The U.S. Incentives Playbook: How Australian Businesses Can Turn Expansion Into Advantage

For many Australian companies, the United States looks deceptively simple, one country, one flag, one massive consumer market. 

However, the reality is far from that. Apart from culture and the use of words two other things are highly diverse as businesses move from US state to US state. The first is tax law, the second is incentives provided by governments.

America is not one market but rather a federation of federal rules, state tax systems, city-level economic development offices, local workforce programmes, utility incentives, property tax negotiations and industry-specific credits.

That complexity can often overwhelm newcomers. However, with the right planning, businesses can benefit.

The question for an Australian company should not simply be, “Where should we incorporate?” or “Which state has the lowest tax?” 

The better question is – where will our U.S. activities create the most value – jobs, investment, research, manufacturing, training, clean energy or exports – and which government wants that activity enough to support it?

America Does Not Hand Out Incentives Automatically

The United States has a deep incentives ecosystem, but it is rarely automatic. 

A business that signs a lease, hires staff and announces a location before speaking to the relevant economic development agencies may have already given away much of its negotiating leverage.

At the federal level, SelectUSA is a useful starting point for foreign investors. 

It is led by the U.S. Department of Commerce and is designed to facilitate job-creating business investment into the United States. 

It has helped facilitate more than US$400 billion in investment and supported more than 270,000 U.S. jobs, according to the Department of Commerce. 

It is important to note though that SelectUSA is a gateway, not a open cheque book. While it helps investors understand the market, access data and connect with federal, state and local stakeholders – it does not itself award most state or local incentives. 

This distinction matters. 

In the U.S., the most valuable incentive package for an expanding business is often not a single federal grant. 

It may be a carefully negotiated combination of state tax credits, local property tax abatements, workforce training support, infrastructure assistance, energy incentives and federal tax credits.

State Incentives: Where The Real Competition Begins

The U.S. states compete fiercely for investment, but they do so in different ways. 

Some states emphasize low headline tax rates. 

Others offer targeted credits for job creation, capital investment, research and development, advanced manufacturing, life sciences, clean energy or workforce training.

That means the “best” state is rarely the one with the lowest headline tax rate. 

It is the state where the company’s operating model, workforce needs, customer base, supply chain and tax profile align.

Let’s look at New York as an example.

Its Excelsior Jobs Program can provide fully refundable tax credits over a benefit period of up to 10 years, but only where businesses meet and maintain specified job and investment thresholds. 

The programme can cover credits linked to jobs, investment, research and development, real property and childcare-related expenditure. 

It is attractive, but it is not automatic. 

It is a performance-based programme with accountability built in. 

Georgia offers a different kind of advantage through Georgia Quick Start, which provides customised workforce training free of charge to qualified new, expanding and existing businesses. 

For labour-intensive or technical operations, that support can be more valuable than a headline tax credit because it directly reduces the cost and friction of building a workforce. 

California’s Employment Training Panel is another example. 

It provides funding to employers to assist with training that leads to long-term, well-paid jobs. 

Importantly, it is a funding agency, not a training provider, so companies must still design and manage their own training strategy. 

The lesson is simple – incentives follow facts. 

A software company, a sports-tech platform, a medical device business and a manufacturing group may all need different states, different agencies and different applications.

Do Not Confuse “Low Tax” With “No Tax”

Australian businesses often hear that Texas and Florida are “no tax” states. 

That is too simplistic.

Texas does not impose a traditional corporate income tax, but it does impose a franchise tax on taxable entities formed or organised in Texas or doing business there. 

For 2026 and 2027, the Texas Comptroller lists a no-tax-due threshold of US$2.65 million and franchise tax rates of 0.375% for retail or wholesale businesses and 0.75% for other businesses, subject to the applicable rules. 

Florida has no personal income tax, but that does not mean corporations operate free of state income tax. 

Florida’s corporate income/franchise tax rate is 5.5% for taxable years beginning on or after 1 January 2022. 

For an expanding Australian group, the state comparison should include corporate tax, franchise or gross receipts taxes, sales tax, payroll taxes, property tax, apportionment, local business taxes, employment law, labour costs, logistics, customer proximity and available incentives. 

A low-tax state can still be expensive if it is the wrong commercial fit.

Zones Can Help – But Know What Kind Of Zone You Are In

Location-based incentives are common in the United States, but the terminology can be misleading. “Enterprise zone,” “opportunity zone,” “empowerment zone,” “development zone” and “distressed area” do not mean the same thing.

Opportunity Zones, for example, are frequently misunderstood. 

They are primarily investor-side tax incentives. 

A taxpayer may be able to defer eligible gains by investing through a Qualified Opportunity Fund, but the benefit does not operate like a direct grant to a business merely because it opens an office in a designated area. 

Under current legacy rules, eligible gains invested into a Qualified Opportunity Fund may be deferred until an inclusion event or 31 December 2026, whichever is earlier. 

The programme is also evolving. 

IRS guidance states that the 2025 federal legislation commonly referred to as the One Big Beautiful Bill Act makes the Qualified Opportunity Zone incentive permanent, with the first post-enactment round of new QOZ designations taking effect on 1 January 2027 and new rounds following every 10 years. 

It also introduced additional tax benefits for certain rural-area Opportunity Zone investments. 

