The IRS treats taxpayers who owe more than $100,000 very differently than it does those who owe less than $100,000.  If you owe more, the IRS expects immediate payment.  It also uses harsh collection measures and makes invasive financial information demands. If you owe less, then you get up to five years to pay what you owe, and the process is relatively easy.

If You Owe Less Than $100,000

The main process for paying off back taxes is the installment agreement.  If owe less than $100,000 and are financially able to pay what you owe within 72 months (5 years), then the IRS will not make other efforts to collect your back taxes.  If your tax liability is less than $50,000, you can set up an installment agreement on-line.  The funds will be debited monthly from your bank account.  If your tax liability is between $50,000 and $100,000, you call the IRS to arrange a payment plan.  Most IRS phone representatives can approve a 5-year plan that pays off a liability of up to $100,000  with no further information or approval needed. See also here.

If  You Owe More Than $100,000

If you owe more than $100,000 everything changes.  You are now the focus of the Large Collection Matters group. Its officers will not approve an installment agreement of even 1-2 years without getting deep into your business. They want what’s owed now. And they have the full authority of the U.S. government to get it: levies, wage garnishments, notices of federal tax liens, cancellation of passports. They will also make invasive demands for details on financial accounts, assets, liabilities, income streams and expenses.The IRS’s goal is to have you pay down the liability as quickly as possible. If there’s equity in your house, they will ask you to get a home equity loan to pay the liability, or even sell the home if it is too “opulent”. They may demand you liquidate retirement accounts. (I usually recommend asking the IRS to levy on these, rather than liquidating them; the IRS levy avoids the 10 percent early-withdrawal tax). The IRS will demand the sale of any assets that can pay some or all of your tax owed — boats, expensive cars, other real estate.

If you have insufficient assets to satisfy your tax debt, then the IRS will negotiate an installment agreement.  However, the terms tend to be onerous. It will look closely at the financial information you have provided. It will expect you to pay, monthly, the difference between how much you make and the expenses that the IRS allows you.  IRS-allowed expenses can be meager.  For instance, the IRS allowance is $3,035 in rental or mortgage expense for a family of four in Los Angeles County, findable here.  If your rent or other expenses are higher than allowed (and they usually are), then the IRS might allow you a few months of your higher living expense before increasing the installment agreement payment to squeeze out of your posh abode or other money-draining habits.  Alternatively, the IRS may demand from the outset that you reduce living expenses it deems extravagant. After all, it sets a poor example if someone who owes more than $100,000 lives in a mansion, drives a Porsche, or pays country club dues.

Once your tax liability falls below $50,000, however, you regain better options.  If your installment agreement has been draconian, you can now renegotiate it to pay off the remaining tax in 72 months.  The bottom line: if you owe more than $100,000 in taxes, the IRS will demand quick liquidation of your assets to pay the debt and dramatic reduction in your monthly living expenses to pay back what you owe.

October 9, 2018