How to Deal with State Tax Debt While Handling IRS Issues
Owing taxes to both the IRS and your state can create a complicated situation. Each tax authority operates independently, with its own rules, timelines, and enforcement actions. While you might be working to resolve one, the other can still issue penalties, garnishments, or liens.
This guide breaks down how state and federal tax debts differ, how they’re collected, and what steps you can take to manage both effectively. If you’re receiving notices from more than one agency, understanding how to approach each one is key to preventing further financial strain.
If you’re overwhelmed and need to talk to a professional, J. David Tax Law offers four decades of collective experience in tax debt resolution services.
The Key Differences Between IRS and State Tax Debt
| Feature | IRS (Federal Tax Debt) | State Tax Debt |
|---|---|---|
| Authority | U.S. Department of the Treasury | Varies by state (e.g., California FTB, New York DTF) |
| Types of Tax Involved | Federal income tax | Income tax, sales tax, unemployment tax, and others |
| Collection Methods | Liens, levies, wage garnishment, and refund offsets | Similar methods, plus possible license suspension in some states |
| Enforcement Speed | Structured, but slower to initiate in most cases | Often faster and more aggressive, varies by state |
| Relief Programs | Installment Agreements, Offer in Compromise, Penalty Abatement | Varies by state; not all offer OIC or formal penalty relief |
| Appeal Options | Formal appeal rights through IRS Appeals Office | Limited or state-specific appeal processes |
| Inter-agency Cooperation | Coordinates with states through Treasury Offset and Levy Programs | May intercept federal refunds or share information with the IRS |
| Resolution Approach | Separate application and resolution process | Must apply directly through your state’s tax authority |
Options for Resolving State Tax Debt
Every state handles tax debt differently — but most offer a few core programs to help taxpayers who are behind. While these vary by location, here are the most common tools used to resolve state tax debt:
1. Payment Plans (Installment Agreements)
Most states allow you to pay your debt over time. You’ll need to apply directly with your state’s tax agency, and terms can vary. Some states require full financial disclosure, while others approve short-term plans automatically. Check out how you can create a plan to pay your tax debt in installments.
2. Hardship Status or Temporary Holds
If you’re experiencing financial hardship (e.g., unemployment, serious illness), some states will temporarily stop collection actions. You’ll usually need to prove your inability to pay and may need to reapply after a set period.
3. Offer in Compromise
A few states, including California, New York, and Maryland, allow taxpayers to settle for less than they owe. These programs are often more limited than the IRS’s Offer in Compromise, and approval is based on strict financial guidelines. See if you’re eligible to settle your tax debt for less than half the amount.
4. Penalty Abatement
You may be able to request that penalties (and sometimes interest) be reduced or removed if you have a valid reason, like a medical emergency, natural disaster, or other unavoidable issue that prevented timely filing or payment. Tax professionals, like J. David Tax Law attorneys, can help you waive your first penalty using a well-prepared first-time penalty abatement.
5. Bankruptcy (in limited cases and as a last resort)
In some situations, older state tax debts may be discharged in bankruptcy, typically if the tax is income-based, more than three years old, and meets other legal criteria. Always consult with a tax attorney before pursuing this option.
The IRS is Forgiving Millions Each Day. You Could Be Next.
How State and Federal Agencies Collect Back Taxes
Both the IRS and state tax agencies have powerful tools to collect what you owe, but they don’t always use them the same way or at the same speed.
The IRS can:
On the state side, tax agencies can:
The biggest difference? State agencies often act faster. While the IRS has formalized steps and timelines, many state tax departments move more aggressively and don’t always provide as much warning.
If you’re hearing from both agencies at once—or already facing enforcement—it’s time to create a strategy or get professional help.
Which Tax Debt Should You Deal With First?
If you owe both the IRS and your state, it’s natural to wonder which should come first. The short answer? Whichever one is most urgent or actively taking action.
While the IRS typically deals with larger balances and has more formal processes, many state tax agencies move faster and more aggressively . Some states, like California , New York , and Georgia , are known for initiating wage garnishments or suspending licenses with little warning.
That said, IRS enforcement tends to be broader and more long-lasting , especially when liens or levies are involved. You’ll want to assess which agency is closest to taking enforcement action, or has already started.
A good rule of thumb:
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If one agency is threatening a wage garnishment, bank levy, or lien, start there
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If both are active, consider negotiating with the more aggressive agency first while keeping the other informed.
