IRS Payment Extension: Extension to Pay Using IRS Form 1127
You can use Form 1127 to request more time to pay your taxes due to financial hardship. When you submit the form, you will need to attach information about your assets, liabilities, income, and expenses to prove that paying the tax would cause you undue hardship.
The IRS will not charge the late payment penalties if they approve your application for the duration of your extension. You will still have to pay your full tax bill when your extension runs out, and interest will accrue for the length of your extension.
When to Apply for a Tax Payment Extension Due to Undue Hardship
Timing is critical when submitting Form 1127. If you don’t send the form by the deadline, you won’t be able to request a payment extension, and you’ll need to consider other tax relief strategies.
The deadline to submit Form 1127 is either of the following dates:
- For tax shown on a return, the deadline is the due date of the tax return, not including extensions.
- For tax assessed as a deficiency, the deadline is the due date for paying the deficiency amount.
Requirements When Submitting Form 1127
You must complete Form 1127 and attach the following as supporting documentation:
- A full statement of your assets and liabilities at the end of the previous month.
- An itemized list of your income and expenses for each of the three months before the due date of the tax.
You need to provide this information to prove that paying your tax would cause undue hardship. An “undue hardship” goes beyond a mere inconvenience. You must show that you will experience a substantial financial loss if you pay your taxes by the due date. You also need to be specific about the type of hardship you would encounter.
For example, if you can sell assets at fair market value to pay your taxes, this may not qualify as an undue hardship. If you can borrow funds to pay your tax debt—such as by obtaining a home equity loan—the IRS may not view this as an undue hardship.
However, if you need to sell assets for less than their market value to get the money and you can’t get a loan, you may satisfy the undue hardship requirement. Consult with a tax attorney to get help determining whether you meet the undue hardship condition.
Where to Submit the Application for a Tax Payment Extension
Submit the completed Form 1127 with supporting documentation to your local IRS advisory group. Your legal residence or principal place of business will determine which advisory group address you should use.
See Publication 4325 to find which advisory group address you should use based on your location.
How Long is the Tax Payment Extension?
You must fill in your desired extension period as part of your application. For tax shown on a return, the extension period can be up to six months after the due date of your tax return, not including any filing extensions.
For tax assessed as a deficiency, your extension period can be up to 18 months from the payment due date. You may receive an additional 12-month extension in exceptional cases. If the tax deficiency were a result of your negligence or tax fraud, the IRS would not grant a payment extension.
Interest will continue to accrue during your payment extension period. You will not be charged any late payment penalties during the extension period, but the IRS may assess if you don’t make payment once your extension is over.
What Penalties Can You Avoid By Getting a Payment Extension?
You can avoid the failure-to-pay penalty if you are granted a payment extension. This penalty accrues at 0.5% of your unpaid tax liability each month, up to a maximum of 25% of your unpaid taxes.
You still need to file your return on time to avoid another tax penalty—the failure-to-file penalty. This penalty is more severe and accrues at a rate of 5% of your unpaid taxes each month, up to a maximum of 25% of your unpaid tax liability. You can also file a Form 4868 to get a six-month extension to file your tax return.
Interest accrues on your unpaid balance even if you receive a tax payment extension. The IRS sets interest rates on a quarterly basis.
Alternatives to a Payment Extension
A payment extension only offers a temporary reprieve from your tax problems. You will still owe the taxes (plus interest), and you will eventually need to develop a plan to get rid of your tax debt.
If you expect to have the money to pay your tax debt within the next six months, a payment extension may be your best option. But if you don’t qualify for a payment extension or you want to look at more permanent ways to resolve your tax problems, consider some of these alternative tax relief strategies.
An IRS payment plan allows you to make monthly payments towards your tax debt. You can apply for a short-term payment plan if you can pay your whole tax liability within 120 days. There are a variety of other types of payment plans as well depending on the time needed to pay and the amount of taxes you owe.
Penalties and interest continue to accrue until you pay off your full balance. However, unlike a payment extension, a payment plan moves you closer to paying off your tax debt each month.
A payment plan can be a good idea if you don’t meet the undue hardship requirement for a payment extension or if you want to start paying off your back taxes now.
If the IRS places your account in CNC status, they won’t take any enforced collection actions against you. CNC status means you won’t have to worry about having your wages or bank accounts levied to pay off your back taxes.
You will need to show that paying your taxes would cause a financial hardship to receive CNC status. CNC status can last longer than a payment extension. However, penalties and interest continue to accrue while your account is in CNC status.
An OIC has several benefits:
- You can settle your tax debt for less than you owe.
- It’s a permanent tax debt solution.
- The IRS will consider your financial situation when deciding whether to accept your offer.
The IRS won’t accept an OIC if you have the ability to make payments, sell assets, or borrow money to pay off your tax debt. You will need to provide detailed information about your finances along with your offer.
Talk to a tax professional to get help deciding whether a payment extension or another tax relief strategy can help you resolve your tax problems.