Unemployed and Owe Taxes to the IRS? Everything You Need to Know

If you’re unemployed and owe back taxes to the IRS, don’t panic. You have options to resolve your tax debt even with little or no income. Always file your tax returns (even if you can’t pay right away) and communicate with the IRS to explore relief programs. The IRS Fresh Start Program offers solutions like payment plans (also called installment agreements), settling for less through an Offer in Compromise, or being placed in hardship status (Currently Not Collectible) if you can’t pay at all. Read on for an easy-to-understand, step-by-step guide – including real-life examples and FAQs – to help you tackle IRS tax debt when you’re out of work.

Sections

1. Why You Might Owe Taxes While Unemployed
2. Don’t Ignore the IRS – File Your Taxes and Respond
3. Understanding IRS Fresh Start Tax Relief Options
4. IRS Payment Plans (Installment Agreements)
5. Partial Payment Plans (If You Can’t Pay It All)
6. Offer in Compromise (Settle for Less)
7. Currently Not Collectible Status (Hardship)
8. Penalty Abatement and Other Relief
9. Owing More Than $10,000: What It Means and What to Do
10. Real-Life Examples of Tax Debt Resolutions
11. Frequently Asked Questions (FAQs)
12. Next Steps – Take Action and Resolve Your Tax Debt

Why You Might Owe Taxes While Unemployed

Being unemployed doesn’t automatically protect you from owing taxes. Here are a few reasons you might owe the IRS even if you don’t currently have a job:

• Unemployment Benefits Are Taxable: Yes, the unemployment checks you receive generally count as taxable income. If you didn’t have taxes withheld from those benefits, you could owe taxes on them at year’s end. For example, if you collected $20,000 in unemployment compensation and didn’t withhold taxes, you’ll have a tax bill in April.
• Previous Year’s Tax Bill: Your tax debt could be from when you were employed or from a side gig. Maybe you didn’t withhold enough taxes from your paycheck or didn’t pay quarterly taxes on freelance income. Losing your job doesn’t erase that debt.
• One-Time Taxable Events: Even while unemployed, certain events can create tax liabilities. Cashing out a 401(k) or pension early, for instance, can trigger taxes and penalties. If you took a distribution to make ends meet, you might now owe the IRS for it.
• Working Odd Jobs or Gigs Without Withholding: You might have picked up side gigs or contract work during unemployment. Self-employed income (like driving for a rideshare, freelancing online, or gig work) often has no taxes withheld, so you could end up owing self-employment tax on that income when you file.

Key point: Owing taxes with no job or steady income can feel scary. The IRS will still expect payment, but they do offer help for taxpayers in financial hardship. Understanding why you owe is the first step; next, we’ll cover what to do about it.

Don’t Ignore the IRS – File Your Taxes and Respond

When you’re struggling financially, it’s tempting to avoid the IRS out of fear. But that’s one of the worst things you can do. Here’s why filing and communicating are critical:

• Always File Your Tax Return on Time, Even If You Can’t Pay: Not filing can lead to a failure-to-file penalty (5% of the unpaid tax per month) which is 10 times higher than the penalty for late payment. By filing, you avoid that larger penalty. Plus, filing on time (or getting an extension) shows good faith. Example: Jane lost her job in 2024 and knows she’ll owe $5,000. Even though she can’t pay it all, she files her 2024 return by April 15, avoiding the hefty failure-to-file penalty. She then explores a payment plan for the $5,000 balance.
• Open and Read IRS Letters: If you owe taxes, the IRS will send notices or a bill. Don’t shove these in a drawer. Often, the IRS notice will explain your options to pay or request help. If you ignore multiple notices, the IRS can escalate to collection actions (like liens or levies). Simply keeping the IRS informed can often delay or prevent aggressive collection.
• Respond to Collection Notices: If you’ve already got an IRS Final Notice of Intent to Levy, time is critical. You generally have 30 days to respond, or the IRS can start levying (taking) assets. Respond by calling the IRS or sending back the included form to request a payment arrangement or appeal. This can put a hold on collections while your case is resolved.
• Communicate Hardship: The IRS has provisions to pause collections if you’re in financial hardship. If you’re unemployed with no ability to pay, let the IRS know – you might be placed in a temporary hold status (we’ll discuss Currently Not Collectible status soon). The IRS will not force you to pay if it means you can’t cover basic living expenses. For instance, if paying the IRS would leave you unable to pay for rent or food, tell them – they can adjust your payment plan or pause collections.