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If you’re unsure or can’t keep up with both, getting help from a tax attorney can help you prioritize and protect yourself.
Ignoring either debt can make the problem worse. But with the right strategy, you don’t have to sacrifice one to resolve the other .
Managing Both Debts at the Same Time
Dealing with IRS and state tax debt at once might feel like spinning plates. But with a clear plan and careful organization, it’s possible to manage both without getting overwhelmed.
Keep Your Accounts and Notices Separate.
The IRS and your state tax authority won’t communicate with each other unless a shared enforcement program is involved (like the Federal-State Levy Program ). That means you’ll need to track two separate sets of deadlines, balances, and correspondence. Keep copies of all notices and confirmations in one place, clearly labeled by the agency.
Prioritize Urgent Threats
If one agency is threatening a wage garnishment, lien, or bank levy, that should take priority. Delays can trigger automatic enforcement actions, especially with state tax agencies that tend to move faster than the IRS.
Avoid Assuming “Paying one helps the other.”
Paying the IRS won’t satisfy your state debt—and vice versa. Each agency needs its own resolution: its own payment plan, offer, or abatement request. Overlooking this is a common (and costly) mistake.
Balance Your Finances Across Both.
The straightforward solution is to pay up. However, if you can’t afford to pay both right away, you may be able to:
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Request a temporary hardship hold from one while resolving the other
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Set up payment plans that fit your combined monthly budget
Work with a tax professional to negotiate terms and present your full financial picture accurately to both agencies
When in Doubt, Get Legal Help
Trying to resolve both sets of debt on your own can lead to errors, missed deadlines, or conflicting obligations. A tax attorney can help you develop a strategy that keeps you compliant with both the IRS and your state, without losing control in the process.
Talk to a Tax Professional for Free
Managing both IRS and state tax debt requires more than a one-size-fits-all approach. Each agency operates under its own rules, and resolving one doesn’t automatically resolve the other. Prioritizing correctly and staying compliant on both fronts is essential to avoid escalation.
If you’re unsure where to begin, a focused legal strategy can make all the difference.
Contact J. David Tax Law for a free consultation to get the guidance you need .
Frequently Asked Questions About Resolving State Tax Debt Issues
Yes, the IRS can intercept your state tax refund through the Treasury Offset Program (TOP). If you have a past-due federal tax debt, the IRS may apply part or all of your state refund toward that balance.
This process happens automatically once your federal debt becomes delinquent and is referred to the U.S. Department of the Treasury for collection. You should receive a notice if your refund is offset, explaining how much was taken and why.
Yes, in many cases, your state tax agency can intercept your federal tax refund if you owe back state taxes. This is done through the State Income Tax Levy Program (SITLP), which allows participating states to collect past-due taxes by offsetting your federal refund.
The process is coordinated between the state and the IRS. Once your state certifies the debt and submits it for collection, the IRS can reduce your federal refund accordingly. You’ll typically receive a notice explaining the offset and how it was applied.
Yes. Because state and federal tax debts are handled by separate agencies, you’ll need to address each one individually. The IRS has its own programs, like Offers in Compromise and Installment Agreements, while each state offers different options, if any.
For example, some states allow settlement offers similar to the IRS, but others only provide payment plans. Deadlines, documentation, and procedures vary widely between agencies.
If you’re juggling both, working with a tax attorney can help coordinate your approach and ensure that actions taken with one agency don’t create problems with the other.
Ignoring your state tax debt can trigger serious consequences. Many state tax agencies act quickly and can initiate wage garnishments, bank levies, or place a lien on your property. In some states, unpaid tax debt may even result in the suspension of your driver’s license or professional license.
Some states also contract private collection agencies, which can increase the pressure with additional fees or persistent contact.
Delaying action won’t make the debt go away—in fact, penalties and interest often continue to accumulate. If you’re receiving notices from your state, it’s best to respond or seek legal help before enforcement escalates.
Yes, but not all tax professionals handle both. State and federal tax debts follow different laws, deadlines, and resolution processes, which means it’s important to work with someone experienced in both areas.
J. David Tax Law focuses exclusively on IRS and state tax debt resolution. Their attorneys help clients across all 50 states address issues like back taxes, liens, wage garnishments, and installment agreements, for both state and federal matters.
