7 Realistic Tax Options If You Can’t Pay Your IRS Tax Bill
Do you have a tax bill you can’t afford to pay? Are you worried about paying your next tax bill? If you ignore the situation, it can get out of control quickly. However, the IRS is willing to work with most taxpayers who can’t pay taxes in full. Many states have resolution frameworks for taxpayers in need.
To help people who cannot afford to pay their taxes, the IRS and many states offer different resolution options. To qualify for many of these options, you must apply and meet specific criteria.
Here’s a look at the most common options offered by the IRS as well as a few un-official options you may want to consider. The IRS usually requires that you file tax returns due before setting up an agreement with the IRS (and most states do too). Even if you cannot pay what your tax return states you owe, always file because the penalty for not doing so is 10x the penalty for not paying on time.
Official IRS Alternatives to Paying Taxes in Full or Late
If you need a few months to pay, request a 120-day (4 months) payment agreement. It is similar to setting up an installment agreement (discussed below) in that you will accrue interest and penalty charges. However, there is no fee to set it up. You can apply online as long as you owe less than $100,000.
If you cannot pay in full, but you can make a payment every month to the IRS, an installment agreement (IA) is a great option. An IA, also known as a tax payment plan, lets you pay off your tax debt in monthly payments. There are different plans based on how much you owe and how long you need. Here are the main options:
It is the quickest payment plan to obtain. It is for taxpayers who owe less than $10,000 and can pay back the entire amount in three years. The IRS guarantees it with a few qualifications to meet.
This installment agreement is for taxpayers who owe $100,000 or less. It allows you to pay off your tax debt in up to 84 months. If you owe less than $50,000, you can apply online. Otherwise, you need to call the IRS directly, work with a tax professional, or fill out form 9465 and mail it to the IRS.
If you owe $100,000 or more, you will probably have to either pay down the balance or verify financial information to obtain an installment agreement above $100,000. To qualify, you have to provide detailed financial statements to the IRS. The agency wants to verify that you can make payments as scheduled.
If you can’t afford the minimum monthly payment on an installment agreement above, you may look into a partial payment installment agreement (PPIA). With this resolution, you make monthly IRS payments based on what you can afford to pay. If the tax debt for a particular tax year is not paid off before the date the IRS can no longer legally collect (aka CSED date), the tax debt falls off. You must submit detailed financial records to qualify.
An offer in compromise is a tax settlement method where you settle your tax liabilities for less than you owe. To qualify, you need to prove that you will never be able to pay your tax bill or that the assessed tax was incorrect. The IRS is very strict with this option, and it can be hard to obtain without professional tax help.
Hardship status is when the IRS declares your account uncollectible. To qualify, you must prove that you don’t have any resources to cover your tax bill. The IRS has its own set of guidelines on how much people need to live. If you have less than the amount the IRS deems necessary for food, clothing, rent, transportation, etc., you may be able to obtain hardship status. In many cases, if you have 25 dollars or less in disposable income per month, the IRS will grant you a CNC status.
Once you apply, the IRS reviews your situation. If the agency decides to approve a hardship status, it stops all collection activity. It is a temporary designation. The IRS revisits your account every year or 2 years, and if your financial situation improves, you have to pay.
Non-IRS Sponsored Alternatives to Pay Taxes in Full
5) Borrow From Family and Friends
If you have friends or family who are willing to help, you may want to ask them for a loan. It can be especially useful when you need short-term help. For instance, if you’re expecting a payment from a client, but your taxes are due before that, you may want to borrow from friends and family.
6) Take Out a Loan
You can use a loan to cover your tax liability. Make sure the interest rate is less than the interest rate you would pay with an IRS payment plan. The IRS’s interest rates change with the Federal short-term rate. Intuit provides an updated quarterly interest rate chart.
If you are considering bankruptcy for the elimination of tax debt, understand whether your tax debt is dischargeable by speaking to a bankruptcy attorney. Bankruptcy negatively impacts your credit score for years, and you cannot always discharge taxes in bankruptcy. The rules vary based on the chapter you are filing. Chapter 7 bankruptcy does provide a means to eliminate tax debt but qualifications exist, and not all taxes qualify.
These are the two most common options:
With Chapter 7, you must liquidate all non-essential assets and use the funds to pay down your debts; any remaining debts owed, the court discharges. Tax debt can only be discharged if it meets specific criteria or rules. If you are considering this as an option, it is best to speak with a bankruptcy attorney.
With Chapter 13, you make payments on your debts for three to five years. In some cases, if you have income tax debt that is old enough to be considered a nonpriority tax obligation, it can be discharged.
No matter what you do, always make sure you file even if you cannot pay your taxes in full. The penalties for filing late are significantly worse than the penalties for paying late.
Regardless of your specific financial situation, there is a way for you to work with the IRS or State. There are even more options than the ones outlined above. If you owe federal or state taxes and can’t pay in full, it is a good idea to work with a tax professional. It’s critical to get ahead of your problem to avoid unnecessary penalties, interest, levies, garnishment or tax liens.