Remember: Filing your taxes (even if you owe) and staying in touch with the IRS can significantly reduce penalties and protect your rights. The IRS won’t know you’re unemployed or struggling unless you inform them. Now that we’ve covered the “do not ignore” rule, let’s explore the tax relief options available under the IRS Fresh Start Program.

Understanding IRS Fresh Start Tax Relief Options

The IRS Fresh Start Program is a set of initiatives designed to help taxpayers in hardship get back on track. Introduced in 2011 and expanded in recent years, Fresh Start makes it easier to set up payment plans, avoid liens, or even settle tax debt for less. If you’re unemployed and owe taxes, this is great news – you likely qualify for relief. Below, we break down the main programs:

IRS Payment Plans (Installment Agreements)

Payment plans let you pay your tax debt in more manageable monthly installments over time. This is often the go-to option if you can pay something each month, even if you can’t pay the whole balance now. Key points:

• Short-Term Payment Plan: If you can pay off the balance within 180 days (about 6 months), the IRS considers it short-term. No setup fee is charged for a short-term plan, and you won’t be hit with a formal lien generally. Interest and some penalties will still accrue until it’s fully paid. Example: You owe $2,400 and can manage $400 a month for 6 months – a short-term plan could work and costs nothing to set up.
• Long-Term Installment Agreement: If you need more than 180 days, you can get a long-term installment agreement to make monthly payments (typically lasting up to 72 months or more). There is a setup fee for these plans, but it can be relatively small (and even waived or reimbursed for low-income taxpayers). As of 2025, online setup fees range from $22 (direct debit) to $69 (non-direct), and higher if you apply by phone/mail (up to $107 or $178). Low-income applicants pay $0 or $43 at most. Tip: Setting up automatic monthly withdrawals (Direct Debit) gets you the lowest fee and also keeps the IRS happy – they even won’t file a tax lien if you agree to direct debit on a balance under $25,000.
• What You Need: To set up a plan, you or your tax pro can file Form 9465. The IRS usually approves installment plans if your total tax debt is within certain thresholds (generally under $50,000 for streamlined plans). While on a plan, penalties and interest still accrue on the unpaid balance, but crucially, you avoid more serious collection actions as long as you make your payments on time.
• Time to Pay and Flexibility: Most installment plans give you up to 6 years (72 months) to pay, and sometimes longer if negotiated (partial payment plans can extend until the debt expires – more on that below). If your situation improves (say you get a new job), you can always pay extra or pay it off early. If your situation worsens, you can request a modification or other relief (like Currently Not Collectible status).
• Fees & Costs: Aside from the one-time setup fee, remember you’ll pay ongoing interest (~7% annually) and late payment penalties (~0.25% per month) until the balance is gone. Still, this is usually cheaper than credit card interest or taking a risky loan to pay taxes. For low-income taxpayers, the IRS will even reimburse or waive installment fees in many cases.

In summary, an installment plan is a solid “safety valve.” It’s easy to set up, keeps the IRS off your back (no more scary letters or threats of levy as long as you pay), and gives you breathing room to pay over time. Many unemployed taxpayers start with an affordable payment plan while they look for work – you can always adjust it later if needed.

Table: IRS Payment Plan Options at a Glance

(Low-income = generally household income under a certain threshold, ~250% of poverty level; they get fees waived or refunded.)

Partial Payment Plans (If You Can’t Pay It All)

What if the amount you owe is so large that even 72 months of payments won’t cover it? For example, you owe $30,000 but can only afford $50 a month – 6 years of $50 is only $3,600, nowhere near $30k. In these tough cases, the IRS may allow a Partial Payment Installment Agreement (PPIA). Here’s how it works:

• Pay What You Can: You’ll still make monthly payments, but the plan is set up knowing it won’t fully pay off the debt. The IRS agrees to this because something is better than nothing.
• 10-Year Collection Clock: The IRS generally has 10 years to collect a tax debt (from the time it was assessed). Under a PPIA, you pay monthly until that 10-year period expires. Any remaining balance is then forgiven by law (though the forgiveness isn’t formal like an OIC, it just becomes uncollectible after the statute).
• Financial Disclosure Required: To get a partial payment plan, you typically must provide detailed financial information (Form 433-A/F) to show what you can afford. The IRS will scrutinize your income, expenses, and assets to ensure you truly cannot pay in full.
• Periodic Reviews: The IRS may review your ability to pay every 2 years with a PPIA. If your financial situation improves (say you find a well-paying job), they can increase your payments or terminate the agreement at that point. If it worsens, you might shift to another status like Currently Not Collectible.
• Pros and Cons: The good news is you make progress on the debt and avoid default, and you could ultimately pay far less than you owe (whatever is left after 10 years is gone). The downside is the IRS files a tax lien in most PPIA cases (since the debt won’t be fully paid, they secure their interest) and you must keep the IRS updated on your finances. Interest and penalties also continue to accrue during the plan, but since part of the debt will be forgiven, that extra interest may never actually be paid by you.

