What If I Owe Taxes and Can’t Pay?

Owing taxes without immediate means to pay can be stressful. Many individuals find themselves in this challenging situation, but viable solutions exist. The Internal Revenue Service (IRS) offers several avenues for taxpayers to address tax liabilities when facing financial difficulty. Understanding these options and the steps involved can help mitigate potential issues and lead to a manageable resolution.

Understanding the Consequences of Non-Payment

Failing to pay taxes by the deadline leads to financial repercussions. The IRS imposes penalties and charges interest on unpaid balances. The “failure to pay” penalty is 0.5% of unpaid taxes for each month or part of a month, capped at 25%. This penalty applies when taxes are not paid by the due date. [26 U.S. Code § 6651]

Interest accrues on underpayments from the tax due date until the balance is fully paid. The interest rate is determined quarterly, typically the federal short-term rate plus three percentage points, compounding daily. [26 U.S. Code § 6601] Both penalties and interest can significantly increase the total amount owed, making it more challenging to resolve the debt. Prompt action is important to avoid the escalation of these charges.

Exploring IRS Payment Options

When a taxpayer cannot pay their full tax liability immediately, the IRS offers several relief programs. Each option caters to different financial situations and has specific criteria. Understanding these options helps individuals choose the most suitable path.

A short-term payment plan offers up to 180 additional days to pay a tax balance in full. This option suits taxpayers who anticipate having funds within this timeframe and owe less than $100,000 in combined tax, penalties, and interest. Interest and penalties continue to accrue during this period, but there is no setup fee.

An installment agreement allows monthly payments over a longer period, generally up to 72 months. This plan is available to individuals who owe $50,000 or less in combined tax, penalties, and interest and have filed all required tax returns. Interest and penalties continue to apply until the debt is fully satisfied. Setting up payments via direct debit can reduce user fees.

An Offer in Compromise (OIC) allows taxpayers to resolve their tax liability for a lower amount than originally owed. This option is for taxpayers facing significant financial hardship who cannot pay their full tax debt. The IRS evaluates OIC requests based on the taxpayer’s ability to pay, income, expenses, and asset equity. An OIC may be accepted if there is doubt as to collectibility, or if collecting the full amount would create an economic hardship.

Currently Not Collectible (CNC) status is a temporary measure for taxpayers experiencing severe financial difficulty. Under CNC status, the IRS delays collection efforts, recognizing the taxpayer cannot meet basic living expenses while paying their tax debt. While in CNC status, the debt does not disappear, and interest and penalties continue to accrue. The IRS may periodically review the taxpayer’s financial situation; if circumstances improve, collection efforts may resume. This status provides a reprieve, but it is not a permanent solution.

Gathering Information for Payment Relief Requests

Before requesting payment relief from the IRS, taxpayers must compile comprehensive financial information. This documentation allows the IRS to assess the taxpayer’s ability to pay. Thorough preparation can expedite the review process and increase approval likelihood.

Detailed income records are essential, including recent pay stubs, bank statements, and profit and loss statements for self-employed individuals. Documentation of all monthly expenses is also necessary, covering housing, utilities, food, medical, and transportation costs. Taxpayers must list all assets, such as cash, investments, real estate, and vehicles, along with liabilities like outstanding debts and credit card balances. This complete financial picture helps the IRS understand the taxpayer’s economic situation.

Taxpayers should also prepare a clear explanation detailing the circumstances that led to their inability to pay. This narrative provides context for the financial data and helps the IRS understand the taxpayer’s situation. Be specific and honest in this explanation.

Specific IRS forms are required for different payment arrangements. For an Installment Agreement, Form 9465, Installment Agreement Request, is used. Those seeking an Offer in Compromise complete Form 656, Offer in Compromise, along with a Collection Information Statement (Form 433-A (OIC) for wage earners and self-employed individuals or Form 433-B (OIC) for businesses). For CNC status, the IRS requires a Collection Information Statement, such as Form 433-F or Form 433-A. These forms are available on the IRS website and must be completed accurately using the gathered financial data.

Submitting Your Payment Arrangement Request

Once all necessary information is gathered and the appropriate forms are completed, submit the payment arrangement request to the IRS. The submission method varies by payment option. Following the correct procedure helps ensure the request is processed efficiently.

For short-term payment plans, taxpayers can often make requests through IRS Direct Pay, by phone, or by checking a specific box on their tax return when filing. This method provides a quick way to secure a brief extension for payment. The online portal for IRS Direct Pay allows direct payments from a bank account.

Installment Agreements can be requested online using the IRS Online Payment Agreement (OPA) tool, which provides immediate notification of approval for eligible taxpayers. Alternatively, taxpayers can mail Form 9465, Installment Agreement Request, to the IRS. Online submission is generally recommended as it can result in lower user fees.

For an Offer in Compromise, taxpayers must mail Form 656, Offer in Compromise, along with the relevant Collection Information Statement (Form 433-A (OIC) or Form 433-B (OIC)) and all supporting documentation. This submission typically includes a non-refundable application fee, unless a low-income certification is met, and an initial payment based on the chosen payment option. The IRS will then evaluate the comprehensive package.

Currently Not Collectible (CNC) status is usually determined through direct communication with the IRS, often after providing financial information. Taxpayers typically contact the IRS by phone to discuss their financial hardship and provide the necessary details, which may involve completing a Collection Information Statement. After submission, the IRS typically takes several weeks or months to process requests, depending on the complexity of the case. Taxpayers should anticipate potential IRS follow-up, which may include requests for additional information or clarification. It is important to continue complying with all tax filing requirements and making any agreed-upon payments during the review period.