For practical purposes, this means a business should not simply ask, “Are we in a zone?” 

It should ask: who receives the benefit, what investment is required, when must the investment be made, what compliance applies, and does the benefit fit our capital structure?

The R&D Tax Credit – Powerful, But Not A Blank Cheque

For innovative Australian companies entering the U.S., the federal R&D tax credit can be one of the most valuable incentives available. 

But it is often oversold.

The U.S. R&D credit is not a reimbursement of research spending. 

It is a tax credit calculated by reference to qualifying research activities and qualifying research expenses. 

The activity must satisfy the section 41 requirements, including the four-part framework: the expenditure must relate to section 174-type research, the work must seek technological information, the information must be intended for use in developing a new or improved business component, and substantially all of the activity must involve a process of experimentation for a qualified purpose. 

That does not mean the company must invent something never seen before. 

The IRS guidance confirms there is no separate requirement that the work exceed or expand the common knowledge of skilled professionals. 

In practice, the focus is on whether the company faced technical uncertainty, identified alternatives and evaluated those alternatives through a genuine process of experimentation. 

Qualifying expenses are narrower than many businesses expect. 

They generally include eligible wages, supplies used in qualified research, certain computer-use costs and 65% of eligible contract research expenses. 

A broad claim for “cloud computing” or “software development” costs should be reviewed carefully rather than assumed to qualify automatically. 

For Australian groups, one rule is especially important – foreign research does not qualify for the U.S. federal R&D credit. Research conducted outside the United States, Puerto Rico or U.S. possessions is excluded, even if it is performed for a U.S. taxpayer or by American researchers. 

That means work performed by engineers in Sydney, Melbourne or Brisbane generally cannot be converted into a U.S. federal R&D credit merely because the intellectual property is later used by a U.S. subsidiary. 

The structure of contracts, ownership of IP, location of personnel, funding arrangements and technical records all matter.

The Payroll Tax Opportunity For Younger Companies

For early-stage businesses, the R&D credit may be valuable even before the company has meaningful income tax liability.

A qualified small business may elect to use up to US$500,000 of its research credit against payroll tax for tax years beginning after 31 December 2022. 

The IRS states that the payroll tax credit is first used against the employer share of Social Security tax, with remaining credit then reducing the employer share of Medicare tax for the quarter. 

The eligibility rules are specific. 

A qualified small business generally must have gross receipts of less than US$5 million for the tax year and no gross receipts for any tax year before the five-tax-year period ending with the credit year. 

The election is also subject to timing and repeat-use limits. 

For a young Australian technology company launching in the U.S., that can be meaningful cash-flow support. 

But the company needs the right records from day one: project descriptions, technical uncertainties, employee time allocation, contracts, invoices and evidence of experimentation.

Do Not Confuse The R&D Credit With R&E Expensing

Another common trap is mixing up the R&D credit with the deduction rules for research and experimental expenditure.

Following recent U.S. tax changes, taxpayers may generally deduct domestic research or experimental expenditure paid or incurred in taxable years beginning after 31 December 2024, or elect to capitalise and amortise those domestic costs over at least 60 months. 

Foreign research or experimental expenditure cannot be currently deducted and is generally amortised over 15 years. 

That distinction is important for cross-border planning. 

A U.S. subsidiary carrying out domestic research may have both credit and deduction considerations. 

An Australian parent carrying out research offshore may face a different U.S. outcome. 

For groups with shared development teams, intercompany agreements and transfer pricing policies should be aligned with the intended tax position.

Clean Energy Incentives – Attractive, But Increasingly Technical

Sustainability incentives remain significant, but the rules are now highly technical.

The U.S. Clean Electricity Investment Credit has a base credit amount of 6% of qualified investment. 

That amount can increase up to 30% where prevailing wage and registered apprenticeship requirements are satisfied. 

Additional 10-percentage-point bonuses may be available for projects meeting certain domestic content requirements or located in an energy community. 

The credit may also be eligible for direct payment or transferability in certain circumstances, although taxpayers cannot claim both the investment credit and production credit for the same facility. 

This is a major planning area for businesses investing in solar, storage, clean electricity, manufacturing facilities or energy-intensive operations. 

But the “30% credit” should not be described as automatic. 

It depends on the project, the property, labour compliance, timing, location, domestic content, tax ownership and documentation.

The timing rules are also changing. 

IRS Notice 2025-42 explains that, under the 2025 legislation, section 45Y and section 48E credits terminate for applicable wind and solar facilities placed in service after 31 December 2027 where construction begins after 4 July 2026. 

For businesses, the message is clear – clean energy tax credits can improve project economics, but they should be modelled before committing capital. 

A rooftop solar project, a battery installation, a manufacturing upgrade and a major renewable generation project may all sit under different rules.

The Real Strategy – Design The U.S. Footprint Before Asking For Incentives

The most successful incentive strategies are built before the U.S. expansion is announced. 

Once a company has chosen a state, signed a lease, hired staff and committed publicly, the economic development agency may have little reason to offer support.

A strong U.S. incentives review should ask:

• What activities will be performed in the U.S.? 

• How many jobs will be created, and at what wage level? 

• What capital expenditure will be made? 

• Will the company conduct U.S.-based R&D? 

• Will it invest in training, manufacturing, clean energy, logistics or distressed-area development? 

