Business Tax Debt Relief: IRS & State Tax Solutions

Business tax debt is unique—and uniquely stressful. Unlike other creditors, the IRS and state tax agencies have extraordinary collection powers: wage garnishment without a lawsuit, bank levies, property seizure, and business closure.

But here's what most business owners don't know: The IRS would rather work with you than destroy your business. They have programs specifically designed to help struggling businesses resolve tax debt.

Types of Business Tax Debt

Federal Taxes (IRS)

• Payroll Taxes (Trust Fund): Withheld employee taxes (income tax, Social Security, Medicare). MOST SERIOUS. Cannot be discharged in bankruptcy.
• Corporate Income Tax: Tax on business profits
• Self-Employment Tax: For sole proprietors, partnerships
• Excise Taxes: Industry-specific (fuel, alcohol, tobacco)
• Penalties & Interest: Added to unpaid taxes. Can equal or exceed original tax owed.

State & Local Taxes

• State Income Tax: On business profits
• Sales Tax: Collected from customers but not remitted
• Use Tax: On items purchased without paying sales tax
• Property Tax: On business real estate
• Unemployment Tax: State unemployment insurance

IRS Collection Process Timeline

Your Options to Resolve Business Tax Debt

Option 1: IRS Payment Plan (Installment Agreement)

Short-Term Payment Plan (120 days or less):

• Owe less than $100,000
• No setup fee
• Apply online at IRS.gov
• No financial disclosure required

Long-Term Payment Plan (Installment Agreement):

• Pay over 6-72 months
• Setup fee: $31-225 (lower for online, direct debit)
• Penalties and interest continue accruing
• Must stay current on future taxes

Streamlined Installment Agreement:

• Owe $50,000 or less
• No financial disclosure required
• Pay off in 72 months or less
• Auto-approved if you meet criteria

Pros:

• Easy to set up (often online)
• Stops levies and seizures
• Keeps business operating
• No negotiation needed

Cons:

• Pay full amount owed plus penalties/interest
• Interest continues accruing during payment period
• If you miss payment, agreement defaults and levies can resume

Best For: Can afford monthly payment, want to pay in full but need time

Option 2: Offer in Compromise (OIC)

What It Is:

Settle your tax debt for less than you owe. The IRS accepts if: 1) Doubt as to collectibility (can't pay full amount), or 2) Effective tax administration (paying would cause hardship).

Acceptance Rate: ~40% of OICs are accepted. Professional representation increases odds significantly.

How Much You'll Pay:

IRS formula: Reasonable Collection Potential (RCP) = Available equity in assets + Future income potential

Example Calculation:

• Assets: Home equity $20K, vehicle $5K, retirement $0 (protected) = $25K
• Income: Monthly income $5,000, monthly expenses $4,500, difference = $500/month × 12 months = $6,000
• Total RCP: $25,000 + $6,000 = $31,000
• Tax owed: $75,000
• OIC offer: $31,000 (saves $44,000)

Requirements:

• All tax returns filed
• Current on estimated tax payments
• Not in bankruptcy
• Complete financial disclosure (Form 433-A or 433-B)
• Application fee: $205 (waived for low income)
• Initial payment (20% lump sum or first installment)

Timeline: 6-24 months for IRS review

Pros:

• Significantly reduce tax debt (sometimes by 70-90%)
• Fresh start
• Stops penalties and interest once accepted

Cons:

• Complex application process
• Low acceptance rate without professional help
• Must have filed all returns
• If rejected, IRS has all your financial info
• Lose tax refunds for year of OIC and previous year

Best For: Genuinely can't afford to pay full amount, have significant financial hardship

Option 3: Currently Not Collectible (CNC) Status

What It Is:

IRS temporarily stops all collection activity because collecting would cause economic hardship.

How to Qualify:

• Monthly income barely covers (or doesn't cover) necessary living expenses
• Little to no assets
• Complete Form 433-F (Collection Information Statement)
• Prove financial hardship

What Happens:

• Collection activity stops
• No levies, garnishments, or seizures
• Penalties and interest continue accruing
• IRS may file tax liens
• IRS reviews financial situation annually
• If situation improves, collections resume

Statute of Limitations:

IRS has 10 years from assessment to collect. If you stay in CNC status and statute expires, debt is gone.

