How to Consolidate IRS Tax Debt

Can You Consolidate Multiple Years of Tax Debt Into a Single Installment Agreement?

Yes, the IRS allows taxpayers to consolidate multiple years of tax debt into one Installment Agreement (IA).

For example, if you owe $7,500 in back taxes for 2023, $2,500 in back taxes for 2022, and $5,000 in back taxes for 2021, you can set up a single IA to pay the $15,000 you owe to the IRS. Consolidating tax debts simplifies paying them by having just one monthly Installment Agreement payment.

Keep in mind that tax consolidation will not reduce interest and penalties owed for tax debt.

How Many Years of Tax Debt Can You Combine In an IA?

The IRS does not limit the number of years of tax debt you can consolidate into a single Installment Agreement. However, IRS payment plans have specific eligibility criteria that may limit your ability to consolidate tax debts or change the type of Installment Agreement you qualify for.

For example, a Streamlined Installment Agreement only applies to tax debts under $50,000, including accrued interest and penalties. If your consolidated tax debt is more than $50,000, you must request a Non-Streamlined agreement or explore other IRS payment plans.

Can an Installment Agreement that Combines Two or More Years of Tax Debt Reduce Your Overall Tax Payment?

If you qualify for a Partial Payment Installment Agreement (PPIA) when you consolidate multiple years of tax debt and have a severe financial hardship, the IRS can reduce your tax liability.

Keep in mind though that PPIAs won’t stop the IRS from filing a federal tax lien. For Guaranteed, Streamlined, and Non-Streamlined agreements you will have to pay the full amount you owe. Also, interest and penalties are not removed or reduced just for combining multiples years of tax debt into one payment agreement.

It is also possible when you consolidate more than one tax debt that you may qualify for an Offer in Compromise (OIC) and the IRS agrees to an “offer” settlement amount that is less than your full tax debt.

Are There Any Tax Debt Consolidation Programs That Can Lower Your IRS Payment?

Yes, an Offer in Compromise can help you resolve a tax debt for less than the amount owed, including interest and penalties.

For example, if you owe $25,000 in back taxes and qualify to offer the IRS a lump sum of $1,500 to settle the debt, you can eliminate the tax debt with one lower payment when the IRS accepts your OIC.

Other benefits of an OIC include stopping IRS liens, wage garnishment, and bank account or other property levies.

When evaluating your Offer in Compromise request, the IRS considers whether your financial situation causes a “collectability” issue.

If you can show you do not have the income or earning potential to keep up with your basic monthly living expenses and pay off your full tax debt within six years, the IRS is more likely to accept your OIC rather than spend resources on a tax debt that may otherwise be uncollectible.

What Happens If You Consolidate Your Tax Debt and Have Additional Tax Debt?

Depending on your finances and how much additional tax debt you owe, the IRS may allow you to modify an existing Installment Agreement. This can include updating monthly payment terms or consolidating new debts into a new Installment Agreement.

Failing to inform the IRS of a new tax debt as soon as possible can lead to a default on a current Installment Agreement. When the IRS determines a taxpayer is in default of an IA, they could begin more aggressive collection actions such as taking money from your paycheck or bank accounts or placing a lien on your home.

How Does Tax Debt Consolidation Differ from Credit Card and Loan Consolidation?

Consolidating tax debts involves complying with rules specific to the IRS versus rules established by private lenders and/or state regulations.

In addition, interest rates charged on unpaid tax debts are set by the IRS. Alternatively, interest rates on credit card and loan balances vary depending on economic factors and conditions determined by individual lenders.

In other words, combining credit card and loan debts may help you get a lower interest rate for the consolidated debt. That is not the case for tax debt.

Tax debt consolidation does not impact your credit score as long as you make timely payments. Consolidating loans and credit cards may impact credit scores since it often requires an individual to close old accounts and open new accounts.

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