Many Americans file new tax returns while still owing money to the IRS from previous years. According to IRS data, millions of taxpayers carry outstanding tax debt, making this a common situation.
To better navigate these circumstances, understanding the IRS’s approach to new filings when old debts exist is crucial. The following sections clarify filing obligations, refund offsets, and available IRS relief programs.
Filing Requirements When You Owe IRS Debt
Taxpayers must file their tax returns on time, even if they owe tax debt from previous years. The IRS requires all taxpayers who meet filing requirements to submit returns by the applicable deadline, regardless of their ability to pay outstanding balances.
Consequences of Not Filing
When taxpayers don’t file returns by the deadline, they face a failure-to-file penalty. According to IRS guidelines, this penalty is typically five percent of the unpaid tax for each month or part of a month that a return is late, up to a maximum of 25%. This penalty applies in addition to any penalties already assessed on unpaid taxes from prior years.
Filing on time helps taxpayers avoid this additional penalty. Even if payment in full is not possible, submitting returns by the deadline prevents penalties from escalating. Taxpayers unable to pay when filing should still submit their returns and pay as much as possible, as any payment reduces the amount subject to interest and penalties.
Understanding Refund Offsets
If a tax return shows an overpayment resulting in a refund, but the taxpayer has unpaid tax debt from a prior year, the IRS has statutory authority (legal power under the law) to keep part or all of that refund. This process is called a refund offset (when a refund is used to pay debt).
How the Offset Process Works
According to IRS procedures, when taxpayers owe federal tax debt from previous tax years, the IRS may apply current tax refunds to outstanding balances. Federal law authorizes the IRS to use refunds this way through the Treasury Department’s Bureau of the Fiscal Service Treasury Offset Program (a program that sends tax refunds to pay federal debts).
Types of Debts Subject to Offset
Tax refunds can be offset to pay several types of debts:
- past-due federal taxes from previous years
- state income tax debts
- child support obligations
- federal student loan debts in default
- state unemployment compensation debts
- other federal nontax debts owed to federal agencies
The IRS handles offsets for past due federal taxes directly. The Bureau of the Fiscal Service (a federal agency that manages government payments and collections) manages all other types of offsets.
Offset Notifications
When an offset occurs, taxpayers receive a written notice. For federal tax offsets, the IRS sends the notification. For other types of offsets, the Bureau of the Fiscal Service provides the notice. The notice typically includes the original refund amount, the offset amount, the receiving agency, and contact information.
How IRS Debt Affects Future Refunds
Offsets to tax refunds occur automatically during standard IRS processing, even if taxpayers have payment plans or Currently Not Collectible status.
The IRS applies as much of the refund as needed to satisfy outstanding debt. If the refund exceeds the debt, taxpayers receive the remaining amount. If the debt exceeds the refund, the offset reduces the balance, but the remaining debt persists.
Joint Returns and Injured Spouse Relief
When offsets occur on joint tax returns due to debt owed solely by one spouse, the other spouse may be entitled to recover their portion of the refund. Form 8379, Injured Spouse Allocation (a form letting one spouse claim a share of the refund), can be filed to request this allocation with the original return, with an amended return, or separately after receiving offset notification.
IRS Relief Options
The IRS offers several programs that may help taxpayers manage outstanding tax debt. Eligibility depends on individual circumstances and IRS approval.
Installment Agreements
Installment agreements allow taxpayers to pay tax debt over time through monthly payments. The IRS offers short-term payment plans (up to 180 days) for taxpayers who owe less than $100,000 in combined tax, penalties, and interest, and long-term payment plans for those owing $50,000 or less.
Taxpayers can apply online through the IRS website, by phone, by mail using Form 9465, or through tax preparation software. Online applications are generally processed faster and typically have lower user fees. Some taxpayers may qualify for reduced or waived fees based on income.
Future refunds will be applied to outstanding tax debt until it is fully paid, even if an active installment agreement is in place.
Offer in Compromise
An Offer in Compromise is an IRS program that may allow qualified taxpayers to settle their tax debt for less than the full amount owed, subject to IRS approval. This option may be available when the IRS determines that collecting the full amount would create economic hardship (serious financial difficulty) or when there is doubt about the taxpayer’s ability to pay.
To be considered, taxpayers must have filed all required tax returns, received a bill for at least one tax debt included in the offer, and made all required estimated tax payments for the current year. Business owners with employees must have made all required federal tax deposits (payments employers make to the government for withheld taxes).
The IRS provides an Offer in Compromise Pre-Qualifier tool on IRS.gov to help taxpayers assess potential eligibility. The application requires Form 656 and either Form 433-A (for individuals, reporting financial information) or Form 433-B (for businesses, reporting company finances), along with required financial documentation.
