Tax Debt Resolution: How Does the IRS Estimate Tax Debt

Last updated on June 27, 2023

When a taxpayer does not file and pay taxes during the tax filing season and does not file for an extension, the IRS begins collection of unpaid taxes after the season is over. To estimate how much taxes a taxpayer owes, the IRS uses third party information from the Information Returns Processing (IRP) System. After receiving information about income sources and the total income, they file a substitute tax return on behalf of the taxpayer.

The amount of tax debt the IRS estimates is an approximation, and can be less or more than the actual taxes owed by the taxpayer. To begin collection actions, the IRS is required to inform the taxpayer about the amount of taxes owed, how they can pay it, how the tax debt occurred, and more. Towards that end, the IRS estimates the tax liability of the taxpayer and sends a notice to the taxpayer.

It is vital to remember that when calculating back taxes, the IRS does not include any tax deductions or credits that the taxpayer qualifies for. Because of this, the total tax debt amount might be more than the actual taxes owed.

When a taxpayer receives the first notice regarding the payment of tax debt, they should calculate their tax liability using all the tax credits and deductions that they qualify for. If the amount is less than the IRS’ estimate, then they must contact the IRS to get it corrected, and follow up with plans to arrange the resolution of the tax debt.