• Does the company need incentives as cash grants, tax credits, abatements, training support or infrastructure assistance? 

• Are the incentives discretionary, automatic, refundable, transferable or subject to clawback? 

• How will the structure interact with Australian tax, U.S. federal tax, state tax and transfer pricing? 

The businesses that win do not treat incentives as an afterthought. 

They treat them as part of site selection, entity structuring, workforce planning and capital allocation.

Final Word – America Rewards Specificity

The U.S. incentive system is not simple but it can be worked through.

Australian businesses should avoid three mistakes:

1. assuming incentives are automatic;

2. chasing headline tax rates without modelling the full operating cost; and 

3. trying to claim credits after the commercial facts have already been locked in.

The better approach is to enter the U.S. with a clear operating story, where the company will invest, who it will hire, what it will build, what technology it will develop and how its presence will benefit the local economy.

In America, governments do not usually subsidise vague ambition. 

They support specific activity. 

The companies that understand that early can turn U.S. expansion from a cost centre into a strategic advantage.

CHECKLIST: Australia – US Market Entry Checklist

A Practical Guide To The Federal Options For Resolving Tax Debt, And When Each One Fits

There is no single way to resolve a federal tax debt. What people loosely think of as “settling with the IRS” is really a collection system with several distinct paths: payment plans, negotiated settlements, hardship deferrals, appeals, penalty relief, relief for spouses, and procedures that intersect with bankruptcy. Which path fits a given taxpayer turns on the particulars: what they can actually pay, the age and type of the liability, their compliance and filing history, the equity in their assets, their income, and whether they even agree they owe what the IRS says they do.

What follows is an overview of those options under the federal collection rules as they currently stand.

First Principle: Become And Stay Compliant

Before any of this matters, there is a threshold question that trips up more taxpayers than the choice of strategy itself: are you compliant? The IRS will not do much with a balance-due account if the taxpayer is still incurring new liabilities or has returns that should have been filed but weren’t.

For offers in compromise, the IRS Form 656 Booklet states that, before an offer can be considered, the taxpayer must: file all legally required tax returns, have received a bill for at least one tax debt included in the offer, make all required estimated tax payments for the current year, and, if the taxpayer is a business owner with employees, make all required federal tax deposits for the current quarter and the two preceding quarters. The same practical compliance concept applies to installment agreements: default can occur if the taxpayer misses required installment payments or fails to timely pay a balance due on a later-filed return.

So the real first move usually isn’t deciding between an installment agreement and an offer. It’s getting the missing returns filed, stopping new balances from piling up, and pulling together a clear picture of current income, expenses, assets, and liabilities.

Comparison Of Major IRS Tax Debt Resolution Strategies

Strategy	Best Fit	What It Does	Key Limits / Risks
Installment agreement	Taxpayer can pay over time	Allows monthly payments toward full or partial collection	Interest and penalties continue; default can trigger enforcement; IRS may file a Notice of Federal Tax Lien
Guaranteed installment agreement	Individual income tax debt of $10,000 or less, meeting statutory conditions	IRS must accept if statutory criteria are met	Full payment required within 3 years; clean recent compliance history required
Streamlined installment agreement	Taxpayer owes within IRS streamlined thresholds	Easier approval, often without full financial disclosure	Must pay within 72 months or by the collection statute expiration date, whichever is shorter
OIC — doubt as to collectibility	Taxpayer’s assets and income are less than the full liability	Settles the debt for less than the full amount	IRS generally rejects if full payment is available through assets or installments
OIC — doubt as to liability	Taxpayer disputes the existence or amount of the liability	Compromises a genuinely disputed liability	Not available where liability is fixed by final court decision or judgment
OIC — effective tax administration	Taxpayer can technically pay, but full collection would cause hardship or be unjust	Allows settlement despite theoretical collectibility	Requires strong hardship or exceptional-circumstance proof
Currently not collectible hardship status	Taxpayer cannot pay anything without losing ability to meet necessary living expenses	Suspends active collection while hardship exists	Does not eliminate the debt; liens may still be filed; IRS may reactivate collection if income improves
Collection Due Process / appeals	Taxpayer receives lien or levy notice and wants review or alternatives	Provides Appeals review and can raise collection alternatives	Strict deadlines apply; generally one CDP hearing per tax period
Penalty relief	Balance includes penalties caused by reasonable cause, IRS error, statutory exception, or administrative waiver	Reduces or removes penalties	Does not generally remove underlying tax or interest on tax
Innocent spouse relief	Joint return liability should not be collected from one spouse	Relieves qualifying spouse from tax, interest, and penalties	Applies only to joint-return liabilities and depends on the type of relief
Bankruptcy	Older or qualifying tax debts, or broader insolvency issues	Can discharge some taxes and stop certain collection actions	Many tax debts are nondischargeable; liens may survive discharge

Installment Agreements

An installment agreement is the most common tax debt resolution tool when the taxpayer can pay the liability over time. 

Guaranteed Installment Agreements

A guaranteed installment agreement is the strongest statutory installment right for qualifying individual taxpayers. The IRS must accept full payment in installments for an individual income tax liability if, as of the date the taxpayer offers to enter the agreement:

• The aggregate tax liability, determined without interest, penalties, additions to tax, and additional amounts, does not exceed $10,000;
• The taxpayer, and the spouse if the liability relates to a joint return, has not during the preceding 5 taxable years failed to file an income tax return, failed to pay income tax required to be shown on a return, or entered into an installment agreement for income tax;
• The IRS determines the taxpayer is financially unable to pay in full when due, based on information required by the IRS;
• The agreement requires full payment within 3 years; and
• The taxpayer agrees to comply with the Internal Revenue Code while the agreement is in effect.

