What to Do When You Owe Taxes to the IRS

When individuals owe taxes to the Internal Revenue Service (IRS), understanding the situation and taking prompt action is important. Addressing a tax bill proactively helps avoid complications, penalties, and interest. This article guides you through owing taxes, from understanding the bill to exploring payment options and addressing unfiled returns.

Understanding Your Tax Bill

Upon discovering a tax liability, the first step is verifying the amount owed. Taxpayers should review their filed tax returns, such as Form 1040, to ensure calculations are correct. The IRS sends notices, like a CP14 Notice, indicating a balance due with details on the amount, penalties, and interest. Individuals can also access their IRS online account to view tax records, payment history, and current balance.

Filing a tax return by the due date, even if the full tax amount cannot be paid, is important. Failing to file on time results in a penalty, 5% of unpaid taxes for each month a return is late, up to 25%. This “failure-to-file” penalty is higher than the “failure-to-pay” penalty, which is 0.5% of unpaid taxes per month.

Making a Direct Payment

Several methods exist to make a direct payment to the IRS:
IRS Direct Pay: A free service allowing payments directly from a checking or savings account via the IRS website without pre-registration.
Electronic Federal Tax Payment System (EFTPS): Requires prior enrollment and allows electronic federal tax payments.
Debit/Credit Card or Digital Wallet: Through approved third-party processors, though these involve a processing fee.
Check or Money Order: When mailing, include a payment voucher, such as Form 1040-V, for proper credit.

Exploring Alternatives for Payment

When immediate full payment is not feasible, the IRS offers several arrangements. An Installment Agreement allows monthly payments over a set period, up to 72 months. This agreement is available to individuals owing under $50,000, including tax, penalties, and interest. Interest and penalties continue to accrue, but at a reduced rate.

An Offer in Compromise (OIC) allows taxpayers to resolve their tax liability for a lower amount. This option is considered when the taxpayer cannot pay the full amount due, when there is a question about the assessed tax’s correctness, or if collection would cause economic hardship. To evaluate an OIC, the IRS requires financial information, submitted on Form 433-A or Form 433-B.

For taxpayers experiencing severe financial difficulty, a Temporary Delay in Collection, also known as Currently Not Collectible (CNC) status, may be an option. This status means the IRS has determined the taxpayer cannot pay without economic hardship. While in CNC status, the IRS temporarily suspends collection efforts, but interest and penalties continue to accrue. To qualify, taxpayers must provide documentation of their financial situation, including income, living expenses, and assets.

Implementing a Payment Arrangement

To apply for an Installment Agreement, individuals can use the IRS Online Payment Agreement tool on IRS.gov/payments. This tool provides an immediate response and sets up monthly direct debit payments. Alternatively, taxpayers can submit Form 9465 by mail. A user fee, which can be reduced for low-income taxpayers, may apply.

Applying for an Offer in Compromise (OIC) requires submitting specific forms and documentation. Taxpayers must complete Form 656, along with Form 433-A (for individuals) or Form 433-B (for businesses), to provide financial information. These forms, a non-refundable application fee, and an initial payment must be mailed to the appropriate IRS service center. The IRS reviews the application to determine if the offer is acceptable based on the taxpayer’s ability to pay.

To request a Temporary Delay in Collection status, taxpayers contact the IRS directly by phone or by responding to a notice. The taxpayer provides detailed financial information to support their claim of economic hardship. The IRS may require additional documentation, such as bank statements, pay stubs, and monthly expenses. Once approved, the IRS periodically reviews the taxpayer’s financial condition.

Addressing Unfiled Tax Returns

If owing taxes is compounded by unfiled returns, addressing them is an important first step. File all delinquent returns as soon as possible, even if the tax cannot be paid. This action helps mitigate the failure-to-file penalty, which accumulates rapidly. The statute of limitations for the IRS to assess additional tax does not begin until a return is filed.

To file past-due returns, gather necessary documents for those years, such as W-2 forms, 1099 forms, and other income or deduction records. Taxpayers can use tax software, consult a tax professional, or download past tax forms from the IRS website. Filing delinquent returns might initiate collection actions if a balance is owed, but it is necessary before any payment arrangements can be considered.