Real-world scenario: Mark is a gig worker who owes $50,000 from a failed small business. Unemployed now, he can pay only $100/month. He enters a partial payment plan at $100/month. The IRS files a lien but does not levy his assets. After 5 years, Mark is back on his feet and earning more; the IRS bumps his payment to $300/month. He pays that for another 3 years until the 10-year statute expires. At that point, he’s paid roughly $18,000 of the debt and the remaining ~$32,000 is written off. Mark is finally free of that tax debt.

Note: PPIAs are part of the Fresh Start toolbox, but they require more paperwork and IRS approval. Many unemployed folks initially opt for the standard installment plan; if it later becomes clear you can’t pay in full, you or your advisor can request to convert it to a partial pay agreement.

Offer in Compromise (Settle for Less)

An Offer in Compromise (OIC) is probably the most well-known (and attractive-sounding) tax debt relief: it lets you settle your tax debt for less than the full amount owed. In simple terms, you offer the IRS an amount that represents the most they could reasonably expect to collect from you, even if it’s pennies on the dollar. If the IRS accepts, you pay that reduced amount and the rest of your debt is forgiven.

However, OICs are not easy to get, especially just because you’re unemployed temporarily. Here’s what you need to know:

• Qualifying for OIC: The IRS bases acceptance on your “reasonable collection potential” – basically, your current and future ability to pay. They look at your income, expenses, and assets in detail. If you have no income and very few assets, on paper you might qualify, but being on unemployment benefits alone usually isn’t enough. Why? Unemployment is temporary. The IRS typically won’t settle while you’re on short-term benefits because they expect your situation could improve when you find a job. They’d rather place you in hardship status (CNC) and revisit later.
• When OIC Works: If your unemployment is part of a larger long-term financial struggle (for example, you have little income, very limited prospects, and few assets to sell), an OIC could be viable. Also, if you owe a huge amount that you likely could never pay back even after returning to work, an OIC is worth exploring. Example: A veteran on disability owes $100,000 from past business income but now has no job and only disability income. He has no house and no savings. He might qualify to settle for a much smaller amount because even if he gained employment, his income potential is limited due to his disability. The IRS might accept, say, $5,000 as a compromise if that’s all his financials indicate they could ever collect.
• Fresh Start OIC Changes: Under Fresh Start, the IRS made OIC slightly easier to qualify for by being more flexible in how they calculate your ability to pay. They now allow more room for basic living expenses and consider your future earning potential in a more taxpayer-friendly way. For instance, Fresh Start expanded allowable living expense categories (like factoring in student loan payments or a bit more for housing).
• The OIC Process: To pursue an OIC, you’ll need to file Form 656 (Offer in Compromise) and a detailed financial disclosure (Form 433-A OIC). There’s a non-refundable application fee ($205) unless you’re low-income, and you must include an initial offer payment (either 20% of your offer amount for a lump-sum offer, or the first monthly payment for a periodic offer). The review can take 6-12 months or more. Important: You must be up-to-date on all tax filings to even be considered, and you can’t currently be in bankruptcy.
• While OIC is Pending: Good news – while your offer is being evaluated, IRS collections are generally suspended (no levies). Interest still accrues, but if the offer is accepted, it doesn’t matter because you won’t be paying the full interest anyway.
• If OIC Is Rejected: You can appeal, or you fall back to other options (installment plan, CNC, etc.). Often, the IRS might counteroffer an amount higher than you proposed.
• Pros/Cons: Pro: If accepted, an OIC can dramatically reduce your debt – truly a fresh start. Con: Harder to qualify – the IRS accepts only those offers that are reasonable based on your finances (they won’t just “forgive” debt if they think you can pay it). Also, OIC requires staying compliant for the next 5 years (file and pay on time); if you default on that, the forgiven debt can come roaring back.

Bottom line: An Offer in Compromise is like the “golden ticket” to eliminate tax debt. Unemployment alone might not get you there if you don’t also have an extended hardship. It’s worth checking eligibility if you owe a lot more than you could ever pay. Wiztax offers an OIC pre-qualifier tool to gauge your chances.

