Settling Your Back Taxes: Checklist

Back taxes are taxes from a prior year that went partly or fully unpaid. They are common, but the penalties for nonpayment are steep and they compound over time. The IRS does provide options for taxpayers who cannot pay in full, including the Offer in Compromise. What follows covers what an unpaid balance costs you, how that option works, and what to have in hand before you apply.

If you owe back taxes to the IRS that you don’t think you’ll be able to ever pay off, you may have an option to settle what you owe the IRS with an “Offer in Compromise.” This is simply an offer to settle for a smaller amount than what you owe.

If you delay payment, your tax balance can grow in three different ways. The failure-to-file penalty is 5% of what you owe for each month a return is late, capping out at 25%. The failure-to-pay penalty is smaller at 0.5% a month, but it runs alongside the first one. Interest is the third, charged on the full unpaid amount and reset every quarter (it was 6% in the second quarter of 2026).

The IRS has 10 years from the date your tax was assessed to collect it. The agency calls this window the Collection Statute Expiration Date. Once it passes, “we can no longer assess or collect additional tax.” A number of actions pause that clock, including submitting an offer.

Important Documents

If you’re considering doing this, you’re going to need a lot of information on hand, whether you submit it yourself or with the help of an accountant specializing in tax debt resolution. Here’s what you should gather before you start:

Any correspondence from the IRS. Did the IRS send you notices in the past concerning tax bills you were unable to pay? Have you ever received a notice of a levy or that they were going to seize your property to satisfy the debt? Find any and all IRS letters and keep them accessible.

Proof of current income, or lack thereof. You may be able to qualify for a low-income waiver when initiating the process, and your historical, current, and future income is going to be considered when making an offer. If you are making significantly less income than you had been, or your income has halted, you should provide up-to-date proof.

Previous tax returns and proof that you filed them. In order for an Offer in Compromise to pass, you need to be up-to-date on all outstanding tax returns. Even if you can’t afford to pay the taxes associated with each open tax year, make sure that you’ve filed those returns first and have proof handy that you submitted them. The IRS will generally want the last six years, though technically every unfiled return is still owed.

A thorough list of all of your assets. The IRS needs to know the value of your assets and whether they could be used to satisfy your tax debt. This includes financial assets like bank accounts, retirement accounts, CDs, and home equity, as well as other assets like cars, jewelry, clothing, electronics, and anything else of value. Blue book value for vehicles and auction sites can help determine the value of these assets.

A complete list of any debts, including balances and whether you’re current on payments. In proving you will be unable to pay your tax debt, you also need to show your other debts, such as student loans, credit cards, personal loans, payday loans, and medical debt. Note whether you’ve stayed current on each one.

Any documentation that makes a case for being unable to pay off your balance. Did you lose your job? Did you find that what you used to do was automated and/or pays significantly less than it used to? If you are ill or disabled, you should have documentation from a medical professional that your ability to work is limited. Any other circumstances that caused financial devastation to the point you will be unable to pay off your tax debt, like a natural disaster, domestic violence, or eviction, should also be documented.

What Happens If You Leave the Balance Alone

The IRS sends notices first. If those go unanswered, the IRS can file a federal tax lien, a legal claim that puts the government first in line against your property and makes it very difficult to sell or refinance anything. A levy is the step up from there, and it lets the agency actually take things: wages, bank accounts, and in some cases property itself.

Your passport can also be affected. Federal tax debt over $66,000 in 2026 (penalties and interest included) can be certified to the State Department as seriously delinquent. “Generally, the State Department will not issue passports to taxpayers” once that certification is made, and a passport you already hold can be revoked. Debts covered by an approved installment agreement or an accepted offer are not certified.

An Offer in Compromise is a very long process that requires staying up-to-date on your current tax payment plans and making a good faith effort to pay the balances. In having all of this information readily available, you can expedite the process and avoid resubmitting your offer.

Read for more information on IRS installment agreements.

Settling back taxes takes time. Filing your return does not have to. E-file.com walks you through the process and does the math for you, so your returns are accurate the first time.

Note: Tax laws may change with little notice. We do our best to keep this information current, but it is provided on an “AS IS” basis. It should not be considered, legal, financial, or other professional guidance. For more, see our terms.