Streamlined Installment Agreements

Most installment agreements use streamlined criteria rather than full financial negotiation. The Form 9465 instructions state that a taxpayer is generally eligible for a streamlined installment agreement if:

• The assessed tax liability is $25,000 or less for an individual, in-business taxpayer with income tax only, or out-of-business taxpayer; or
• The assessed tax liability is $25,001 to $50,000 for an individual or out-of-business sole proprietorship, and the taxpayer agrees to pay by direct debit or payroll deduction.

The proposed payment must pay the assessed tax liability in full within 72 months or by the Collection Statute Expiration Date, whichever is less. The Collection Statute Expiration Date is normally 10 years from the date of assessment, although it may be suspended or extended for various reasons. 

Levy Protection During Installment Agreements

An installment agreement can protect the taxpayer from levy while the request is pending, while the agreement is in effect, and during certain appeal windows. 

However, installment agreements do not eliminate the debt. If the taxpayer misses payments or fails to timely pay a later-filed balance due return, the taxpayer will be in default, the IRS may terminate the agreement, and enforcement actions such as filing a Notice of Federal Tax Lien or issuing a levy may follow.

Offers In Compromise

An offer in compromise is a settlement of tax debt for less than the full amount owed. The core difference between an installment agreement and an offer in compromise is that an installment agreement generally pays the liability over time, while an offer in compromise seeks to settle the liability for less than the full balance.

The contrast with an installment agreement is straightforward: the installment agreement pays the liability off over time, while the offer tries to settle it for less than the whole balance.

Grounds For An Offer In Compromise

There are three recognized grounds for an offer, and Treasury regulations lay them out:

OIC ground	Standard
Doubt as to liability	A genuine dispute exists as to the existence or amount of the correct tax liability under law; it does not exist where liability has been established by final court decision or judgment.
Doubt as to collectibility	The taxpayer’s assets and income are less than the full amount of the liability.
Effective tax administration	The IRS determines that, although full collection could be achieved, full collection would cause economic hardship.

The IRS generally will not accept an offer if the taxpayer can pay the tax debt in full through an installment agreement and/or equity in assets. If full payment would create economic hardship or exceptional circumstances make full payment unjust, the taxpayer may qualify under effective tax administration guidelines.

OIC Forms, Fee, and Initial Payments

An offer must be submitted in writing, signed under penalties of perjury, and contain the information required by the IRS. Taxpayers submitting offers solely on doubt as to liability are not required to provide financial statements. 

For payment structure:

• A lump-sum offer is an offer payable in 5 or fewer installments and must be submitted with 20 percent of the offer amount under IRC § 7122(c)(1)(A).
• A periodic payment offer must be submitted with the first proposed installment, and failure to make later proposed installments while the offer is being evaluated may be treated as withdrawal under IRC § 7122(c)(1)(B).

Evaluation Of The Offer

Under IRC § 6331(k)(1), no levy may be made while an offer in compromise is pending, for 30 days after rejection, or during a timely appeal of the rejection. An offer is pending beginning when the IRS accepts it for processing.

Acceptance, Rejection, Appeals, And Deemed Acceptance

Nothing here is final until it’s in writing. An offer isn’t accepted until the IRS sends written notice of acceptance to the taxpayer or the taxpayer’s representative.

This acceptance conclusively settles the liability specified in the offer. 

An offer is not rejected until the IRS issues a written notice stating the reasons for rejection and the right to appeal. The taxpayer may administratively appeal a rejected offer to Appeals if the appeal is requested within the 30-day period beginning the day after the date on the rejection letter.

Under IRC § 7122(f), an offer is deemed accepted if the IRS does not reject it within 24 months after submission, excluding any period during which the liability is disputed in a judicial proceeding. 

Five-Year Compliance Obligation After OIC Acceptance

An accepted OIC is not the end of the taxpayer’s obligations.  After acceptance, the taxpayer must continue to file required returns and pay estimated and federal tax payments on time. If the taxpayer fails to timely file and timely pay obligations that become due within five years after acceptance, the IRS may default the offer; upon default, the taxpayer becomes liable for the original tax debt, less payments made, plus accrued interest and penalties.

During the five-year period after acceptance, the taxpayer cannot request an installment agreement or another offer for unpaid taxes incurred before or after the accepted offer.

Currently Not Collectible Hardship Status

Currently not collectible status is not a settlement. It is a collection deferral when the IRS determines the taxpayer cannot pay without hardship.

The Internal Revenue Manual (IRM) states that a hardship exists if the taxpayer is unable to pay reasonable basic living expenses. The hardship determination is based on financial information provided on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses. These cases generally involve no income or assets, no equity in assets, or insufficient income to make any payment without hardship.

The IRM also states that accounts should not be reported as currently not collectible (CNC) if the taxpayer has income or equity in assets, and enforced collection of that income or equity would not cause hardship.