Currently Not Collectible Status (Hardship Pause)

“Currently Not Collectible (CNC)” status – also known as Hardship Status – is like hitting the pause button on IRS collections. If you genuinely cannot pay anything toward your tax debt without jeopardizing your basic living expenses, the IRS can mark your account as uncollectible temporarily. Here’s how that helps:

• No More Collection Actions: When you’re in CNC, the IRS will not levy your assets or garnish wages because they acknowledge it would cause hardship. Essentially, they agree to leave you alone for now. They also won’t require you to make payments.
• Qualification: You must show that paying any amount would prevent you from affording necessities. The IRS has allowable living expense standards (for food, housing, utilities, transportation, etc.). If your income is at or below those levels after basic expenses, you likely qualify. Unemployment is a strong factor here – if your only income is unemployment benefits or none at all, you’re a prime candidate. Often, the IRS will ask for proof, like an unemployment benefits letter or financial statement.
• How to Request CNC: You (or your representative) typically call the IRS collections department or write to request hardship status. You’ll fill out a collection information statement (Form 433-F or 433-A) showing your income = $0 (or very low) and expenses. The IRS may also simply place you in CNC if you tell them you’re unemployed and have no ability to pay, especially if you were previously on a payment plan and lost your job.
• Interest Still Accrues: Important – CNC is not debt forgiveness. Your debt remains, and interest and penalties keep accruing in the background. However, as long as you’re in hardship status, the IRS won’t press for payment.
• Duration: CNC status can last as long as your financial situation warrants. It’s often reviewed every couple of years. If you’re still unemployed or under severe financial strain, it continues. If you get a new job or your income rises, the IRS can remove you from CNC and ask for payment or put you on a payment plan.
• Collection Statute Still Runs: One perk – the 10-year statute of limitations on collection keeps ticking while you’re in CNC. If your situation doesn’t improve for that whole period, the debt could expire. (Though if you have many years left, it’s likely your income will change before then.)
• No Shame in CNC: Many people feel embarrassed or scared to admit they can’t pay anything. But the IRS has this option for a reason – they won’t collect if it means pushing someone into destitution. Think of CNC as a breather until you can get back on your feet.

Example: Maria is a single mother who was laid off and owes $12,000 from a prior year. After covering rent, groceries, and childcare with unemployment income, she has nothing left. Maria contacts the IRS, provides her financial info, and the IRS places her account in Currently Not Collectible status. This means no collection actions, giving Maria time to find a new job. Two years later, she’s employed again; at that point, the IRS asks her to start an installment plan to tackle the debt (which has grown to $14,000 with interest). Because of CNC, she avoided levies and had peace of mind during the hardest times.

Penalty Abatement and Other Relief

In addition to the major Fresh Start programs above, there are a few other relief tools that can help when you’re dealing with tax debt:

• Penalty Abatement: If a chunk of your debt is IRS penalties (for example, failure-to-file or failure-to-pay penalties), you might qualify for penalty abatement. The IRS Fresh Start expanded the availability of First-Time Penalty Abatement (FTA) for those with a clean compliance history. If you’ve been compliant and this is the first time you ran into trouble, the IRS may remove penalties for one tax year. Alternatively, reasonable cause penalty abatement can apply if you can show extenuating circumstances (job loss and financial hardship can qualify as reasonable cause in some cases). Removing penalties won’t erase the base tax you owe, but it can substantially reduce your balance and make repayment easier.
• Tax Extensions and Delays: Sometimes, simply getting a bit more time helps. While an extension to file (up to October 15) doesn’t extend time to pay, during special hardship situations (like a natural disaster or pandemic), the IRS has granted extra time to pay. Always check IRS announcements – for instance, in 2020 many taxpayers got a 3-month payment deferral. If you’re unemployed due to a disaster or pandemic-related event, there might be specific relief available.
• Avoiding Liens – Fresh Start Threshold: One aspect of Fresh Start is that the IRS generally won’t file a Notice of Federal Tax Lien on debts under $10,000. If you owe just over $10k, paying it down below that can prevent a lien. If a lien has already been filed, entering a direct debit installment plan and making three on-time payments can qualify you for a lien withdrawal (meaning it’s as if the lien was never filed). This can be important for your credit record (though tax liens no longer show up on standard credit reports since 2018, they can still affect loan approvals).
• Innocent Spouse Relief: This might apply in a married couple scenario if the tax debt is due to one spouse’s income or underpayment that the other spouse didn’t know about. If, say, you’re unemployed but your spouse caused a big tax bill without your knowledge (perhaps by underpaying taxes on gig income), you could explore innocent spouse relief to be absolved of joint liability. This is a specialized process with its own rules, but worth mentioning for married taxpayers in tough situations.

