Options When You Can't Pay Your Taxes

It's that time of year. Your tax returns are due on April 15th, but instead of a refund, you owe Uncle Sam. You are low on cash and can't pay. Nobody wants to get on the bad side of the IRS, so what are your alternatives?

Don't Delay Filing

Even if you owe more money than you can pay, you should still file your tax return to avoid incurring a penalty for failure to file. If you don't file, IRS employees prepare your return for you, and they may not give you credit for all the exemptions and deductions you're entitled to receive. Then they'll send you a bill that includes the tax due, penalties and interest.

Obviously, paying your taxes on time, and in full, costs you the least amount of money. If you don't file, or file late, penalties and interest could increase your tax bill by 25% or more. If you can't pay your entire tax bill, pay as much as possible to reduce penalties and interest.

You have a number of options if you can't pay your bill immediately:

  • Extension of time to pay
  • Installment agreement
  • Savings or loans
  • Offer in compromise

If you ignore your tax bill, it won't go away. The IRS will file a Notice of Federal Tax Lien that can ruin your credit rating. The IRS can also levy your bank accounts and wages or take your assets to satisfy the tax debt.

Request an Extension of Time to Pay

You may qualify for an extension of time to pay your tax debt. Depending on your situation, the IRS may grant an extension from 30 to 120 days. The penalties and interest you incur through an extension of time to pay are generally less than if you ask for an installment plan.

Ask for an Installment Plan

Ask the IRS for an installment agreement that will allow you to pay your taxes in monthly payments. If you owe $25,000 or less in combined tax, penalties and interest, you can complete the Online Payment Agreement (OPA) on the IRS Web site.

If you owe more than $25,000, you may still qualify for an installment agreement, but you'll be required to complete a Collection Information Statement (CIS) so the IRS can determine the amount you can pay based on your monthly expenses.

Savings or Loans

An alternative to asking the IRS for an extension of time to pay or an installment plan would be to use your savings or borrow the money. It's preferable to obtain a bank or home equity loan, or to use a low-interest credit card, than to request a payment agreement from the IRS.

Interest and penalties continue to mount while making your payments on an IRS installment plan. The interest you pay on a loan or credit card will likely be lower than the combined interest and penalties imposed by the IRS.

Settle the Debt with an Offer in Compromise

An offer in compromise is an agreement between you and the IRS to settle your tax debt for less than you owe. However, if you have the money to pay, either in a lump sum or through a payment plan, the IRS won't accept an offer in compromise. Generally, an offer in compromise will only be accepted if:

  • It's doubtful you can pay the tax you owe within the time the IRS has to collect the debt
  • There's a legitimate doubt that the tax assessed is correct, or
  • An exceptional circumstance exists where collection would create a severe economic hardship

If you think you may qualify, you must submit the application for an offer in compromise along with the fee.

Better Luck Next Year

Generally, if you owe money to the IRS at the end of the year, it's because your employer isn't withholding enough tax from your paycheck. Make sure you report the correct number of exemptions on your W-4 form. You must ensure that your employer withholds the correct amount of tax from your salary so you do not owe any tax at the end of the year. You can also make quarterly estimated tax payments in addition to the taxes withheld from your paycheck.

If your income is not subject to employer withholding, e.g., you're self-employed, then you aren't making the right amount in your quarterly estimated tax payments to the IRS during the year. The IRS will help determine the correct amount to be submitted each quarter.

Additional detailed information can be found on the IRS Web site, along with forms, instructions and contact information for IRS taxpayer assistance representatives.

Questions for Your Attorney

  • Does a payment arrangement such as an installment payment plan or an offer in compromise appear on credit reports? If so, how harmful is such an item to my credit score?
  • My former spouse and I owe taxes for years when we were married and filed joint returns. How does the IRS handle payment options when a couple divorces? I don't think my former spouse will be cooperative.
  • How long does it take the IRS to make a decision on a request for an alternate payment arrangement?
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