CNC status does not necessarily prevent lien filing. In general, a Notice of Federal Tax Lien should be filed on accounts being reported CNC when the aggregate unpaid balance of assessments equals or exceeds $10,000.00, subject to lien determination criteria and exceptions.

If hardship is established, levies must be released in certain circumstances. IRC § 6343(e) requires release of a levy on salary or wages payable to or received by the taxpayer upon agreement that the tax is currently not collectible, and that release should be accomplished immediately.

Liens, Levies, And Collection Due Process Rights

Tax debt resolution often occurs because the taxpayer receives a lien or levy notice. Understanding those notices is critical.

Notice Of Federal Tax Lien

Under IRC § 6320(a)(1), the IRS must give written notice after filing a notice of lien.  The notice must be given in person, left at the taxpayer’s dwelling or usual place of business, or sent by certified or registered mail to the taxpayer’s last known address, not more than 5 business days after the lien notice is filed.

The notice must explain the right to request a hearing during the 30-day period beginning the day after the 5-day notice period. 

Levy Notices

Under IRC § 6331(a), if a taxpayer liable for tax neglects or refuses to pay after notice and demand, the IRS may collect by levy on property and rights to property, except property exempt under IRC § 6334.

Levy on salary, wages, or other property generally may occur only after the IRS gives written notice of intent to levy at least 30 days before the levy. The levy notice must include a brief, simple explanation of levy procedures, administrative appeals, collection alternatives including installment agreements, redemption and lien-release procedures, and passport-related certification rules for seriously delinquent tax debts.

A wage levy is continuous, meaning that a levy on salary or wages continues from the date first made until released under IRC § 6343.

Collection Due Process Hearing Issues

At a Collection Due Process hearing, the taxpayer may raise broad collection issues. The taxpayer may raise relevant issues relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of collection actions, and collection alternatives such as bond, substitution of assets, installment agreement, or offer in compromise.

A timely CDP request can suspend collection. Under IRC § 6330(e)(1), if a CDP hearing is requested, the levy actions that are the subject of the hearing and the running of the limitations periods under IRC §§ 6502, 6531, and 6532 are suspended while the hearing and appeals are pending.

Penalty Relief And Abatement

Penalty relief can be a powerful tax debt reduction strategy when penalties make up a substantial part of the balance. Penalty relief does not generally eliminate the underlying tax, but it can materially reduce the amount owed.

The Internal Revenue Manual states that penalty relief generally falls into four categories, considered in this order unless otherwise specified:

• Correction of IRS error;
• Statutory and regulatory exceptions;
• Administrative waivers; and
• Reasonable cause.

The IRM states that reasonable cause may be considered where the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply with a prescribed duty within the required time.

The IRM identifies administrative relief for the following penalties, if the qualifying criteria are met:

• Failure to File penalty under IRC § 6651(a)(1), IRC § 6698(a)(1), or IRC § 6699(a)(1);
• Failure to Pay penalty under IRC § 6651(a)(2) and/or IRC § 6651(a)(3); and
• Failure to Deposit penalty under IRC § 6656.

To request abatement of a penalty after assessment, the taxpayer must submit a written request to the IRS. If the taxpayer disagrees with the IRS’s penalty determination, the taxpayer generally has the right to an administrative appeal, although Appeals review is not automatic.

Innocent Spouse Relief

For joint returns, both spouses are generally exposed to joint and several liability. Innocent spouse rules provide a separate resolution path when one spouse should not be held liable for all or part of a joint liability.

Three types of relief are available to married persons who filed joint returns:

• Innocent spouse relief;
• Separation of liability relief; and
• Equitable relief.

Under IRC § 6015(b), qualifying innocent spouse relief can relieve the requesting spouse from tax, interest, penalties, and other amounts to the extent the liability is attributable to an understatement.

Under IRC § 6015(c), qualifying taxpayers who are no longer married, legally separated, or not living together may limit liability through separation of liability. Publication 971 explains that separation of liability allocates the understated tax, plus interest and penalties, between the spouses or former spouses.

Under IRC § 6015(f), equitable relief is available if, considering all facts and circumstances, it is inequitable to hold the individual liable for an unpaid tax or deficiency and relief is not available under IRC § 6015(b) or IRC § 6015(c). Equitable relief can apply to an unpaid tax properly shown on the return but not paid, unlike innocent spouse relief or separation of liability relief.

For innocent spouse relief or separation of liability relief, Form 8857 generally must be filed no later than 2 years after the date on which the IRS first began collection activities against the requesting spouse.

While an innocent spouse request is pending for a tax year, the IRS cannot collect from the requesting spouse for that year, but interest and penalties continue to accrue.

Bankruptcy As A Tax Debt Strategy

Bankruptcy is not an IRS administrative program, but it can be relevant to tax debt resolution. A bankruptcy discharge is a permanent injunction against the collection of certain debts as a personal liability of the debtor.

The bankruptcy court may discharge a debtor from personal liability for certain debts, including taxes, but not all debts are dischargeable. Many tax debts are excepted from discharge, and the scope of discharge depends on the bankruptcy chapter and the nature of the debt. Chapter 7 debtors do not have an absolute right to discharge; Chapters 12 and 13 debtors generally receive discharge after completing all payments under the bankruptcy plan.

Secured creditors with valid pre-bankruptcy liens may enforce those liens to recover property secured by the lien, even after discharge of personal liability.

