What Do I Do If I Can’t Pay My Taxes?

Discovering you owe the Internal Revenue Service (IRS) money that you cannot afford to pay can be stressful. It is important to understand that the IRS has established clear pathways for taxpayers in this situation. The most constructive action is to address the issue head-on rather than ignoring it. Proactively engaging with the process is the first step toward resolving your tax liability, as the federal tax system includes several programs to assist individuals facing financial difficulties.

Immediate Actions When You Cannot Pay

When you realize you cannot pay your tax bill, the first step is to file your tax return by the deadline, regardless of your ability to pay. Delaying filing is a mistake because the IRS imposes two separate penalties: one for failing to file and one for failing to pay. The failure-to-file penalty is 5% of the unpaid taxes for each month a return is late, capped at 25% of your unpaid tax bill. The failure-to-pay penalty is less severe, accruing at 0.5% of the unpaid taxes per month, also capped at 25%. By filing on time, you avoid the much larger failure-to-file penalty.

For those who can pay their tax liability in the near future, a short-term payment extension is an option. The IRS allows up to 180 additional days to pay a tax bill in full, although interest and the failure-to-pay penalty will continue to accrue during this period. This option is suitable for individuals expecting funds from a specific source, like a bonus or sale of an asset. This short-term solution can be requested directly through the IRS website or by phone and does not require the extensive financial disclosures of long-term plans.

IRS Tax Relief and Payment Programs

Installment Agreement

For those who cannot pay their tax debt within the 180-day extension period, an Installment Agreement (IA) is a common long-term solution. An IA allows you to make monthly payments for up to 72 months. While an IA is active, interest and late-payment penalties continue to accumulate on the unpaid balance, though the late-payment penalty rate is often reduced to 0.25% per month.

A guaranteed installment agreement is available to taxpayers who owe $10,000 or less, have filed all required returns, and have not had an installment agreement in the previous five years. A streamlined installment agreement is available for those who owe a combined total of up to $50,000. For balances between $25,001 and $50,000, the IRS prefers payments be made through a Direct Debit Installment Agreement.

Offer in Compromise

An Offer in Compromise (OIC) allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than what they originally owed. This option is granted when a taxpayer’s financial situation suggests that paying the full tax debt is highly unlikely. The IRS evaluates an OIC application based on a review of the taxpayer’s ability to pay, including their income, expenses, and asset equity. The agency uses formulas based on national and local standards for living expenses to determine a taxpayer’s collection potential.

The IRS accepts an OIC under three circumstances: Doubt as to Collectibility, Doubt as to Liability, or Effective Tax Administration. To apply, you must have filed all required tax returns and made all required estimated tax payments. The IRS requires a non-refundable $205 application fee and an initial payment, though this may be waived for low-income taxpayers. If the IRS accepts the offer, you must comply with all tax laws for the next five years.

Currently Not Collectible Status

When a taxpayer’s financial situation is so severe they cannot afford to pay their tax debt or basic living expenses, the IRS may place their account in Currently Not Collectible (CNC) status. This is a temporary suspension of collection activities, so the IRS will stop sending notices and will not levy assets or garnish wages. This status is for individuals experiencing significant hardship, such as unemployment or having income that only covers essential living costs.

CNC status does not eliminate the tax debt, and penalties and interest will continue to accrue. The IRS will also keep any future tax refunds and apply them to your debt. The agency periodically reviews your financial situation to determine if your ability to pay has improved, and if so, can remove the CNC status.

Required Information and Forms for IRS Programs

For an Installment Agreement

To request a payment plan by mail, you will need to complete and submit Form 9465, Installment Agreement Request. This form requires personal information, the total tax you owe, and the specific tax year(s). You must also propose a monthly payment amount you can afford and a preferred due date. Form 9465 can be attached to your paper-filed tax return or submitted separately.

For an Offer in Compromise or CNC Status

Applying for an OIC or requesting CNC status requires a detailed financial disclosure. This information is collected through the Collection Information Statement, either Form 433-A for individuals or Form 433-F. These forms require you to list all assets, including bank accounts, stocks, real estate, and vehicles. You must also provide a detailed breakdown of your monthly income and living expenses.

In addition to the Collection Information Statement, an OIC application must include Form 656, Offer in Compromise. This form outlines the legal terms of your offer, the total amount you are offering, and the payment terms. The entire application package is often referred to as the Form 656 booklet.

The Process for Requesting a Payment Solution

Online Application

The most efficient method for many taxpayers is the IRS’s Online Payment Agreement (OPA) tool. The online application can be used for both short-term and long-term plans, provided you have filed all required tax returns. A short-term payment plan of up to 180 days is available for those who owe less than $100,000. For a long-term installment agreement, the online tool can be used by individuals who owe $50,000 or less. Upon submission, the OPA system provides immediate notification of approval and details about setting up payments.

Mail Submission

For those who do not qualify for the online application or who prefer to file by paper, submission is by mail. After completing the required forms, mail them to the IRS address specified in the form instructions. It is recommended to send these documents via certified mail with a return receipt requested. For an OIC, you must include the application fee and initial offer payment unless you qualify for a waiver. Expect a waiting period for processing, which can take several months. The IRS will send a letter confirming receipt and may contact you for additional information.