What Do I Do If I Can’t Pay My Taxes?

Facing a tax bill you cannot afford is a common and often overwhelming situation. Ignoring the issue can lead to significant problems with the Internal Revenue Service (IRS), including mounting penalties and collection actions. Fortunately, the IRS offers various solutions for taxpayers who are unable to pay their taxes in full, emphasizing proactive engagement rather than avoidance.

Understanding Penalties and Interest

When tax payments are delayed, the IRS assesses two main types of additions: the failure-to-pay penalty and interest. The failure-to-pay penalty, under 26 U.S. Code § 6651, is 0.5% of the unpaid taxes for each month or part of a month that taxes remain unpaid. This penalty is capped at 25% of your unpaid tax liability. Interest, under 26 U.S. Code § 6601, is charged on underpayments and accrues daily on the unpaid balance, including any penalties. The interest rate can fluctuate each quarter.

These charges are distinct from the failure-to-file penalty. This penalty is significantly higher, 5% of the unpaid taxes for each month or part of a month a tax return is late, also capped at 25%. Filing your tax return on time, even if you cannot pay the full amount, is crucial to avoid this substantial penalty. Both the failure-to-pay penalty and interest continue to accrue until the tax liability is satisfied.

IRS Payment Programs and Required Information

The IRS provides programs to assist taxpayers who cannot pay their tax obligations. Each requires specific financial information to determine eligibility. Understanding these options and the data needed is the first step toward resolution.

Installment Agreement

An Installment Agreement allows taxpayers to make monthly payments over a set period, up to 72 months. To qualify, you must have filed all required tax returns. For individuals, if the total amount owed is $50,000 or less (including tax, penalties, and interest), you can apply online or submit Form 9465, Installment Agreement Request.

Form 9465 requires basic identifying information:
Name
Social Security number
Address
Phone number
Tax form and year for which you owe taxes

You will also need to propose a monthly payment amount and preferred payment day, ensuring the liability can be paid within the allowed timeframe. For balances exceeding $50,000, Form 9465 must be mailed, often with Form 433-F, Collection Information Statement, which details your financial situation.

Offer in Compromise (OIC)

An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for a lower amount than originally owed. This option is considered when paying the full liability would cause significant financial hardship. The IRS considers OICs based on three criteria: doubt as to collectibility (inability to pay), doubt as to liability (dispute about amount owed), or effective tax administration (economic hardship or unfairness).

To apply for an OIC, submit Form 656, Offer in Compromise, along with a detailed financial statement: Form 433-A for individuals, or Form 433-B for businesses. These forms require extensive financial data, including income, expenses, assets, and liabilities, to assess your ability to pay. Supporting documentation, such as pay stubs, bank statements, and asset appraisals, will be necessary to substantiate the information.

Currently Not Collectible (CNC) Status

Currently Not Collectible (CNC) status is a temporary measure where the IRS determines you cannot pay your tax debt due to financial hardship. While in CNC status, the IRS temporarily ceases collection activities, but interest and penalties continue to accrue, and the debt does not disappear. To demonstrate eligibility for CNC, you must provide detailed financial information proving inability to meet basic living expenses. This involves completing Form 433-F, Collection Information Statement, which outlines your income, expenses, assets, and liabilities. The IRS will review this information, often requesting proof like pay stubs, bank statements, and utility bills, to assess economic hardship.

Submitting Your Request and What Happens Next

After gathering all necessary financial information and completing the appropriate forms, submit your request to the IRS. The method of submission can vary depending on the specific program and the amount owed. For Installment Agreements, if your total tax debt is $50,000 or less, you can apply online through the IRS website, which may offer a reduced user fee. If your debt exceeds this amount, or if you prefer, Form 9465 can be mailed to the IRS, either with your tax return or separately. When mailing forms, use certified mail with return receipt to ensure proof of delivery.

For Offers in Compromise, completed Forms 656 and 433-A or 433-B, with all supporting documentation, must be mailed to the specific IRS facility indicated in the Form 656-B booklet, as addresses vary by location. An application fee and an initial payment toward your offer are required at submission, unless you qualify for low-income certification. For Currently Not Collectible status, Form 433-F can be mailed, often with Form 9465 if you are also requesting an installment agreement.

What Happens Next

After submission, the IRS begins a review process. This initial phase for an OIC takes about 1-2 months, where the IRS checks for completeness and confirms all required tax returns are filed and payments are current. An IRS representative may contact you for clarification or additional information. For OICs, an interview might be requested to discuss your financial situation. The decision-making period for an OIC can range from six to twelve months, during which the IRS evaluates your ability to pay.

If an agreement is reached, the IRS will communicate its decision, outlining the terms of the payment plan or settlement. Maintaining compliance with the agreed-upon terms is important. This includes making all monthly payments on time, filing all future tax returns by the due date, and paying any future taxes in full. Failure to comply can result in the default of your agreement, leading to the reinstatement of the original tax debt, penalties, and interest, and potentially renewed collection actions. If your request is denied, you have the right to appeal the decision. If an OIC is rejected, you have 30 days to file Form 13711, Request for Appeal of Offer in Compromise, to initiate the appeals process. The Collection Appeals Program (CAP) and Collection Due Process (CDP) are avenues available for appealing various collection decisions, including rejected payment agreements.

Seeking Professional Assistance

Navigating tax debt and IRS procedures can be challenging, making professional assistance valuable. Qualified tax professionals, such as Enrolled Agents (EAs), Certified Public Accountants (CPAs), or tax attorneys, possess in-depth knowledge of tax laws and IRS protocols.

These professionals can provide support, from assessing your financial situation and identifying the most suitable payment program to preparing and submitting necessary forms and documentation. They can negotiate directly with the IRS on your behalf, ensuring your rights are protected and advocating for the most favorable resolution. For intricate cases, such as those involving significant amounts, complex financial situations, or the need for an Offer in Compromise, a professional’s expertise can be beneficial in maximizing your chances of a successful outcome and potentially reducing the amount owed. They can also help minimize penalties and interest and guide you through the appeals process if an initial request is denied.