If debt is canceled in bankruptcy, the canceled amount is not taxable income, but it can reduce other tax benefits. Debt canceled under a bankruptcy proceeding is not taxable income, and the bankruptcy exclusion applies only where the discharge of indebtedness occurs within the bankruptcy case.

A failure-to-pay penalty is not imposed in certain cases involving taxes incurred by the bankruptcy estate or by the debtor before the earlier of the order for relief or trustee appointment, subject to stated requirements. This relief does not apply to penalties for failure to pay or deposit taxes withheld or collected from others, and it does not apply to failure-to-file penalties.

Bankruptcy should be evaluated where the taxpayer has broader insolvency issues or older tax liabilities, but it requires careful analysis because many taxes survive bankruptcy, and federal tax liens may remain enforceable against property.

Practical Resolution Workflow

In practice, working a tax debt case tends to follow the same disciplined sequence:

• Confirm The Liability – Verify tax periods, assessments, penalties, interest, payments, offsets, and whether the taxpayer disputes the debt.
• Check The Collection Statute – Under IRC § 6502(a)(1), the IRS generally has 10 years after assessment to collect by levy or court proceeding, subject to suspensions and extensions.
• Bring Filings Current – File missing returns before requesting most collection alternatives.
• Stop New Liabilities – Adjust withholding, make estimated tax payments, and make required business payroll deposits.
• Analyze Ability To Pay – Determine monthly disposable income and asset equity.
• Request Penalty Relief Where Available – Consider IRS error, statutory exceptions, administrative waivers, and reasonable cause before locking in a long-term resolution.
• Choose The Resolution Path – if full payment over time is feasible, use an installment agreement; if full payment is not feasible, evaluate an OIC; if no payment is feasible, request CNC hardship status; and if the taxpayer received a lien or levy notice, preserve CDP rights.
• Document Everything – Financial statements, bank records, proof of expenses, medical hardship, unemployment, asset valuations, and compliance records often determine the outcome.
• Maintain Compliance After Resolution – Installment agreements and accepted offers can default if future filing and payment obligations are missed.

If you have just opened an envelope from the IRS or refreshed your IRS Online Account and seen a letter you weren’t expecting, take a breath. Receiving an audit notice is unsettling. It does not have to be a disaster.

I represent both U.S. and foreign clients in IRS examinations, and I can tell you that audits are, more than anything else, a process. The taxpayers who get the best outcomes treat it that way, methodical, deadline-driven, evidence-based, rather than as a crisis. This guide walks you through how to do that, from the day the notice arrives through Appeals, Tax Court, and post-assessment options. If you have cross-border facts such as foreign accounts, foreign entities, foreign trusts, foreign gifts, or treaty positions, read the international section below even if the audit notice does not appear to raise those issues. The information-return penalties can dwarf the underlying tax.

Understand What An Audit Actually Is

An audit is a review of a tax return and supporting records to confirm that what was reported is accurate. The IRS accepts most returns as filed. The ones it examines are usually flagged for a third-party mismatch (W-2, 1099, K-1, brokerage), an algorithmic score, a related-party examination, or random selection.

The most important point I make to clients in the first conversation is this: an audit is a verification process, not an accusation. Holding that distinction in mind changes how you behave during the audit, and how you behave changes the outcome.

It is also worth noting that our tax system depends on honest reporting. In consultations, prospective clients often ask, “But how would they know about…” followed by whatever amount or issue concerns them.

Identify The Type Of Audit

Correspondence Audit – Handled by mail or through the IRS Document Upload Tool. Usually, one or two specific items, such as a credit, deduction, or a 1099 mismatch.

Office Audit – You appear at an IRS office with documentation. Typically broader than a correspondence audit but narrower than a field audit.

Field Audit – A Revenue Agent visits your home, business, or your representative’s office. The most comprehensive type, common for business taxpayers, high-income individuals, and complex international cases.

If you have a choice about where the meeting takes place, hold it at your representative’s office. You control the documents produced and avoid letting the examiner form impressions based on what is sitting on a desk.

Step 1: Read The Notice Carefully Before You Do Anything Else

The audit letter is the operative document. Before you call, email, or send anything, identify five things:

1. The tax year (or years) under examination.
2. The specific items the IRS is questioning.
3. The response deadline.
4. The form of response the IRS expects (mail, fax, upload, in-person).
5. Whether the IRS is requesting documents or proposing a change.

A document request calls for substantiation. A proposed change calls for a decision; you either agree, partially agree, or appeal. Resist the impulse to call the IRS the moment the notice arrives. An unprepared call expands issues, creates confusion, and produces statements you may later need to correct.

Step 2: Do Not Ignore Notice

Ignoring an IRS notice is the single most damaging response I see. The audit does not go away. The IRS proceeds without your input, disallows deductions and credits it cannot independently verify, and assesses tax, penalties, and interest. Even if you cannot fully respond by the deadline, contact the IRS or have your representative do so. Most deadlines can be extended for a reasonable period if you ask before they expire. Almost none can be extended after they expire.

Step 3: Decide Whether You Need Representation 

You have the right to represent yourself, but for many audits, representation is the difference between a clean resolution and a multi-year proceeding. I generally recommend representation when the audit involves business income, Schedule C, rental real estate, or cryptocurrency; foreign accounts, foreign assets, or foreign entities; an in-person interview; multiple tax years; proposed penalties; incomplete records; or any potential exposure beyond civil tax.

