Tax Debt Resolution – How the IRS Processes Back Taxes

Last updated on September 4, 2023

When taxpayers owe back taxes, many times they’re not aware how the IRS discovers the debt and begins collection proceedings. A tax liability may lead to penalties and interest, facing aggressive IRS collection actions, and a lot of stress. In order to avoid complicating your tax debt case, it’s important to know what to expect from the IRS. Determining an effective resolution early on is the best strategy.

Discovering Tax Debt

When you don’t file your tax return, the IRS uses information from third parties to determine whether you’re required to pay in, and how much taxes you owe. The IRS uses the Information Returns Processing (IRP) System to collect data about a taxpayer’s income. The data on the IRP is submitted by employers and other third parties. It usually includes information such as wages, pension, interest and dividends. The IRS uses this data to determine if the taxpayer owes money and, if so, how much.

The IRP matches the income reported on information returns with the income reported by the taxpayer. If a liability is detected, the case is sent to collections. If underreporting of income is discovered, a further examination is conducted to ensure that the assessment is accurate.

IRS Notices 

Regardless of the details of the IRS review, a notice will be sent to inform the taxpayer about it. If a tax debt is suspected, the amount included in the notice is an estimate. In other words, the IRS does not include any credits or deductions in its estimation of the taxes owed. When a taxpayer receives an IRS notice, they should file a tax return and deduct the credits and deductions that they qualify for from their income. This must be done early, as the IRS will consider their estimation final if the taxpayer does not respond to their early notices.

Tax Debt Resolution: IRS Payment Plans and Collection Actions

After receiving notices about a tax debt from the IRS, taxpayers have two options: resolve their tax debt or face collection actions. The IRS notices encourage taxpayers to use a payment plan to resolve their back taxes. They provide a reasonable amount of time to the taxpayer to resolve the case. If the debt is left unresolved after repeated reminders, the IRS can move to collection actions such as a federal tax lien and/or a tax levy.

When the IRS discovers a tax debt and begins sending notices, it’s in the taxpayer’s best interest to begin resolution efforts. It will help them achieve a smoother and more affordable back tax resolution.