What is Tax Debt Consolidation?

How to roll multiple years of unpaid tax debt into a single payment.

If you have several years’ worth of tax debts, a great first question for you to ask is, “can’t I just consolidate these bills into one?” The short answer is yes. But let’s think about the word “consolidate”. You may have the notion that tax debts work like credit cards, in that by agreeing to combine your balances you can receive a lower, overall total. Unfortunately, that concept doesn’t really apply with the IRS. Not exactly.

In order to sort out what you can and can’t do when it comes to consolidating tax debt, let’s first consider how the IRS bills you. When you combine this information with your best resolution options, your choices will become a lot clearer. The good news is, there’s more than one way to handle back taxes – even those spanning numerous years.

Unpaid tax debt is divided by date

Every individual tax debt represents a delinquent balance for a specific year, which is evidenced by the itemized details provided on your IRS notice of assessment. Additionally, the debt from each year generates its own penalties and interest (those extra charges for not having paid the liability by the original due date). It can seem daunting, then, to have a tax debt notice in hand, only to receive another for a completely separate year. Fortunately, the IRS will provide a workable solution.

The most common tax debt consolidation solution

Perhaps the most popular IRS resolution is the installment agreement (IA). This plan enables you to pay your tax debt back in fixed monthly installments, rather than all at once. Depending on the size of your balance, your payments may be stretched out as far as six years. And while penalties and interest continue to accrue for the life of your debt, you don’t have to pay several different installment agreements at one time. The IRS will include tax debts from several different years into one IA, allowing you the relative comfort of just one monthly tax bill.

Complications that can arise

Should you roll multiple years of tax debts into one IA, you still have to proceed with caution. Specifically, you want to be on the lookout for any new tax liabilities; these will jeopardize an existing IRS payment agreement. For instance, if you have an IA and make a mistake on next year’s tax return, and in turn receive a delinquent tax bill, your IRS plan will be invalidated – forcing you to start over. If you suspect that you’re going to owe for a year that has not been included in your IA, contact the IRS or, if applicable, your tax professional.

Do you need a professional?

You may be well-equipped to deal with the IRS directly when resolving your tax issue. However, if you want a second opinion – or a chance to explore all of your options – you may want to contact a licensed tax professional. There may be a better resolution for your situation, which a tax professional will quickly determine (likely in one phone call). Whatever you do, though, it’s definitely a good idea to handle all of your tax debts at once and, if possible, with one simple payment plan.