A qualified representative communicates with the examiner on your behalf, preserves legal privileges where they apply, organizes the evidence so the examiner can verify your position quickly, and keeps the audit focused on the items in the notice instead of letting it spread.

A Note For Non-U.S. Taxpayers: The U.S. tax system is procedurally different from most foreign systems, and the consequences of routine missteps like admissions in an interview, late information returns, and signing the wrong form can be severe. If you have U.S. tax exposure, do not attempt an IRS audit without U.S. tax controversy counsel.

Step 4: Gather And Organize Your Documentation

Documentation is the foundation of an audit defense. The burden of proof is on you to substantiate deductions, credits, and most return positions. The IRS does not have to prove you are wrong; you have to prove you are right.

Beyond the return itself, assemble the third-party reporting forms (W-2, 1099, K-1, 1095, 1098); bank and credit card statements; receipts, invoices, contracts, and closing statements; mileage logs and calendars; loan and payroll records; accounting ledgers; and prior-year and later-year returns that explain carryovers, basis, or depreciation.

Organize by issue, not just chronologically. For each item the IRS has questioned, build a short proof schedule that ties documents to the tax return. The goal is to make it easy for the examiner to verify your position. One practical rule: never send originals. Send photocopies and keep complete copies of everything you submit, along with mailing or upload confirmation.

Step 5: Know Your Rights

The Taxpayer Bill of Rights and the Internal Revenue Manual give you specific protection. The IRS lists quality service, representation, the right to challenge the IRS and be heard, the right to appeal, the right to pay only the correct amount, and the right to privacy and confidentiality. These are not theoretical. If an examiner is not considering the documents you provided, you can ask for a manager conference. If an examiner is applying the wrong legal standard, you can challenge it. If negotiations are deadlocked, you can move the matter to Appeals.

Step 6: Respond And Answer Only What Is Asked

The cardinal rule of audit defense is to answer the question that was asked and nothing more. If the IRS asks for substantiation of your charitable contributions, send that, not unsorted bank statements full of unrelated transactions. Cooperation is not the same as expansiveness.

A focused written response usually includes a copy of the IRS notice; taxpayer name, identification number, and tax year; a short statement that you are responding to the notice; a list of the issues addressed; organized photocopies of supporting documents; a summary schedule tying documents to the return; a clear statement of the outcome you are requesting; and representative authorization (Form 2848 or 8821) where applicable.

Step 7: Prepare Carefully For Any Interview

If the audit involves an in-person meeting, prepare. Review the return line by line. Review the documents you have produced. Anticipate what the examiner will ask. A few rules I give clients before any IRS interview: do not guess (if you do not remember, say you need to check); answer only the question asked; do not volunteer unrelated information, even if it feels harmless; defer to your representative on what is produced and what is said; and do not allow a tour of a business without a plan for what is shown and why.

Step 8: Pay Special Attention To International Compliance

This deserves its own section because international compliance is where I see the most damage done in audits.

The U.S. international tax system runs on information returns. These are forms that disclose foreign accounts, assets, entities, trusts, and gifts. They are separate from your income tax return, separate from each other, and each carries its own penalty regime. Penalties apply even where no additional income tax is due.

If you have foreign accounts, foreign financial assets, ownership of or signature authority over a foreign entity, an officer or director role in a foreign corporation, CFC or PFIC exposure, an interest in a foreign partnership, a foreign disregarded entity or branch, a relationship with a foreign trust, a large gift or bequest from a non-U.S. person, or any treaty or cross-border withholding position — treat the audit as an international case until proven otherwise.

The main international information returns and their penalty exposure:

Form	Trigger	Initial Penalty Exposure
FBAR (FinCEN Form 114)	U.S. person with foreign financial accounts exceeding $10,000 in aggregate at any time during the year	Up to $10,000 per non-willful violation; willful violations up to the greater of $100,000 or 50% of account balance; criminal penalties available
Form 8938	Specified foreign financial assets above filing thresholds (IRC §6038D)	$10,000, plus $10,000 per 30-day continuation after IRS notice, capped at $50,000
Form 5471	Certain U.S. officers, directors, or shareholders of certain foreign corporations	$10,000 per annual accounting period, plus $10,000 per 30-day continuation, capped at $50,000; foreign tax credit reductions also apply
Form 8865	Controlled foreign partnerships, transfers, and certain interest changes	$10,000 for certain failures, plus continuation penalties; foreign tax credit reduction may apply
Form 8858	U.S. persons operating a foreign branch or owning a foreign disregarded entity	Generally follows IRC §6038 regime
Form 3520 / 3520-A	Foreign trust creation, transfers, ownership, distributions; large foreign gifts	Greater of $10,000 or 35% of gross reportable amount for many trust events; 5% per month, capped at 25%, for unreported foreign gifts

A Few Patterns I See Repeatedly: the taxpayer reported foreign interest on Schedule B but did not file the FBAR (the income is on the return; the FBAR is still required); the foreign company had no profit, so the taxpayer assumed there was nothing to report (Form 5471 is still required); the foreign LLC is disregarded for U.S. income tax (Form 8858 is still required); the foreign trust did not make a taxable distribution (Form 3520 and possibly Form 3520-A may still be required); the receipt from a non-U.S. relative was a gift, not income (for large foreign gifts, Form 3520 may still be required).

