If you owe the IRS money from prior years and have not been able to address it, you are not alone — and more importantly, you are not without options. Unpaid tax debt is one of the most solvable financial problems a person can face, provided you understand the tools available and approach the situation with a clear strategy. Avoiding the IRS, however, is not a strategy. It is a guarantee that things will get worse.
What Happens to Unpaid Tax Debt Over Time
The IRS charges both penalties and interest on unpaid balances, and they compound. The Failure to Pay penalty is 0.5% per month on the outstanding balance, applied until the balance is paid or the maximum penalty of 25% is reached. Interest accrues daily based on the federal short-term rate plus 3 percentage points — a rate that has been in the 7–8% range in recent years. On a balance of $25,000, that translates to roughly $175–200 per month in interest alone, before penalties.
Beyond the financial cost, unpaid taxes can lead to a federal tax lien — a legal claim against your property that becomes public record and affects your ability to sell real estate or refinance. In New Jersey, a federal lien attaches to all real and personal property in the state, and the Division of Taxation can file its own concurrent lien. Eventually, unpaid debt can result in a levy — the IRS's authority to seize wages, bank funds, and retirement accounts. These are not idle threats.
Why Unfiled Returns Are the First Priority
Before any resolution program can be pursued, the IRS requires that all outstanding returns be filed. A taxpayer who owes taxes but has also failed to file is in a more complicated position than one who filed but cannot pay. The IRS will prepare a substitute return using whatever third-party information it has — W-2s, 1099s, bank data — and that substitute return will not include any deductions, credits, or expenses you were entitled to claim. The resulting bill is almost always higher than if you had filed correctly. Filing delinquent returns, even years late, typically reduces the amount owed and opens the door to formal resolution programs.
Your Resolution Options
There is no single right answer for every taxpayer. The best approach depends on your total liability, your current income and assets, and how many years are involved.
Installment Agreement. If you can pay your debt in full over time, a monthly payment plan is often the most straightforward resolution. The IRS offers streamlined agreements for balances under $50,000 that do not require detailed financial disclosure — you simply propose a monthly amount and the IRS approves it if the balance will be paid within 72 months.
Currently Not Collectible Status. If you genuinely cannot afford to pay anything right now, the IRS can place your account in a temporary hold status. Penalties and interest continue to accrue, but collection activity stops while your financial situation is reassessed. This status is not permanent — the IRS reviews cases periodically.
Offer in Compromise. This program allows qualifying taxpayers to settle their debt for less than the full amount owed. Eligibility is based on a detailed analysis of income, expenses, and assets. The IRS accepted approximately 13,000 offers in 2023, with an average settlement of about 16 cents on the dollar.
Penalty Abatement. If you have a history of compliance and experienced a circumstance that caused your inability to pay — illness, job loss, natural disaster — the IRS may remove penalties through First Time Abatement or reasonable cause relief. First Time Abatement is available to taxpayers with no prior penalty history over the preceding three years and can eliminate a significant portion of the total balance.
Statute of Limitations. The IRS generally has ten years from the date of assessment to collect a tax debt. Understanding where each liability stands relative to the Collection Statute Expiration Date (CSED) can be an important part of a resolution strategy.
Real-World Scenario
A Haddonfield couple filed their returns but fell behind on payments during a period when one spouse was out of work following a medical issue. By the time they sought help, they owed $42,000 in combined tax, penalties, and interest across three tax years. After a thorough financial review, their representative determined they qualified for a streamlined installment agreement at $650 per month. A First Time Abatement request removed $6,200 in penalties. The case was resolved without a lien being filed, and they have been on a structured payment plan ever since.
Why Representation Matters
Navigating these options without professional guidance puts you at a disadvantage. The process of negotiating a resolution involves specific procedures, forms, and financial disclosures that are easy to mishandle. Presenting your financial information incorrectly can result in a less favorable resolution than you were actually entitled to.
HofflerSmith Tax Advisory works exclusively in this space. Our Enrolled Agents represent taxpayers before the IRS every day — analyzing balances, identifying the best resolution path, and managing the process from start to finish.
If you have back taxes and are not sure where to start, schedule a consultation with HofflerSmith. The right strategy begins with a clear picture of where you stand.
Frequently Asked Questions
Q: What if I owe back taxes to both the IRS and the state of New Jersey?
A: Both debts need to be addressed, but they are handled separately. The IRS and the NJ Division of Taxation are different agencies with different programs, timelines, and procedures. New Jersey has its own installment agreement program and penalty abatement provisions. A qualified representative can address both simultaneously.
Q: Can the IRS take my Social Security benefits if I owe back taxes?
A: Yes. The IRS can levy up to 15% of your Social Security benefits through the Federal Payment Levy Program. This can continue indefinitely until the debt is resolved, making proactive action particularly important for retirees.
Q: Will getting on a payment plan stop IRS collection activity?
A: Generally, yes. Once an installment agreement is active and payments are being made, the IRS will not levy wages or bank accounts as long as the agreement remains in good standing. However, the IRS can still maintain a federal tax lien on balances over $10,000 even while you are paying.
Dealing with an IRS problem? Call HofflerSmith Tax Advisory at (856) 740-4912.
Our Cherry Hill, New Jersey Enrolled Agents handle the IRS so you don’t have to. We are licensed in all States.
Related HofflerSmith Services: Back Taxes Help | Tax Representation | IRS Notice Help
Need help with your IRS situation? Schedule a free discovery call with HofflerSmith today.