IRS Options If You Cannot Pay Your Taxes
How to Resolve Your Federal Tax Debt
When tax time comes around, inevitably there are people who are not able to pay everything they owe.
Although the IRS always prefers that you find a way to pay your taxes in full, circumstances can sometimes prevent that from happening. If you find yourself in this predicament, the IRS does have options available to help you resolve your tax debt.
Obviously, the best solution for past due taxes is to pay the entire debt as quickly as possible. Remember that penalties and interest will continue to accrue until your balance is fully paid – the IRS does not necessarily waive these late fees, even if you set up an approved payment arrangement.
In some cases, it is actually more affordable to pay your tax debt using a personal loan or credit card(s), which often charge lower fees than the IRS.
Your specific tax situation will determine which IRS payment options are available to you.
Here are the payment options if you cannot pay your taxes on time:
Apply for a Payment Agreement
There are a few options for individual payment plans – including full payment, a short-term payment plan (paying in 120 days or less), or a long-term payment plan (a.k.a. installment agreement) (paying in more than 120 days).
Taxpayers with past due taxes can request to establish a payment agreement with the IRS. Individuals who owe $50,000 or less (and businesses that owe $25,000 or less) can apply for an Online Payment Agreement on the IRS website. If your tax debt exceeds that threshold, you must file Form 9465 (Installment Agreement Request) along with a Collection Information Statement (Form 433-A, Form 433-B, or Form 433-F).
You may qualify to apply for a payment agreement online if:
- Short-Term Payment Plan: You owe less than $100,000 in combined tax, penalties and interest
- Long-Term Payment Plan (a.k.a. Installment Agreement): You owe $50,000 or less (in combined tax, penalties, and interest) and you filed all required returns
NOTE: If you are a sole proprietor or independent contractor, you should apply for a payment plan as an individual (instead of as a business).
Keep in mind, setup fees for IRS payment agreements may be higher if you apply for a payment plan by phone, mail, or in-person (instead of online).
Short-Term Payment Extension
You may be eligible for a short-term agreement if you owe the IRS less than $100,000. This option gives you 120 days to pay in full, with no setup fees involved. You can call the IRS at 1-800-829-1040 or apply online to establish your request.
Long-Term Installment Agreement
With an installment agreement, you gradually pay off your tax liability by making monthly payments over a period of time (up to 72 months). You can pay by check, money order, credit card, direct debit, or payroll deduction. After you make each payment, you will receive an IRS notice that shows your remaining balance and the details for your next payment. The setup fee for a long-term installment agreement is $149 (or $31 if you choose to pay monthly through automatic withdrawals via Direct Debit).
For more information about IRS payment agreements, see the Instructions for Form 9465 (Installment Agreement Request).
Submit an ‘Offer in Compromise’
An offer in compromise (OIC) allows you to settle your IRS tax debt for less than the full amount owed. With an OIC, you offer to pay a portion of your taxes right away and the IRS agrees to drop the remaining balance. This payment option comes with a number of strict eligibility requirements, as well as a $186 non-refundable application fee.
When considering your offer, the IRS looks at your income, expenses, asset equity, and ability to pay. Your OIC will be rejected if you are able to pay your full tax debt through a short-term extension or long-term installment plan. The IRS recommends that you “explore all other payment options before submitting an offer in compromise.” For more information, see the IRS Form 656 Booklet (Offer in Compromise).
Request a Temporary Delay of the IRS Collection Process
If the IRS determines that you are unable to pay any of your tax debt, your account may be reported as “currently not collectible.” This means that the IRS will temporarily delay collection until your financial situation improves. However, this does not reduce the amount you owe – it just indicates that the IRS has decided you cannot afford to pay at this time. In fact, your tax debt will continue to increase because the IRS charges penalties and interest until your balance is fully paid.
You can request a temporary delay of collection by contacting the IRS at 1-800-829-1040 or by calling the phone number shown on your tax notice/bill. Before your request can be approved, you may need to submit a Collection Information Statement (Form 433-A, Form 433-B, or Form 433-F) and provide proof of your financial status (e.g., your income, assets, and expenses). Keep in mind that the IRS may file a ‘Notice of Federal Tax Lien’ during a temporary delay period in order to protect its interest in your assets.
Request an Extension of Time to Pay (Undue Hardship)
As part of the IRS Fresh Start initiative, certain eligible individuals may request an extension of time to pay and have their late payment penalties waived. This option is reserved for taxpayers who would experience “undue hardship” if forced to pay their taxes by the due date. It can apply to the tax shown on your return or a tax deficiency, which is the amount owed after your return is reviewed by the IRS.
According to the IRS, “the term ‘undue hardship’ means more than an inconvenience.” You must give proof that you will suffer a significant financial loss if you pay your tax on the due date. For example, if you would need to sell property at a loss in order to pay your taxes, that could be considered “undue hardship.” Whatever your reason is for the extension, you must provide the IRS with a detailed explanation.
To make a request, file Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship). If your extension is approved, it can give you up to 6 more months to pay the tax shown on your return, or up to 18 months to pay a tax deficiency.
NOTE: You must file all required tax returns before you can apply for any payment agreement with the IRS.
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- 5 Tips for People Who Owe Taxes
- IRS Tax Debt Relief