IRS Problems: A Complete Guide to Solutions and Options

Having problems with the IRS is more common than you think and doesn’t mean all is lost, but it does mean you need to act fast and strategically. You should not ignore the problem because this only makes it bigger and more expensive.

The good news is that the IRS has options for almost any situation. You can negotiate payment plans, reduce penalties, and even in some cases pay less than you owe. The important thing is to understand your options and act in time.

This guide explains the most common problems with the IRS, what to do when you receive a letter, and what options you have to resolve your situation.

1. Types of Common Problems with the IRS

Not all IRS problems are the same. Understanding what type of situation you’re facing helps you find the right solution.

IRS Letters and Notifications

The IRS communicates mainly by mail. Receiving a letter doesn’t automatically mean you’re in serious trouble. These notifications can address pending balances, changes to your return, possible errors, or requests for additional information. Sometimes they’re just informational notices or adjustments that you can review and respond to calmly.

That’s why we share a practical table below so you know what each letter means and what to do in each case.

IRS Letters: what they mean and what to do

Letter Code	What it means	Urgency level	What to do immediately
CP14	You have a pending tax balance	High: first notice of debt	Verify the amount and year. If you agree, arrange payment or a payment plan; if not, review the return.
CP501 / CP503	Debt reminders (follow-up to CP14)	High: the situation progresses if you don’t respond	Don’t ignore it. Review your balance and consider requesting a payment agreement with the IRS.
CP504	Notice of intent to levy, especially state refunds	Very high: serious warning of possible levy	Act immediately. Contact the IRS or a professional and propose a payment or agreement before they initiate levies.
CP2000	Differences between what you reported and what third parties reported	Medium: requires review and response	Compare with your W-2 and 1099 forms. If you agree, sign and return; if not, respond with explanation and supporting documents.
LT11	Final notice of intent to levy with right to hearing (CDP)	Very high: last notice before levy	Seek professional help immediately and consider requesting a due process hearing.
CP12	The IRS corrected your return and the change results in a refund or adjustment in your favor	Low: review recommended, low urgency	Verify that the correction makes sense. If you disagree, follow the instructions to respond.

You can find the exact meaning of your letter and official instructions at: IRS page “Understanding Your Letter or Notice

Unfiled Taxes (Back Years)

Another common problem is having one or several years without filing a return. Sometimes it started with “I’ll do it later this year” and when you realize it, you already owe several returns and you’re afraid to catch up.

The IRS can file “substitute returns” with the information they have (W-2, 1099, etc.), normally without including deductions that would benefit you. This usually results in higher debts than would actually correspond.

Tax Debts

You can owe taxes for several reasons: they withheld too little from your job, you didn’t make estimated payments as an independent contractor, or the IRS adjusted your return. If you don’t pay on time, interest and penalties are added, and the IRS can initiate collection actions (wage garnishment, bank accounts, etc.).

Audits

Audits don’t always mean you did something “wrong,” but they do mean the IRS wants to review your return more closely. They can be by mail (requests for documents) or in person, and they focus on specific points like high expenses, unusual deductions, or unreported income.
Being prepared, having receipts, and often having professional representation can make a difference in the outcome.

2. What to Do When You Receive an IRS Letter

How to Read and Understand the Letter The first thing is to stay calm and read the entire letter. Each letter has specific deadlines and not responding on time limits your options.

Every IRS letter includes:

• Notice number (upper right corner): Tells you what type of letter it is
• Date of the letter: Important for calculating your response deadline
• Explanation of the problem: What the IRS found or what they need from you
• Amount owed (if applicable): Includes tax, interest, and penalties broken down
• Deadline to respond: Generally 30-60 days from the letter date
• Response options: What you can do and how to contact them

If the letter is in English and you need help understanding it, the IRS offers interpretation services by calling the number on the letter.

Deadlines You Must Respect

IRS deadlines are strict and have due dates. If you don’t respond on time:

• You may lose the right to dispute certain charges or appeal.
• The IRS can proceed with collection actions (levies, liens, etc.).
• Penalties and interest continue to accumulate.