Now that we’ve covered the gamut of solutions, let’s address the significance of how much you owe – especially if your tax debt is over a notable threshold like $10,000.

Owing More Than $10,000: What It Means and What to Do

“I owe the IRS five figures and I have no job – am I in big trouble?” It’s a common worry. Owing over $10,000 does have some implications, but it’s manageable with the right approach:

• Tax Lien Risk: As mentioned, the IRS can file a federal tax lien if you owe above $10k. A lien is the government’s legal claim to your property (if you own a home, car, etc.) as security for the debt. While it sounds scary, a lien alone doesn’t seize anything; it just gets recorded publicly. The Fresh Start Program raised the lien threshold from $5,000 to $10,000, so under $10k you’re usually safe from liens. Over that, be prepared that a lien might be filed. Action item: If you’re just barely over $10k, see if you can pay it down below that threshold (maybe borrow from a family member) to avoid a lien.
• Payment Plans for >$10k: If you owe above $10k but under $50k, you typically qualify for a streamlined installment agreement (no need to provide detailed financials) – you just need to pay it within 72 months. If you owe more than $50k, you can still get a plan but will have to provide more financial information to the IRS.
• Potential for Passport Denial/Revocation: Unlikely at $10k, but worth noting: if tax debt grows to seriously delinquent levels (around $65,000 as of 2025, adjusted annually for inflation), the IRS can certify it for passport action, meaning the State Department can revoke or refuse to renew your passport. This is more for very large debts, but it underscores why tackling your tax debt before it snowballs is important.
• Interest and Penalties Pile Up: On a larger balance, the monthly interest and penalty accrual can be substantial. For instance, $10,000 of tax debt might grow roughly ~$100+ each month in combined interest and penalties (interest ~0.5% per month in recent rates, failure-to-pay penalty 0.25% per month if on an installment). The sooner you get an arrangement in place, the more you cap those extra charges.
• Offer in Compromise More Likely for Big Debts: If you owe very large debt compared to any realistic income, the IRS may be more willing to compromise. If an unemployed person owes, say, $100,000, and even re-employment would only give them modest income, an Offer in Compromise could be a strong option (with professional guidance). For a $10k debt, the IRS might expect you to eventually pay through a plan; for a $100k debt, they might realize it’s doubtful you ever could, which opens the door to settling for less.
• Psychological Impact: Ten thousand dollars or more can feel overwhelming. But remember, the IRS wants to collect, not punish. They will work with you if you engage with them. Plenty of taxpayers have successfully resolved >$10k debts through installment agreements or even had a portion forgiven via Fresh Start initiatives.

Action plan for >$10k: If you’re in this boat, strongly consider getting help from a tax relief service or advisor (Wiztax offers free consultations). They can help you map out the best strategy, whether it’s a long-term payment plan or aiming for an OIC. The peace of mind of having a plan for a large debt is worth it.

Next, let’s look at some real-life examples of how different individuals and families handled their tax debt while unemployed. These examples will show the diversity of situations and solutions – hopefully you’ll see one that resonates with your story.

Real-Life Examples of Tax Debt Resolutions

Sometimes the best way to understand your options is to see how someone like you found a resolution. Below are several hypothetical (but realistic) examples and scenarios that reflect common situations of unemployed taxpayers owing over $10,000 and what steps they took.

