What Should I Do If I Owe Taxes to the IRS?

Individuals often find themselves owing taxes to the Internal Revenue Service (IRS). This can arise for various reasons, such as insufficient tax withholding from wages, income from self-employment, or gains from investments. Receiving a tax bill can be concerning, but it is important to remember that established procedures and options are available to address the obligation. Proactive engagement with the IRS is always recommended to mitigate potential financial implications. This article outlines the different methods for paying your tax bill and the solutions the IRS offers if you cannot pay the full amount immediately.

Methods for Paying Your Tax Bill

Taxpayers have several convenient options for submitting their full tax payment. IRS Direct Pay is an electronic method allowing payments directly from a checking or savings account. To use this free service, visit IRS.gov/DirectPay, select the payment reason, tax form, and period, then verify identity using prior tax return information before entering bank details and scheduling the payment. This service provides instant confirmation.

The Electronic Federal Tax Payment System (EFTPS) is another free electronic payment system. EFTPS requires prior enrollment, which takes five to seven business days as a Personal Identification Number (PIN) is mailed. Once enrolled, taxpayers can schedule payments up to 365 days in advance through the website or a voice response system, ensuring timely payments.

Taxpayers can also pay using a debit card, credit card, or digital wallet through IRS-authorized third-party payment processors listed on IRS.gov. These processors typically charge a processing fee, which can vary but averages around 1.85% for credit cards or a flat fee of $2-$3 for debit cards. Payments can be initiated online or by phone through these processors.

For traditional methods, checks or money orders can be mailed to the IRS. Payments should be made payable to the “United States Treasury” and include the taxpayer’s name, address, phone number, Social Security number (SSN) or Employer Identification Number (EIN), tax year, and related tax form or notice number. Send payments with the appropriate payment voucher to the correct IRS address.

Cash payments are also accepted at retail partners by first obtaining a payment barcode online through an authorized processor. There is typically a payment limit of $500 to $1,000 per transaction and a small fee, and these payments should be initiated well in advance of the due date.

IRS Payment Solutions

When a taxpayer cannot pay their tax bill in full by the due date, the IRS offers several solutions to help manage the debt. Each solution has specific requirements and application procedures.

Short-Term Payment Plan

A short-term payment plan, also known as an extension to pay, allows taxpayers up to an additional 180 days to pay their tax liability in full. This option is for those who can pay their taxes within this shorter timeframe. The IRS may grant this extension if the taxpayer demonstrates a good-faith effort to pay.

Taxpayers can typically make this request through their IRS online account or by calling the phone number on their tax bill or IRS notices. While interest and penalties continue to accrue during this extension, the failure-to-pay penalty rate may be reduced. There is no user fee to set up a short-term payment plan.

Installment Agreement

An installment agreement allows taxpayers to make monthly payments for up to 72 months. This option suits individuals needing more time than a short-term plan and who can commit to regular payments. Eligibility requires the taxpayer to owe under $50,000 in tax, penalties, and interest for individuals, or $25,000 for businesses, and to be current with all filing requirements. Before applying, taxpayers should gather detailed financial information, including their income, expenses, and assets, to propose a realistic monthly payment amount.

To apply, taxpayers can use the IRS Online Payment Agreement application, which often provides an immediate determination. If applying by mail, Form 9465, Installment Agreement Request, must be completed and sent to the IRS. The IRS charges a user fee for setting up an installment agreement, though this fee may be reduced or reimbursed for low-income taxpayers. Payments can be made via direct debit from a bank account, which incurs a lower user fee.

Offer in Compromise (OIC)

An Offer in Compromise (OIC) allows taxpayers to resolve their tax liability with the IRS for a lower amount than originally owed. This solution is for taxpayers facing significant financial hardship who cannot pay their full tax debt. Eligibility depends on the taxpayer’s ability to pay, income, expenses, asset equity, and overall financial situation. The IRS evaluates OIC applications based on “doubt as to collectibility,” “doubt as to liability,” or “effective tax administration.”

Preparing for an OIC requires extensive financial disclosure, including information about income, living expenses, and asset values on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. Supporting documentation, such as bank statements, pay stubs, and appraisals, must be provided. Submit Form 656, Offer in Compromise, with the application fee and an initial payment. The IRS will review the application and may request additional information to determine if the offer reflects the taxpayer’s true ability to pay.

Temporary Delay in Collection (Currently Not Collectible)

For taxpayers experiencing severe financial hardship, the IRS may determine their account is “Currently Not Collectible” (CNC). This status means the IRS agrees the taxpayer cannot pay their tax debt due to their financial condition. While in CNC status, the IRS temporarily stops collection efforts, but the tax liability, including penalties and interest, continues to accrue. This status is not a forgiveness of debt; it is a temporary pause.

To be considered for CNC status, taxpayers must provide proof of their inability to pay basic living expenses. This involves a thorough review of their income, expenses, and assets, similar to the financial information required for an OIC. Contact the IRS directly, often by phone, and provide financial documentation to an IRS representative. The IRS will then evaluate the information to determine if the taxpayer qualifies for this temporary relief.

Understanding Penalties and Interest

When taxes are owed and not paid by the due date, the IRS assesses penalties and interest. These charges encourage timely compliance. Understanding how they accrue highlights the importance of addressing tax debt promptly.

The Failure to Pay penalty, under Internal Revenue Code Section 6651, is typically 0.5% of the unpaid taxes for each month or part of a month, up to a maximum of 25%. This penalty applies even if an extension to file has been granted, as an extension of time to file does not grant an extension of time to pay. The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late, capped at 25%. This penalty is larger than the Failure to Pay penalty, highlighting the importance of filing on time even if the tax cannot be paid.

Accuracy-related penalties, under Internal Revenue Code Section 6662, can be imposed for a substantial understatement of income tax or negligence in preparing a return. This penalty is typically 20% of the underpayment attributable to the inaccuracy. Interest also accrues on underpayments of tax, under Internal Revenue Code Section 6601. The interest rate is determined quarterly and is the federal short-term rate plus 3 percentage points. Interest applies to the unpaid tax balance and any unpaid penalties until the balance is fully satisfied.

When to Seek Professional Tax Help

Navigating tax obligations, especially when facing a tax debt, can be complex. Consulting a tax professional is often beneficial, providing specialized knowledge and guidance. These professionals include Certified Public Accountants (CPAs), Enrolled Agents (EAs), and tax attorneys.

Seeking professional help is advisable for complex financial arrangements, such as significant business income, multiple investment streams, or international financial interests. When large tax debts are involved, a professional can help explore all available IRS solutions and negotiate on your behalf. They can also clarify intricate IRS forms and procedures, ensuring all documentation is correctly prepared and submitted.

Receiving official IRS notices or facing collection actions, like liens or levies, indicates a stage of tax debt where professional intervention can be particularly valuable. If considering an Offer in Compromise, a tax professional can assess the likelihood of success, help gather financial documentation, and present the case effectively to the IRS. In the event of an audit or an appeal, a tax professional can represent the taxpayer, communicate with the IRS, and protect their rights.