deal with. So, if you find yourself with no idea how to proceed, take a deep breath. If you need help, don't be afraid to contact a tax professional. After all, it's what we're here for! Don't make the same mistakes that so many people before have made – instead, solve the initial problem, resolve your debt, and then decide what you want your future to look like.


If you need assistance, contact us. We're here to help.