In many notices you have 30 days (or 90 days in the case of some deficiency letters) to respond or appeal, depending on what the letter indicates. Always check the deadline that appears on the specific notice.

If you need more time, in certain cases you can call the number on the letter and request an extension before the original deadline expires; the IRS usually grants additional time for some notices, like the CP2000, but there are legal deadlines (for example, for Tax Court or collection hearings) that cannot be extended.

3. Options to Resolve Debts with the IRS

Payment Plan (Installment Agreement) A payment plan allows you to pay your debt in installments instead of all at once. There are short-term plans (a few months) and long-term plans (several years), depending on the amount and your ability to pay.

Key points:

Interest and some penalties continue to run, but you avoid more aggressive collection actions as long as you comply with the plan.

It’s important to propose a realistic monthly payment that you can maintain.

More official information: Online Payment Agreement (IRS)

Offer in Compromise

The Offer in Compromise (OIC) is a program that allows you to negotiate paying less than you owe when you really can’t pay the total and can prove it. The IRS reviews your income, expenses, assets, and future payment capacity before deciding whether to accept.

Not everyone qualifies; it’s an option for cases where the debt is clearly unpayable within the normal collection period. Preparing a well-supported OIC usually requires professional help.

More details: Official Offer in Compromise page

Currently Not Collectible Status

If your economic situation is so tight that any payment to the IRS would leave you unable to cover basic expenses, you can request that your account be placed in “Currently Not Collectible” status.

In this status:

• The IRS temporarily suspends active collection actions (like levies).
• The debt still exists and interest continues.
• The IRS may review your situation later to see if you can now pay.

Penalty Abatement (Penalty Reduction)

In some cases, the IRS can reduce or eliminate certain penalties if you demonstrate “reasonable cause” (for example, serious illness, disaster, erroneous information from a professional, etc.).

There’s also something called “First Time Penalty Abatement” for taxpayers with a good history facing penalties for the first time. Although it’s not always granted, it’s worth evaluating when penalties are a significant part of the debt.

4. What to Do if You Haven’t Filed Taxes in Years

Consequences of Not Filing Not filing returns for several years can lead to:

• Penalties for not filing and not paying.
• “Automatic” returns filed by the IRS that don’t include deductions in your favor.
• Difficulty obtaining credits or refunds, and even payment agreements or other solutions.

Additionally, if you’re entitled to a refund, you normally only have 3 years to claim it; after that time you lose it.

How to Catch Up

In many cases, the IRS expects you to file at least the most recent years to be considered current (often 6, depending on the case). A typical plan would be:

• Request tax transcripts to see what information the IRS has about your income.
• Prepare and file the missing returns, starting with the years the IRS indicates as priority.
• Once filed, evaluate whether a payment plan, offer in compromise, or other option is convenient for you.

Even if you can’t pay everything immediately, filing is a mandatory step to access almost any formal solution.

5. When You Need Professional Help

There are situations you can handle on your own, like a simple letter that only notifies you of a small adjustment. But it’s worth seeking professional help when:

• The debt is high or spans several years.
• You’ve received notices of wage garnishment, bank accounts, or property.
• Your case includes self-employment, multiple income sources, or audit.
• You don’t agree with the IRS and want to appeal or negotiate.
• You feel the situation has already overwhelmed you and you don’t know where to start.

A professional with experience in IRS problem resolution can:

• Review your letters, returns, and transcripts.
• Explain to you, in simple words, what options you have and what risks each one implies.
• Design a strategy (payment plan, offer, currently not collectible status, penalty reduction) adapted to your reality.

The cost of a professional tax preparer varies depending on the complexity of your case, but the value is in the peace of mind of handling your IRS problems correctly, reducing risks, and not missing savings opportunities due to lack of knowledge.

At Contabilidad BO we help people and businesses in the United States regularize their taxes, negotiate with the IRS, and regain control of their finances.