Currently Not Collectible Status
Taxpayers experiencing financial hardship who cannot afford to pay basic living expenses along with tax debt may qualify for Currently Not Collectible status. This status provides temporary relief from IRS collection actions.
When accounts are placed in Currently Not Collectible status, the IRS temporarily suspends collection activities such as levies (legal seizure of property for payment) and wage garnishments (withholding of earnings to pay debt). However, debt continues to accrue interest and penalties; the IRS may still file a Notice of Federal Tax Lien (an official claim to your property for debt); and future tax refunds will still be applied to outstanding debt.
To request this status, taxpayers should call the IRS at the number on their notice or at 800-829-1040. The IRS may require completion of a Collection Information Statement providing proof of income, expenses, and assets.
Will the IRS take my refund if I owe back taxes?
According to IRS procedures, if taxpayers owe federal tax debt from a prior year and are entitled to a refund, the IRS will automatically offset part or all of the refund to pay that debt. This occurs even when payment plans are in place, or accounts are in Currently Not Collectible status.
Can I file my tax return if I owe money from previous years?
Yes. Taxpayers must file returns if they meet filing requirements, regardless of outstanding debt. Failing to file results in a failure-to-file penalty of up to 25 percent of the unpaid tax.
What if I cannot pay my tax debt?
Taxpayers facing genuine financial hardship may qualify for Currently Not Collectible status, which temporarily suspends IRS collection actions. Other options include payment plans and, for qualifying taxpayers, an Offer in Compromise. Eligibility depends on individual circumstances and IRS approval.
Will a payment plan prevent the IRS from taking my refund?
No. Even with active installment agreements, the IRS will continue to apply future tax refunds to outstanding balances until the debt is fully paid.
Conclusion
Filing new tax returns while owing old IRS debt is a situation many Americans face. Key points include the requirement to file returns on time regardless of outstanding debt, the automatic nature of refund offsets when debt exists, and the availability of IRS programs such as installment agreements, Offers in Compromise, and Currently Not Collectible status for qualifying taxpayers.
Every taxpayer’s situation is unique, and eligibility for IRS relief programs depends on individual circumstances and IRS approval. Tax professionals can help evaluate situations, explain available options, and work with the IRS to explore potential solutions for addressing outstanding tax obligations.
We’re Helping Thousands Of Americans Resolve Their Tax Problems With The IRS. Call 1-888-615-8342 to speak with a tax specialist and explore your options with confidence.
Table of Contents:
- Filing Requirements When You Owe IRS Debt
- Consequences of Not Filing
- Understanding Refund Offsets
- How the Offset Process Works
- Types of Debts Subject to Offset
- Offset Notifications
- How IRS Debt Affects Future Refunds
- Joint Returns and Injured Spouse Relief
- IRS Relief Options
- Frequently Asked Questions
- Conclusion
Common Mistakes When Filing With IRS Debt:
Explore Related Tax Topics:
Learn who qualifies for an IRS Offer in Compromise, why most applications are rejected, and how the IRS evaluates eligibility. Understand acceptance rates and common mistakes.
Financial hardship is a tough place to be in and you need all the help you can get so you’re not placed in further debt. Call ACTR now for financial freedom!
Tax professionals are your mediators between the IRS and you. Their sole purpose is to support you and guide you while you negotiate with the IRS together.
The Partial Payment Installment Agreement (PPIA) is a tax relief program designed for individuals with low disposable income and can’t make minimum payments.
There are a few different payment options you may choose from: Short term or long term. Both allow you to pay your tax bill over time. Which one is better?
The IRS assesses trillions of dollars per year and billions of dollars in penalties. Get rid of your IRS penalties through a tax professional.
A tax levy is an aggressive collection scare tactic made by the IRS. They’ll sell your assets before you can do anything about it. Learn more about tax levies.
A tax lien is an aggressive collection scare tactic made by the IRS. They’ll claim your assets before you can do anything about it. Learn more about tax liens.
The IRS assesses trillions of dollars per year and billions of dollars in penalties. Get rid of your IRS penalties through a tax professional.
Few taxpayers know programs like the Offer in Compromise exist to reduce their tax debt. A tax professional can help dispute your tax debt! Call today!
Prevent the IRS from forcing your into financial hardship. Apply for Currently Not Collectible Status to pause their collections process. Speak with a tax pro!
Disclaimer
The information provided in this article is for general informational and educational purposes only and does not constitute legal, tax, or financial advice. This content is not intended to replace professional advice from a qualified tax attorney, certified public accountant (CPA), or enrolled agent.
Tax laws and IRS policies are complex and subject to change, and individual circumstances vary. Any actions taken based on the information contained in this article are done at the reader’s own discretion and risk.
No attorney-client or professional relationship is created by reading or relying on this content. For advice specific to your situation, you should consult a qualified tax professional or legal advisor.