What Happens If You Owe the IRS More Than $25,000?
If you owe the IRS more than $25,000, the following eight things will happen:
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1. You will lose some installment agreement options.
If you owe the IRS more than $25,000, you are no longer eligible for a non-direct-debit streamlined installment agreement.
What does this mean? It means that you may still qualify for a streamlined installment agreement since you owe $50,000 or less, but unlike for those taxpayers who owe less than $25,000, you must agree to the IRS directly debiting your bank account every month if you want to qualify for a streamlined installment agreement.
A streamlined installment agreement is a type of installment agreement the IRS will enter into with a taxpayer without them to submit financial information, such as on Form 433-F (Collection Information Statement).
Related: What Happens If You Owe the IRS More Than $50,000?
2. You will likely have to pay the IRS at least $350 per month in a standard installment agreement.
Unless you submit financial information to the IRS proving that such an installment agreement would cause a hardship for you, you will likely have to pay your $25,000 or more in tax debt in a standard installment agreement over 72 months, meaning that your monthly payment will be at least $350 per month.
If you can’t afford to make this kind of monthly payment to the IRS — even after cutting out discretionary expenses — you may be able to negotiate a partial-payment installment agreement with the IRS.
3. You may be stuck with your notice of federal tax lien.
If you owe the IRS more than $25,000, and the IRS has filed a notice of federal tax lien (NFTL) against you, the IRS will not withdraw the NFTL even if you enter into a direct debit installment agreement with them.
However, thanks to the Fresh Start Program, the IRS will generally withdraw a NFTL if you do the following things:
- Pay your balance down below $25,000
- Enter into a direct-debit installment agreement that will pay off your IRS debt within the earlier of 60 months or its collection statute expiration date.
- Make three consecutive direct-debit payments under the installment agreement.
- Request withdrawal of the notice of federal tax lien using Form 12277.
So if you don’t want the general public — especially lenders and others interested in your creditworthiness — aware of your tax debt, consider getting your tax debt below $25,000 and entering into a direct-debit installment agreement with the IRS so that you can eliminate your tax lien!
Important: If the IRS has not filed a notice of federal tax lien against you yet, and your IRS assessed balance is $50,000 or less, consider entering into a streamlined installment agreement with the government; if you do so while your assessed balance is $50,000 or less, the IRS will not file a notice of federal tax lien against you.
4. Over $145 of interest is accruing on your IRS account every month.
If you owe the IRS more than $25,000, they will charge you over $145 of interest per month (at current interest rates).
This is because the current IRS interest rate is 7%, compounded daily. Even at simple interest, $25,000 x 7% = $1,750 of annual interest, which translates to more than $145 monthly.
5. At least $125 of penalties are accruing on your IRS account every month.
If you owe the IRS more than $25,000, they will charge you at least $125 of penalties per month, assuming that the tax debt was not due more than 50 months ago.
This is because the IRS charges a failure-to-pay penalty of 0.5% per month of your balance, and $25,000 x 0.5% per month = $125 per month.
Note that if you enter into an installment agreement with the IRS, they may reduce this penalty to 0.25% per month.
6. You will no longer be eligible for an in-business trust fund express installment agreement.
If you owe the IRS more than $25,000 in business taxes, you are no longer eligible for an in-business trust fund express installment agreement to pay these taxes off.
An in-business trust fund express installment agreement is a special kind of installment agreement that the IRS will enter into with businesses without requiring them to submit a financial statement or financial verification to apply.
7. If you owe more than $25,000 in payroll taxes, a revenue officer is more likely to be assigned to your case.
If you owe the IRS more than $25,000 in payroll taxes, the IRS is much more likely to assign a revenue officer to your case than if you owe $25,000 or less.
So if you owe a bit over $25,000 in payroll taxes, I would recommend that you get that balance below $25,000 as quickly as possible and get yourself into the in-business trust fund express installment agreement mentioned previously
8. You are probably at greater risk of wage garnishments and bank levies.
Now, this is a bit more speculative — I can’t point to any part of the Internal Revenue Manual to support this — but clearly the IRS views $25,000 of tax debt as a certain threshold for taxpayers.
As stated above:
- $25,000 is the threshold over which taxpayers lose some installment agreement options, and that goes for both individuals and businesses.
- $25,000 is the threshold over which taxpayers are stuck with their notice of federal tax lien (assuming one has already been filed), even if they enter into an installment agreement with the IRS.
So there is clearly some significance to the IRS of the $25,000 figure.
And I believe then that it follows — and my experience as a tax relief CPA bears this out — that as a result of owing the IRS more than $25,000, you are a higher priority to them in terms of collections than someone who owes the IRS $25,000 or less.
Are you necessarily as high a priority as someone who owes $100,000 or more or $1,000,000 or more? No, not necessarily; but while the IRS may not ever take collection activity against someone who owes, say, $5,000, I believe you are at a greater risk of forced collection activity if you owe more than $25,000.
What Should You Do If You Owe the IRS More Than $25,000?
As daunting as owing the IRS more than $25,000 sounds, you do have options. Here are some of the most common ones we recommend to taxpayers who have found themselves in this situation.
1. Pay your balance to $25,000 or below.
As described throughout this article, the IRS appears to take special notice of — and denies some privileges to — taxpayers who owe them more than $25,000.
Therefore, if you can, consider paying your balance down to $25,000 or below before seeking to enter into a resolution with the IRS on your tax debt.
Tip: Consider requesting penalty abatement from the IRS to lower your balance!
2. Enter into an installment agreement.
If you can’t pay the amount you owe to the IRS immediately, consider applying for an installment agreement with the IRS.
3. Consider your tax relief options.
If paying your balance in full — even over several months or years in an installment agreement — will cause you financial hardship, consider tax relief options such as:
- Offer in Compromise: This is an agreement with the IRS to settle your tax debt for less than you owe.
- Partial-Payment Installment Agreement: This is a special kind of payment plan with the IRS in which you pay them less than you owe over time. Note that in order to be approved for a partial-payment installment agreement, you will need to prove to the IRS on a Collection Information Statement such as Form 433-F that paying your liability in full before its collection statute expiration date will result in financial hardship. Also keep in mind that the IRS will generally file a notice of federal tax lien against you if you are approved for a partial-payment installment agreement — regardless of how much you owe. Also, partial-payment installment agreements are subject to review every two years.
- Currently Not Collectible (CNC) Status: This is a special hardship status with the IRS in which you do not have to pay anything to the IRS and the IRS cannot take forced collection activity against you. Similar to a partial-payment installment agreement, you have to qualify for this status and should expect the IRS to file a notice of federal tax lien against you if you are placed into CNC status. Note that the IRS can remove you from CNC status if it believes your financial situation has approved.
For more information about your tax relief options, read this article or watch my video below!
Author:
Logan Allec, CPA, Founder and Owner
Logan Allec has been serving taxpayers as a CPA for over 14 years. After leaving his role at a "Big 4" firm, he started Choice Tax Relief to help everyday Americans who have found themselves behind on their taxes. He also educates thousands of people daily about tax relief on his YouTube channel. In addition to his CPA license, Logan also has a Master's Degree in Taxation from the University of Southern California (USC). He lives with his wife and children in the Los Angeles area. Learn more about Logan here.
