Tax Resolution: What to Do When Your Clients Owe Back Taxes and Can’t Afford to Pay

Owing back taxes isn’t just a financial burden - it can disrupt one’s peace of mind and create a constant sense of anxiety that lingers with every missed IRS notice. Additionally, it can lead to bank levies, wage garnishments and even loss of passport. Being able to assist your clients with back tax issues is a critical service that can make a substantial difference in their financial future.

IRS Resolution Options

• A partial pay installment agreement (PPIA) is an agreement with the IRS that allows taxpayers to make lower monthly payments than a standard installment agreement. Unlike a full installment agreement, a PPIA does not require the taxpayer to pay the entire tax debt — the IRS may forgive the remaining balance after the agreed-upon payments are made. To qualify, taxpayers must provide detailed financial information using Form 433-A and/or 433-B to demonstrate that they cannot pay their full tax debt. Since the IRS has a 10-year collection statute expiration date (CSED), any unpaid balance after this period may be forgiven, effectively reducing the overall tax burden. The IRS does have the ability to reassess the taxpayer s financial situation every two years and request a greater payment amount.
• An offer in compromise (OIC) is a settlement agreement where the IRS allows the taxpayer to pay less than the full amount owed to resolve their tax debt. The IRS accepts an OIC when it determines that it is unlikely to be able to collect the amount in full. To apply, the taxpayer must submit Form 656 along with a detailed financial disclosure using Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. If the IRS believes the taxpayer can fully pay through an installment agreement or by liquidating assets, the OIC will likely be rejected. Currently, the offer process takes at least eight to 12 months.
• Currently not collectible (CNC) status is a temporary relief option. A taxpayer must show they are unable to pay their tax debt without causing financial hardship. To request CNC status, the taxpayer must provide a financial disclosure using Form 433-A and/or Form 433-B. While in CNC status, the IRS may review the taxpayer’s financial situation (usually every two years) to determine if their ability to pay has improved. If the taxpayer’s income increases, the IRS may remove the CNC designation. However, if the 10-year CSED passes while in CNC status, the debt may expire without the taxpayer having to pay it. This can be an effective tool for someone whose income is not expected to increase, like an elderly or retired person.
• A streamlined installment agreement can be used for balances of up to $50,000, and the IRS may extend the term to the length of the CSED. They also may allow this for debt up to $250,000 in certain cases as well.
• A first-time penalty abatement (FTA) is available to taxpayers with a clean compliance history for at least three years. Reasonable-cause penalty abatement may also be granted under the following circumstances: serious illness, death or unavoidable absence; natural disasters, fires or other catastrophes; reliance on erroneous professional advice; inability to obtain records; and IRS error or processing delays.

New Jersey Resolution Options

• New Jersey offers installment plans with up to 60 months for repayment. Repayment over 72 months is also available, but you will need to provide financials showing economic hardship.
• A closing agreement is a settlement that resolves outstanding tax liabilities. Taxpayers must demonstrate financial hardship, proving that they cannot reasonably afford to pay the full amount owed without causing significant economic distress. This requires submitting detailed financial records, including income, expenses, assets and liabilities, to show that full payment would create hardship. New Jersey will rarely reduce the principal balance of tax owed, just the interest and penalties.
• Taxpayers may request penalty abatement if they can demonstrate reasonable cause for failing to comply with tax laws. This means the taxpayer must show that their failure to file or pay was due to circumstances beyond their control, rather than willful neglect. New Jersey normally considers penalty abatement under the following circumstances: serious illness, death, natural disasters or unforeseen events; significant financial hardship; errors by a tax professional or government agency; or IRS penalty abatement granted.

Helping clients navigate resolution programs requires expertise and persistence. You need to assess each client's financial situation to determine the best strategy. Be proactive with tax authorities to avoid liens and levies. By understanding the available options, CPAs can play a crucial role in alleviating tax burdens and guiding taxpayers toward financial stability.