Unpaid Back Taxes: When You Can’t Pay What You Owe

I owe the IRS money I don’t have. What are my options?

This is the situation that causes the most anxiety, and I completely understand why. Owing money to the IRS feels different than owing money to anyone else. They have extraordinary collection powers, and that’s genuinely scary.

But here’s what I want you to understand: the IRS knows that not every taxpayer can pay their full tax debt immediately. They have multiple programs designed to help taxpayers resolve their obligations, and my job is finding the right solution for your specific situation.

Installment Agreements

This is the most common resolution. You make monthly payments to the IRS until your debt is paid off. For debts under $50,000, you can often get this set up relatively easily. For larger debts, we need to prove to the IRS that the payment amount is all you can afford based on your financial situation.

I recently set up an installment agreement for a Chicago warehouse owner who owed $180,000. Based on his financial analysis, we got him approved for $2,100 monthly payments. Without proper representation, the IRS would have demanded much more, potentially forcing him into bankruptcy.

Offer in Compromise

This is the program you’ve probably seen advertised—”Settle your IRS debt for pennies on the dollar!” While those ads are often misleading about who qualifies, legitimate offers in compromise do exist.

An OIC allows you to settle your tax debt for less than the full amount owed when paying the full amount would cause financial hardship. The IRS looks at your income, expenses, assets, and future earning ability to determine your “reasonable collection potential.”

I’ll be honest: these are hard to get approved. The IRS rejects about 60% of offers. But when they work, they’re life-changing. I helped a Detroit couple settle $120,000 in tax debt for $15,000 through an OIC. The wife had developed a chronic illness that prevented her from working, dramatically reducing their household income. We documented everything meticulously, made a compelling case, and got it approved.

Currently Not Collectible Status

If you genuinely cannot pay anything, even in installments, we can request Currently Not Collectible (CNC) status. This temporarily stops IRS collection actions. They won’t seize your assets or garnish your wages while you’re in CNC status.

The downside? Interest and penalties continue accruing, and the IRS reviews your financial situation annually. But for people in genuine hardship—illness, unemployment, caring for sick family members—it provides breathing room.

I worked with a Cleveland teacher who’d gotten into tax trouble after her husband’s death left her with his business tax debts. She was barely making ends meet on her salary. We got her into CNC status for three years while she rebuilt her life, then established a manageable payment plan once she was back on her feet.

Penalty Abatement

Sometimes we can’t reduce the tax itself, but we can get penalties removed or reduced. If you have “reasonable cause” for your tax problems—illness, natural disaster, bad advice from a tax professional, or other circumstances beyond your control—we can request First Time Penalty Abatement or reasonable cause penalty abatement.

I’ve saved clients tens of thousands of dollars through penalty abatement alone. One Chicago business owner owed $65,000, with $28,000 of that being penalties. We got all penalties abated based on his legitimate health crisis, reducing what he owed by nearly half.

How long do I have before the IRS can’t collect from me anymore?

This is about the Collection Statute Expiration Date (CSED), and it’s more complex than most people realize.

The IRS generally has 10 years from the date a tax is assessed to collect it. After that, the debt expires and they can’t collect it. Sounds simple, right?

Not quite. That 10-year clock can be paused or extended by various actions: filing for bankruptcy, submitting an Offer in Compromise, leaving the country for six months or more, or requesting a Collection Due Process hearing.

I’ve seen people accidentally extend their collection statute by years because they didn’t understand these rules. One Detroit business owner I consulted with had been making minimal payments for nine years, thinking he just needed to run out the clock. What he didn’t realize was that two of his actions had extended his CSED by three years. He had another four years of payments ahead of him.

Understanding your CSED is crucial for strategic planning. Sometimes waiting out the statute makes sense; other times, it’s better to negotiate a settlement. Each situation requires careful analysis.