Owing money to the IRS can be intimidating. The IRS has collection powers that exceed most creditors. If you do owe the IRS money do not panic. If you cannot pay the full amount of taxes you owe, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your options. The IRS may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. In some cases, the IRS may be able to waive penalties, but they cannot waive interest.

If you do not pay in full when you file your tax return, you will receive a bill. This bill starts the collection process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax. The first notice you receive will be a letter that explains the balance due and demands payment in full. If you believe you can full pay the taxes within five years you should send in as much as you can with the notice and enter into an installment agreement for the balance. You should be aware that the creation of an installment agreement does not stop the accrual of penalties or interest.

If you cannot find the resources to full pay the taxes you may want to consider having your account placed in hardship. If you are unable to pay anything because of financial hardship, the IRS may temporarily suspend certain collection action, such as issuing a levy, until your financial condition improves. Being placed in hardship does not stop the accrual of penalties or interest on your account.

If you do not qualify for an installment agreement and cannot be placed in hardship status you may propose an Offer in Compromise (OIC) to the IRS. An OIC is a contract between a taxpayer and the IRS that resolves the taxpayer's tax liability by payment of a reduced amount. In most cases, the IRS will not accept an offer unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP) of the taxpayer. The RCP is how the IRS measures the taxpayer's ability to pay. The RCP includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

Whichever way you choose to resolve your liability with the IRS it is important to contact them to make arrangements to resolve the liability voluntarily. If the IRS does not receive contact from a taxpayer they may take action to collect the liability. IRS collection activity may include: filing a Notice of Federal Tax Lien, serving a Notice of Levy, offsetting a refund to which you are entitled or any combination of these activities. You have rights and protections throughout the collection process. The IRS is suppose to inform you of your rights when they start collection activity. However, they will not provide legal advice on which is the best course for you to take.