1. Married Couple with a Job Loss (John and Emily): John and Emily are married with two kids. John was laid off last year, and they owe about $12,000 in combined back taxes (from John’s side gig income where not enough taxes were paid). With only Emily’s income now, money is tight. They filed their taxes and immediately set up a long-term installment plan of $200/month. Because they did direct debit and their debt was under $25k, the IRS did not file a lien. The payment plan kept them safe from enforcement, and they were able to adjust their budget. After 6 months, John was still unemployed and they were struggling with the $200 payments, so they called the IRS. The IRS reviewed their finances and placed them in Currently Not Collectible status until John finds a job. This gave them a break from payments during their hardship. They’re still accruing interest, but no levies or new liens are happening. Once John is employed again, they plan to resume payments or consider an Offer in Compromise if his new salary is modest.
2. New Graduate with First Job Tax Shock (Aisha): Aisha, 23, had a freelance design gig in college and didn’t realize she owed self-employment taxes on that income. She now owes $10,500 to the IRS for last year, but she just lost her first full-time job due to company layoffs. Aisha is also carrying student loan debt. Scared and unsure, she filed her return and reached out to a tax relief service. They found that Aisha qualifies as low-income for IRS programs. She entered a $0 down short-term payment plan for now (since she hopes to be employed within a few months) – effectively a 120-day extension. No setup fee was needed for this short-term plan. She also requested First-Time Penalty Abatement on the failure-to-pay penalty, given her clean tax record, which the IRS granted, reducing her debt by a few hundred dollars. With the pressure eased, Aisha focused on her job search. If she doesn’t land a job by the time the short-term plan ends, she will either set up a small monthly payment she can afford (even $50/month) or ask for hardship status until her situation improves.
3. Veteran on Disability (Carlos): Carlos is a military veteran who is unemployed and primarily living on VA disability benefits (which are not taxable). He owes $18,000 from a time he withdrew from his IRA and didn’t withhold taxes. Given his limited income and the fact that his disability benefits cannot be levied, Carlos is in a tough spot to ever pay this debt. He contacted the IRS and was put into Currently Not Collectible status because any collection would cause hardship. Meanwhile, with the help of a tax professional, Carlos submitted an Offer in Compromise. His financial analysis showed he could afford to pay at most about $2,000 in total. After several months and some back-and-forth with the IRS offering additional documentation, the IRS accepted his Offer in Compromise for $2,400. Carlos paid it off and got the debt officially settled. The remainder of the $18,000 was forgiven. He now has a fresh start, and he’s careful to keep up with current taxes so as not to default on the compromise agreement.
4. Self-Employed Truck Driver (Mike): Mike is a long-haul truck driver who was an independent contractor (meaning no taxes were withheld from his pay). He ended up owing $25,000 in self-employment taxes after a couple of profitable years. Unfortunately, an injury put him out of work, and he’s currently unemployed, going through rehab. Mike filed all his tax returns to keep compliant. To deal with the $25k, he initially tried an installment plan of $300/month. However, with medical bills and no income, he quickly found he couldn’t even sustain that. Mike’s tax resolution specialist advised him to switch strategy. They provided the IRS a detailed financial statement showing $0 disposable income, and the IRS agreed to a Partial Payment Installment Agreement of just $50/month. The IRS did file a tax lien given the size of the debt (standard for PPIAs), but this didn’t affect Mike’s day-to-day life since he isn’t seeking new credit at the moment. After two years, Mike’s health improved and he returned to work, earning a modest income. The IRS then increased his monthly payment based on his new income to $200/month. Mike will pay that for several more years until the collection statute expires – whatever balance remains at that time will be forgiven. It’s not an ideal situation, but it’s manageable and kept the IRS from aggressive collection while he was vulnerable.
5. Family Facing Tax and Job Juggle (The Nguyen Family): Linh and Peter Nguyen have three children. Peter lost his job last year, and Linh’s income alone isn’t enough to cover everything. They owe $14,000 to the IRS, partly due to an early 401(k) cash-out they took to stay afloat after the job loss. The Nguyens were worried about how to pay. They learned about the IRS Fresh Start Program and decided to pursue an installment agreement. Because their debt was over $10k, they were mindful of the lien threshold. They managed to use a small portion of Linh’s bonus to pay the balance down to $9,800 before setting up the installment – this avoided a potential lien filing. They then set up a direct-debit payment plan for the remaining balance of $9,800 over 3 years. Their monthly payment is about $275. It’s tight, but they budgeted it in. The direct debit meant a lower setup fee and hassle-free payments. When Peter finds a new job, they plan to use part of his new income to expedite paying off the plan. In the meantime, they feel relief knowing the debt is contained and on a path to resolution, and the IRS isn’t going to come after their bank account or property.

Each of these examples shows a different path: monthly payment plans, hardship deferrals, partial pay agreements, and even settlements. No matter your situation – whether you’re a young adult with student debt, a veteran on fixed income, a gig worker, or supporting a family – there is a way to address your IRS tax debt. The common thread is that these individuals took action and worked with the IRS (or a tax professional) to find a solution. You can do the same.

Frequently Asked Questions (FAQs)

Q1: Will the IRS take my unemployment benefits or stop my unemployment checks if I owe back taxes?
A: No – generally the IRS will NOT garnish unemployment benefits or welfare payments to collect back taxes. The IRS has policies against taking federal or state unemployment checks because that’s considered necessary support during a tough time. (They also typically won’t touch needs-based income like SSI.) However, state tax agencies might deduct from your state unemployment for state tax debt. For instance, California can reduce your unemployment checks to pay state taxes. But for federal taxes, your unemployment is safe. So you can use those benefits for living expenses, and work out a payment plan or other solution for the IRS separately.

