What to Do If You Owe the IRS and Can’t Pay

The IRS would prefer working with you to ensure you’re meeting your legal obligations than punish you regardless of their status as a federal institution that instills fear and collects debt. If you’re in a state where you’re unable to pay your tax debts, there’s no need to be afraid. Having a proper understanding your options will help you better determine the best course of action when you owe the IRS but can’t afford to pay the bill. Here are a few common options for taxpayers with an outstanding balance they’re struggling to pay.

1.  Apply for a Hardship Extension

Hard times are simple part of life, and the IRS can aid you in your financial troubles through a hardship extension. Available to taxpayers who are facing undue hardship, this extension offers up to 6 additional months to the standard repayment period. For an extension based on hardship, qualification is dependent upon evidence that shows that paying your tax balance in full would cause extreme financial hardship. In the words of the IRS: “The term ‘undue hardship’ means more than an inconvenience. You must show you will have a substantial financial loss if you pay your tax on the date it is due.” Action required: As soon as you notice an outstanding tax liability that you cannot pay, you should file IRS Form 1127. Within this application form, you will be expected to give a detailed account of your reason for applying and any supporting documentation that can confirm your claim. Fees or cost: Applying for an Extension of Time for Payment of Tax Due to Undue Hardship is free. Once accepted, you will face no penalties, but interest will accrue in the months leading up to full payment.

2.  Set up a Payment Plan

To make it easier for taxpayers to afford and repay their tax debts, the IRS offers payment plans by dividing your tax bill into monthly installations; you can prevent the jarring financial impact of paying the full lump sum at once. IRS payment plans are made directly with the federal agency. There are two types of payment plans you may be eligible for: short-term and long-term. Short-term payment plans (120 days or less), grants taxpayers up to four months to repay their debts in four equal payments. Short-term payment plans are only available to those who owe a maximum of $100,000 in combined taxes, penalties, and interest. Long-term payment plans, also known as installment agreements, can allow up to 72 months of repayment time. These plans are available to those who have a debt of $50,000 or less in combined taxes, penalties, and interest. The type of payment plan agreement you may be eligible for depends on your particular situation. Factors like how much you owe and how soon you can pay the balance are typically the most significant determining elements. After receiving approval from the IRS, it’s absolutely important that you stay on track and pay your monthly bill on time. The IRS has the authority to void an agreement if you ignore to comply with the terms and conditions of your contract. Action required: In order to apply for either form of IRS payment plan, you’ll need to fill out Form 9465. For installment agreements over $50,000, you may need to submit supporting financial documentation. Fees or cost: Short-term payment plans are usually free to apply for and free to set up, however, interest will accrue on your unpaid balance at a rate of 0.25% per month until your full balance is totally recouped. Additional fees apply if you make your monthly plans via credit or debit card payment. As for non-direct debit long-term installment agreements, the application fee is $149. This amount is reduced to a reimbursable $43 application fee for those who qualify as low-income. For auto-debit long-term installment agreements, the application fee is reduced to $31. This amount is fully reimbursable for those low-income applicants. To determine if you are eligible or to apply for a low-income application fee, submit Form 13844.

3.  Request a temporary collection delay

Just like applying for an extension due to hardship, if paying off your tax bill would prevent you from affording basic necessities such as food and housing, you may be qualified for a temporary collection delay. This request would offer some extra time and leeway as your financial situation improves. If the IRS supports your claim and grant your request, they can mark your account as not collectible and place a temporary delay on collection. It’s very vital to distinguish that a not collectible status doesn’t wipe away your outstanding tax debts; it simply means the IRS has granted time for your circumstances to heal before relinquishing the hold. Bear in mind that a temporary delay does not suspend your debts from collecting interest and penalties. Your tax bill will increase for as long as it goes unpaid. A temporary collection holdup also authorizes the IRS to file a tax lien against you. Generally speaking, this should be a last resort alternative. Action required: To request a temporary collection delay, you may be asked to submit a Collection Information Statement that takes form as Form 433-F, Form 433-A or Form 433-B. You may also be asked to provide evidence of financial status to make your case to the federal agency. Fees or cost: There’s no charge to apply for a temporary collection delay.

How to Resolve Your Tax Debt

1. Contact a Tax Professional

Dealing with your tax responsibilities can be devastating, stressful, and confusing. There’s plenty of paperwork to be filed and documents to be read to ensure you’re making the best legal decision for you and your finances. Instead of subjecting yourself to the anxiety and chaos of your complicated tax situation, turn to a tax professional.  

2. Consider an Offer in Compromise

An Offer in Compromise works as a way for you to settle your tax debts for less than the full amount you owe. This option is very useful for those who aren’t able to pay their full liability if doing so causes financial hardship. In essence, an OIC can help manage or get rid of an UN affordable tax burden. Pre-Qualifier tool is fast and easy 6-step questionnaire that can confirm or deny your eligibility in minutes. To fully assess that paying your tax bill in full would cause financial hardship, the IRS accounts for a few key considerations; ability to pay, income, expenses, and asset equity.

3. Sign Up for the IRS Fresh Start Program

The IRS Fresh Start Program, commenced in 2008, was structured to allow taxpayers to manage their tax debts over the course of a six-year repayment period. Accessible to those who owe up to $50,000 in taxes, the IRS Fresh Start Program successfully simplifies the process of recouping massive tax debts. Each month, qualified taxpayers are expected to make payments based on their current income and the worth of their liquid assets. tax debts.