If you owe back taxes to the IRS and one or more state tax agencies, you might think you need to resolve each problem separately. Many taxpayers make this mistake, hiring one representative for federal issues and another for state matters, or worse, trying to negotiate with one agency while ignoring the other. This approach often backfires.
Federal and state tax problems are connected. The information you provide to one agency can affect your negotiations with the other. A resolution strategy that works for the IRS might create problems with your state, and vice versa. Without coordination, you risk undermining your own case.
How Federal and State Tax Agencies Share Information
The IRS and state tax agencies regularly exchange data. When you file a federal return, that information flows to the states where you have filing obligations. When the IRS adjusts your income after an audit, your state will likely receive notice and issue its own assessment. If you enter into an installment agreement with the IRS based on your financial situation, the state may obtain those same financial disclosures and use them in their own collection analysis.
This information sharing means you cannot present different financial pictures to different agencies. If you tell the IRS you have $500 per month available for payments, the state may learn this and expect a similar arrangement. If you claim hardship with one agency but not the other, inconsistencies will raise red flags.
The Sequencing Problem
The order in which you resolve federal and state tax debts can significantly affect your outcome. In some cases, resolving federal debt first makes sense because the IRS has more flexible programs and larger debts often take priority. Once you have an IRS installment agreement in place, you can present that payment obligation to the state as part of your expense budget, potentially reducing what the state expects you to pay.
In other situations, resolving state debt first may be advantageous. State agencies sometimes move faster and have more aggressive collection tools. New York can suspend your driver’s license for unpaid taxes. Texas can forfeit your business entity. Oklahoma can garnish wages without a court order. If state collection actions are causing immediate harm, addressing those first while requesting a collection hold from the IRS may be the better strategy.
The right sequence depends on your specific circumstances, including the amounts owed, the collection status with each agency, and which agency is causing the most immediate financial pressure.
Offer in Compromise Complications
If you qualify for an offer in compromise with the IRS, you need to consider how that affects your state tax situation. The IRS will require you to be current on all tax filings, including state returns. If you have unfiled state returns, you will need to address those before the IRS will consider your offer.
Additionally, not all states have offer in compromise programs, and those that do have different qualification criteria than the IRS. Settling your federal debt for less than the full amount does not automatically mean the state will do the same. A coordinated approach evaluates your eligibility for settlement programs at both levels and develops a strategy that accounts for both outcomes.
Protecting Yourself During Dual Investigations
If both the IRS and a state agency are auditing you simultaneously, coordination becomes even more critical. The positions you take in one audit may be discoverable by the other agency. Admissions you make to the IRS could be used against you by the state, and vice versa.
Having a single representative who understands both audits allows for consistent positions and prevents inadvertent admissions that could harm your case. Your representative can also identify timing strategies, such as resolving one audit before the other or coordinating appeals to achieve the best overall outcome.
The Bottom Line
Resolving federal and state tax problems requires a unified strategy. The information you provide, the sequence of your negotiations, and the positions you take must be consistent and coordinated. Working with a representative who handles both federal and state matters ensures that your resolution strategy accounts for all the moving pieces and protects your interests across jurisdictions.
If you owe taxes to both the IRS and a state agency, contact us for a free consultation. We will evaluate your situation and develop a coordinated plan to resolve both obligations efficiently.