Q2: What happens if I just can’t pay anything at all? Will I go to jail for not paying my taxes?
A: If you can’t pay anything, contact the IRS and request Currently Not Collectible (hardship) status. As discussed, this will pause collections until you’re able to pay. You will not go to jail for being unable to pay – jail is typically only for willful tax evasion or fraud. Owing money by itself isn’t a crime; it’s a civil issue. The IRS has many civil tools (liens, levies) to collect, but they won’t jail someone just because they lost their job and can’t pay. Important: Still file your tax returns even if you can’t pay – failing to file could lead to legal trouble and penalties, whereas failing to pay leads to financial penalties and interest, but not criminal prosecution. The IRS would much rather work out a payment solution than pursue enforcement.

Q3: How much time will the IRS give me to pay off my tax debt?
A: It depends on the option you choose: – With a short-term extension, you get up to 180 days to pay in full. – With a long-term installment plan, you can get 72 months (6 years) or even up to 84 months in some Fresh Start scenarios. Sometimes longer if the IRS agrees, but 72 is common for streamlined plans. – Under a partial payment plan, you might be paying until the 10-year collection statute expires, which could be many years if the debt is recent. – An Offer in Compromise usually requires you to pay the agreed settlement amount within 5 months (lump sum offers) or 24 months (short-term periodic offers) after acceptance. But the process itself could take a year or more. – Currently Not Collectible status can last indefinitely until your finances improve or the 10-year collection period runs out. In summary, the IRS is fairly flexible – you could get a few months, several years, or in hardship cases, as long as needed. They key is that you stay in communication and stick to whatever plan is arranged.

Q4: What fees or costs should I be aware of when setting up a tax resolution?
A: The IRS doesn’t charge interest on interest or any super punitive fees beyond what’s in the tax code, but here are the main costs: – Interest: Currently around 7% annually (changes quarterly) on unpaid tax. – Penalties: Failure-to-pay penalty is 0.5% of the unpaid tax per month (capped at 25%). If you’re on an installment plan, that penalty may reduce to 0.25% per month. Failure-to-file (if you didn’t file) is much higher at 5% per month, but maxes at 5 months. – Installment Plan Setup Fee: As detailed earlier, anywhere from $0 to $178 depending on the plan type, method of setup, and your income level. Many people end up paying around $31 (older fee) or $22 (new fee) for an online direct-debit setup – relatively small. – Offer in Compromise Fee: $205 filing fee for the offer, unless you’re low-income (then it’s waived). Plus you have to send in some money with the offer (which goes toward your tax if the offer is accepted). – Professional Fees: If you use a tax relief company or advisor, they will charge for their service. This isn’t an IRS fee, it’s a private one. Always ensure any help you get is reputable. (One advantage of using a service like Wiztax is that we allow you to start the process affordably, instead of paying thousands up front.) – Reinstatement Fee: If you default on an installment plan and need to reinstate it, the IRS might charge a small fee (currently $10 online reinstatement for most, or higher if by phone).

There are no fees to just call the IRS or request CNC status, etc. Be wary of any third-party that promises a quick fix for an upfront large fee – it’s better to understand the options (as you’re doing now) and know what you can tackle yourself versus where you need help.

Q5: If I get a new job, what happens to my IRS payment plan or CNC status?
A: Congrats on the new job! If you’re on an installment plan, nothing bad happens – you simply continue making your payments. In fact, you might choose to increase your monthly payment to get out of debt faster now that you have income. The IRS doesn’t automatically raise your payment just because you got a job; they don’t track that in real-time. It’s on you to either stick to the plan or adjust it. If you want to pay it off early, even better – there are no prepayment penalties. If you were in CNC (hardship) status, you are expected to contact the IRS when your financial condition improves. Realistically, many people wait until the IRS sends a review notice. The IRS periodically checks in (often annually or every two years) by sending a letter asking for an update on your finances. At that point, if you’re employed and can pay, they’ll remove you from CNC and likely set up an installment plan. Bottom line: a new job means you now have the ability to resolve the debt faster. Just make sure you adjust your current arrangement so you don’t fall out of compliance. And update your withholding on your new job’s W-4 so you don’t end up owing again next year!

