What if I can’t pay my taxes?
If you can’t pay the taxes you owe, don’t panic. There are payment options available. Which one is right for you will depend on the amount owed, your financial situation, and the varying requirements and fees of each option.
Most importantly, be proactive!
When dealing with IRS debt, the most important thing is to take action. By reaching out to the IRS, or having your tax attorney do so on your behalf, you usually can avoid harsh collection actions such as bank account and wage levies. In some cases, the IRS may agree to waive some or all of the penalties, resulting in thousands of dollars of savings. If you receive letters from the IRS, open and read them. We have worked with many clients who missed important deadlines because they never read the letters sent by the IRS. It is important to understand that ignoring IRS tax debt will not make it go away. Moreover, most of the payment options discussed below work best if you are proactive.
In addition, always file your tax return on time and pay as much as you can with your filing. Failing to file your return only makes matters worse because the IRS will assess a failure-to-file penalty on top of the tax, interest, and failure-to-pay penalty that will already be due.
Step 1: Understand your financial situation.
To understand your options, you must determine the amount you reasonably can afford to pay each month. To do this, make a list of your income, assets, and living expenses. Using an IRS form, such as Form 433-A, will help ensure you include everything the IRS expects you to consider. Also, when reviewing your financial situation, consider whether you have another way of getting money to pay the IRS, such as through a loan from a bank or family member, or using available credit. In most cases, the combination of penalties and interest charged by the IRS is higher than the interest rate and fees charged by a bank or credit card company.
Step 2: Choose the payment option that’s right for you.
After completing your financial assessment, you likely will fall into one the following five situations:
- I can pay the full amount now.
If you have the funds available, you can make your payment with an electronic funds transfer, a debit or credit card, by mailing a check to the address listed in your bill, or with cash at your local IRS office.
- I can’t pay the full amount immediately, but will be able to pay it within 120 days.
If you can’t pay in full immediately, the IRS will allow additional time (up to 120 days) to do so. This is not a formal installment agreement, so no fees apply; but, penalties and interest will continue to accrue until the balance is paid in full. This agreement can typically be set up using the IRS’s online payment agreement application (“OPA”) or by calling the IRS at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).
- I can’t pay the full amount now, but I can afford to make monthly payments.
If you need to make monthly payments to pay off the tax, you can request an installment agreement by using the OPA application or by submitting Form 9465. Because this is a formal agreement with the IRS, you will be charged a user fee. The amount of the fee varies depending on your income level and how you choose to make payments. For example, if you use the OPA application to request an installment agreement, the user fee is $149; but, if you use the OPA application and agree to pay via direct debit, the user fee is only $31.
- I can barely afford to make monthly payments and I own few or no assets.
If you can’t pay in full and an installment agreement won’t work, you should consider applying for an offer in compromise (OIC). An OIC allows you to satisfy your debt for less than the full amount you owe. You will need to submit an application and generally must pay a fee and a portion of your offer up front. The IRS offers an OIC Pre-Qualifier Tool to help taxpayers determine if this option is right for them.
- I can’t make any payment now.
If you can’t make any payment toward your tax debt because it would prevent you from paying your basic living expenses, you can ask the IRS to place your account in currently-not-collectible (“CNC”) status until you are able to pay. If the IRS agrees that you cannot pay the tax and your basic living expenses, it will place your account on hold—meaning, all collection activity will stop—until your financial situation improves. Penalties and interest will continue to accrue while your account is in CNC status, and the IRS will periodically ask you to submit proof of your financial status to ensure CNC status remains appropriate.
Regardless of your situation, it is important to read and respond to all IRS notices. You have certain rights and protections that could be lost. If your situation is more complex than those described above or you need help understanding your options, please call the tax attorneys at Mosebach, Funt, Dayton & Duckworth. We would be happy to negotiate an IRS debt settlement on your behalf.