Income reporting and information reporting are separate compliance questions. During an audit, you have to answer both.

One Practical Word: do not casually file a late FBAR, Form 8938, Form 5471, Form 8865, Form 8858, Form 3520, or Form 3520-A during an audit without first developing a procedural strategy. Once the IRS has opened an examination, your options narrow. Some penalties are immediately assessable and are not subject to ordinary deficiency procedures. Reasonable-cause defenses depend on what you knew, what you told your advisor, and what advice you received. Get the facts and the file complete before you argue the penalty.

Step 9: Evaluate The Examiner’s Findings

When the examination closes, you will receive either an acceptance of the return as filed or a report of proposed adjustments. The possible outcomes:

Outcome	Meaning
No change	The IRS accepts the return as filed for the issues examined.
Agreed adjustment	You agree to the IRS changes and sign the agreement form.
Partially agreed	You agree to some changes and dispute others.
Unagreed adjustment	You preserve your appeal rights and do not sign.
Penalty proposal	The IRS proposes penalties in addition to tax and interest.

If you intend to appeal, do not sign the agreement page. If you partially agree, sign only what reflects the items you actually accept and continue to dispute the rest.

Step 10: The 30-Day Letter And Appeals

If you do not agree with the examiner’s proposed changes, the IRS generally issues a 30-day letter transmitting the examination report. You have 30 days to agree and sign, submit additional information, or request Appeals consideration.

The IRS Independent Office of Appeals is separate from the examination function. Appeals officers have broad settlement authority and are trained to consider the “hazards of litigation” — the risk to both sides of going to court. In my experience, Appeals is where most disputes that survive examination actually get resolved, often on terms that examiners cannot offer.

The form of the Appeals request depends on the amount in dispute. For $25,000 or less per tax period, you may use a small case request (Form 12203 or a brief written statement). For more than $25,000 per tax period, a formal written protest is required, signed under penalties of perjury, identifying the disputed adjustments, the amount in dispute, the facts supporting your position, the legal authority you rely on, and any disputed penalties with reasons they should not apply. The protest is the first impression Appeals gets of your case, thus draft it carefully.

Fast Track Settlement can be an alternative for appropriate cases. It keeps the case in examination jurisdiction while a trained Appeals employee acts as a neutral facilitator. You retain your normal appeal rights if Fast Track does not produce a settlement.

Step 11: The 90-Day Letter And Tax Court

If the matter is not resolved at examination or Appeals, the IRS issues a statutory notice of deficiency — the 90-day letter. You have 90 days from the date of the notice (150 days if the notice is addressed outside the United States) to file a petition with the U.S. Tax Court.

The 90-day deadline is one of the most important deadlines in tax practice. The IRS cannot extend it. Missing it forfeits your right to petition the Tax Court without first paying the tax. You can still litigate in U.S. District Court or the U.S. Court of Federal Claims, but only after paying the assessed tax and filing a refund claim.

Forum	When Used	Payment Required First?
U.S. Tax Court	Within 90 days of a statutory notice of deficiency (150 days if addressed outside the U.S.)	No
U.S. District Court	Refund litigation after payment and a refund claim	Yes
U.S. Court of Federal Claims	Refund litigation after payment and a refund claim	Yes

Tax Court has subject-matter expertise; District Court offers a jury option; the Court of Federal Claims has unique precedential authority for certain issues. Forum selection deserves serious analysis with experienced tax litigation counsel. A note on interest and payment: interest accrues on unpaid balances throughout the dispute, and paying part or all of a deficiency at the wrong moment can shift you out of the deficiency-jurisdiction track. These are strategic decisions, not clerical ones.

Step 12: Post-Assessment Options

Audit Reconsideration – The IRS will reconsider a prior audit if you present information that was not previously considered. This is most useful when the original audit closed without taxpayer participation, when records were unavailable at the time, or when a credit was reversed, and you now have proof it should be allowed. You do not have to pay first. But audit reconsideration is not a do-over for taxpayers who failed to respond on time; the IRS expects new information.

Refund Claims – A refund claim (Form 1040-X for individuals) must generally be filed by the later of three years from the date the original return was filed or two years from the date the tax was paid. If the IRS denies the claim, Appeals rights typically follow, and a refund suit becomes available if the claim is denied or not acted on within six months.

Common Mistakes To Avoid

The same mistakes recur in audit after audit: ignoring the notice; sending originals instead of photocopies; signing an agreement while intending to appeal; missing the 30-day letter deadline; missing the 90-day Tax Court deadline; producing an unorganized document dump; volunteering unrelated information; lying to the IRS or providing false documentation (this converts a civil audit into a criminal investigation — never do it); signing a statute extension on Form 872 without understanding the consequences; and treating audit reconsideration as a guaranteed second chance.

Final Thoughts

The taxpayers I see come out of audits in the best shape are the ones who treat the process with the seriousness it deserves and the discipline it rewards. They read the notice. They get representation early when the stakes warrant it. They organize their records. They answer only what is asked. They meet every deadline. They preserve their appeal rights. They do not sign away positions they intend to fight.

If you are facing an audit and want help thinking through your position before responding, my colleagues at CST Tax Advisors and I are here to help.