Q6: Can I discharge my IRS tax debt in bankruptcy since I’m broke/unemployed?
A: Bankruptcy is a complex last-resort option. Some older tax debts (usually income taxes at least 3 years old, assessed 240+ days ago, with returns filed on time) can be discharged in Chapter 7 bankruptcy. Newer tax debts or those from unfiled returns generally cannot be discharged. Even in Chapter 13 (reorganization bankruptcy), you often have to pay recent tax debts through the payment plan. If you’re unemployed, you might not qualify for Chapter 13 (since it requires income to fund a plan), and Chapter 7 has income limits too. So yes, it’s possible to discharge tax debt in certain cases, but it’s not quick or guaranteed. Most people should try IRS Fresh Start options first – bankruptcy is a last resort option that has broad credit/financial ramifications. Always consult a bankruptcy attorney for advice on this route. Often, they’ll tell you to try an Offer in Compromise or CNC status before filing bankruptcy purely for taxes.

Q7: I owe the IRS and also the state tax agency. Does being unemployed help with state taxes too?
A: Every state has its own rules, but many offer similar hardship programs. Being unemployed might allow you to get on a hardship deferral or low-payment plan with the state. States can be quicker to garnish state refunds or unemployment benefits (as noted earlier) for state tax debts. You should contact your state taxation department to see what relief is available. In general, always prioritize the IRS debt first in terms of compliance (because the IRS has more powerful collection tools and their penalties can be harsher). But don’t ignore state taxes either – they can sometimes suspend licenses or take other actions. Luckily, if you work out a plan for the IRS, you can usually work something out for your state. Some tax relief services handle both federal and state negotiations.

Got more questions? It’s normal – tax debt is complex and scary for many. But armed with knowledge, you’re already ahead of the game in resolving it.

Next Steps – Take Action and Resolve Your Tax Debt <a id=”next-steps”></a>

Dealing with tax debt while unemployed may feel overwhelming, but you now have an action plan. Here’s a quick recap of next steps to take:

1. File Any Unfiled Tax Returns: You can’t get on a payment plan or other relief unless you’re compliant with filings. So if you haven’t filed a past return, make that a priority. It’s the gateway to all solutions.
2. Assess Your Situation: How much do you owe? (Find out via IRS notices or your online IRS account.) Do you have any ability to pay monthly right now? Are you truly unable to pay anything? This will determine which relief to pursue.
3. Communicate with the IRS: Don’t wait for them to come after you. Call the IRS or go online. If you need hardship status, call them and explain your unemployment situation, requesting Currently Not Collectible. The IRS phone lines can be busy, but persistence pays off. You can also get in-person help at a local Taxpayer Assistance Center or seek free help from a Low Income Taxpayer Clinic if you qualify.
4. Consider Professional Help for Complex Situations: If you owe a large amount (>$10k) or think you might qualify for an Offer in Compromise, it could be worth reaching out to a tax relief professional or service. For example, Wiztax offers a free initial evaluation and can guide you through Fresh Start programs (we can even help prepare forms and contact the IRS for you). The right professional can simplify the process and ensure you get the best outcome – but always use a trusted, transparent company.
5. Stay Organized and Follow Through: Keep copies of your IRS notices, any payment plan agreements, and correspondence. Mark your calendar for any payment due dates if not automatic. If you’re in CNC, remember to update the IRS if requested. If you submitted an OIC, follow up on the status periodically.
6. Adjust for the Future: Once you’re back on your feet with a job or income, adjust your tax withholding or estimated tax payments to avoid falling into the same trap again. Also, factor any installment payments into your new budget. It might be tempting to forget about the tax debt once you’re employed, but sticking to the plan will lead you to financial freedom from the IRS.
7. Celebrate Small Wins: Paid off a portion of the debt? Got an offer accepted? Made your first payment plan installment? These are victories on your journey. Handling tax debt is tough, so give yourself credit for taking responsibility and making progress.

Final thought: Being unemployed and owing taxes is hard, no doubt. But the situation is far from hopeless. The IRS has programs specifically for people in your shoes because they want you to eventually get back to being a productive, tax-paying citizen. By using the information in this guide, you can protect yourself from severe IRS actions and put a plan in place to become tax debt-free over time. Take it step by step. You’re not the first person to face this, and you won’t be the last – but you can get through it.

Remember, if you need a helping hand or more personalized advice, don’t hesitate to reach out for assistance – be it the IRS, a nonprofit clinic, or a trusted tax relief service like Wiztax. With the right plan and support, you can resolve your tax issue and focus on what’s next: getting back on your feet financially.

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