Pros:

• Immediate relief from collection
• Keeps business operating
• Debt may expire after 10 years

Cons:

• Debt continues growing (penalties/interest)
• Must requalify annually
• Tax liens may be filed (damage credit)
• Temporary solution only

Best For: Truly cannot afford any payment, need breathing room, hope situation will improve or debt will expire

Option 4: Penalty Abatement

What It Is:

Request IRS remove penalties (not tax or interest). Can save 25-50% of total balance.

Types of Relief:

• First-Time Penalty Abatement: If you have clean 3-year history, IRS will waive penalties for one tax period. Easy to get.
• Reasonable Cause: Penalties removed due to circumstances beyond control (death, serious illness, natural disaster, etc.)
• Statutory Exception: IRS gave you bad advice, or other statutory reasons

How to Request:

• Call IRS (800-829-1040) and request verbally, or
• Submit Form 843 (Claim for Refund), or
• Write letter explaining reason

Success Rate: High for first-time abatement (if eligible). Lower for reasonable cause (must prove).

Example Savings:

• Original tax: $50,000
• Penalties: $12,500
• Interest: $8,000
• Total owed: $70,500
• After penalty abatement: $58,000 (save $12,500)

Best For: Everyone. Always request penalty abatement—worst case, they say no.

Option 5: Bankruptcy (Limited Circumstances)

Can You Discharge Tax Debt?

Sometimes. Rules are complex, but income tax CAN be discharged if:

• Tax is at least 3 years old (from original due date)
• Return was filed at least 2 years ago
• Tax was assessed at least 240 days ago
• You didn't commit fraud or willful evasion

CANNOT Discharge:

• Payroll taxes (trust fund): Never dischargeable
• Recent taxes: Under 3 years old
• Unfiled returns: Must file first
• Fraud penalties: If you committed fraud

Chapter 7: Discharge eligible income taxes

Chapter 11: Restructure tax debt in payment plan (including non-dischargeable payroll taxes)

Best For: Old income tax debt that meets discharge criteria, or restructuring in Chapter 11

Trust Fund Recovery Penalty (TFRP)

The Nuclear Option:

If your business fails to remit payroll taxes, IRS can assess the Trust Fund Recovery Penalty against responsible persons personally.

Who Is Responsible:

• Owner, officers, directors
• Anyone who could have ensured taxes were paid
• Anyone with check-signing authority

Amount: 100% of the trust fund portion (employee withholdings)

Example:

• Business owes $100K in payroll taxes
• $60K is trust fund (employee withholdings)
• IRS assesses TFRP: $60K against owner personally
• This is in addition to business owing $100K

Cannot Be Discharged in Bankruptcy

How to Fight TFRP:

• Prove you weren't a "responsible person"
• Prove you didn't act willfully (you didn't know or tried to pay)
• Challenging, requires tax attorney

Prevention: ALWAYS pay payroll taxes first, even if you can't pay other bills. This is the one debt you cannot escape.

State Tax Debt

State tax agencies have similar (sometimes more aggressive) collection powers:

• Wage garnishment: Often higher % than IRS
• Bank levies
• Business license revocation: Can shut down your business
• Sales tax permits: Revoke your ability to collect sales tax (effectively closing retail businesses)

State Programs Vary:

• Most states offer installment agreements
• Some offer Offer in Compromise (CA, NY, etc.)
• Penalties more negotiable than IRS
• Less formal than IRS

Strategy: Contact state tax agency directly, explain situation, request payment plan or settlement

DIY vs. Professional Help

DIY Situations:

• Owe less than $25,000
• Setting up simple payment plan
• First-time penalty abatement request
• Currently Not Collectible (straightforward hardship)

Get Professional Help:

• Owe over $25,000
• Facing Trust Fund Recovery Penalty
• Want to pursue Offer in Compromise
• Already have liens or levies
• Haven't filed returns for multiple years
• Facing business closure

Who to Hire:

• Enrolled Agent (EA): Licensed by IRS, tax resolution specialists, most affordable
• CPA: Can prepare returns and negotiate, mid-range cost
• Tax Attorney: For litigation, TFRP, or complex cases, most expensive

Frequently Asked Questions