What to Do if You Owe the IRS and Can’t Pay

What to Do if You Owe the IRS and Can’t Pay

Owing money to the IRS can be really stressful. I totally get it–I’ve been there myself. When you get that letter in the mail saying you owe taxes, it can make your stomach drop. You start worrying about how your going to come up with the money and what will happen if you can’t pay.

But don’t panic! There are options for getting your tax debt resolved, even if you can’t pay in full right now. The key is being proactive and exploring all your choices. In this article, I’ll walk you through everything you need to know if you owe back taxes and can’t afford to pay them at the moment.

First Steps If You Owe Back Taxes

If you get a notice from the IRS saying you owe taxes from a previous year, the first thing to do is take a deep breath. I know it’s stressful, but freaking out won’t help anything. Try to stay calm and take things one step at a time.

Next, don’t ignore the letter. I know it’s tempting to just pretend it doesn’t exist, but that will only make things worse. Unpaid taxes won’t go away on their own. You need to address the situation.

So read through the notice carefully. Make sure you understand exactly how much the IRS says you owe for which tax years. Double check the calculations and interest and penalty charges. If you disagree with anything in the letter, or if you need clarification, contact the IRS right away to discuss.

You’ll also want to pull together your financial records so you know exactly where you stand. Make a list of your income, assets, expenses, and other debts. This will help you figure out what repayment options could work for your situation.

Can You Pay in Full?

First, look at your finances and see if there is any way you can pay the full amount you owe the IRS. Coming up with the money to pay off your tax debt in one lump sum is ideal, since it will minimize interest and penalty charges.

Look for assets you can use to pay the debt, like money in savings, stocks/investments you can cash out, a tax refund you have coming, or equity in your home. You may need to make some sacrifices like cutting expenses, taking on a side job, or temporarily reducing 401k contributions.

If possible, pay as much as you can upfront, even if it’s not the full amount. The more you can pay now, the less you’ll owe in the long run.

IRS Payment Plans

If you simply can’t afford to pay your tax debt in full immediately, the IRS offers payment plans to help taxpayers pay over time. This can make getting square with the IRS much more manageable.

Short-Term Payment Plan

If you need just a little extra time, like 60-120 days, to pay in full, the IRS may allow you to set up a short-term extension. You don’t have to submit a formal request, but you will accrue interest and penalties until it’s paid off.

Installment Agreement

An installment agreement allows you to pay your tax debt through monthly payments over time. The IRS will work with you to set up a monthly amount you can afford. This is one of the most common ways taxpayers resolve back taxes they can’t pay all at once.

To qualify for an installment plan, you’ll need to owe less than $50,000 in combined tax, interest, and penalties. You also have to be current on filing tax returns. If you owe over $50,000, you may still be eligible but will have to provide more financial information.

The IRS charges a fee to set up an installment agreement, which is usually around $31. To request an installment plan, complete IRS Form 9465 and attach it to your tax return. Or you can apply online if you owe less than $50,000.

Partial Payment Installment Agreement

If you can’t afford to pay your full debt through an installment plan, you may qualify for a partial payment installment agreement. This allows you to make smaller monthly payments based on what you can afford. However, your debt won’t be paid off by the end of the agreement.

Offer in Compromise

An offer in compromise allows you to settle your tax debt for less than the full amount owed. If you can show you don’t have the means to pay your tax liability in full, the IRS may agree to accept a smaller lump sum payment to resolve your debt.

To be eligible, you’ll need to demonstrate financial hardship. The IRS looks at factors like your income, expenses, assets, and future earning potential. You’ll have to fill out Form 656 and pay a $205 application fee.

If the IRS accepts your offer in compromise, you’ll need to pay future tax obligations on time for the next 5 years. This program can save you thousands of dollars, but approval is not guaranteed.

Currently Not Collectible Status

If you truly can’t pay anything right now, you may be able to get your account put into uncollectible status. This pauses IRS collection efforts and protects you from aggressive actions like wage garnishment or levies.

To qualify, you’ll have to show you don’t have enough income left after basic living expenses to make any kind of payment. Interest and penalties continue to accrue in this program. The IRS will review your finances periodically to see if your situation has changed.

Penalty Relief

In some cases, the IRS may agree to lower penalties you’ve been assessed. This can reduce the total amount you end up owing. Penalty abatement usually requires proving reasonable cause, like serious illness or major financial hardship.

You’ll need to submit a written request explaining your circumstances and justification for penalty relief. But it doesn’t hurt to call the IRS and politely request they remove penalties due to inability to pay.

Avoiding Future Tax Debts

Once you resolve your existing IRS debt, take steps to avoid ending up in the same situation again down the road. Here are some tips:

• Review your withholding – Make sure enough tax is being taken out of your paycheck so you don’t owe a large balance.
• Make estimated payments if required – Pay taxes quarterly if you have freelance income or other sources without withholding.
• Set aside money for taxes – Open a separate savings account and set aside a percentage of income to cover your tax liability.
• Get professional help – Hire a tax pro to make sure your returns are done accurately and on time.

Don’t Delay – Take Action Now

I know owing the IRS money can feel overwhelming. But the worst thing you can do is ignore it and hope it goes away. Tax debt won’t disappear on its own. And the longer you wait, the more penalties and interest will continue piling up.

So don’t delay. Even if you can’t pay in full now, take steps to address your tax debt today. Explore payment plans, settlement options, and uncollectible status. The IRS wants to work with taxpayers, so let them know you are willing to resolve your balance.

And remember–you have rights as a taxpayer. The IRS has to treat you fairly and provide options to help resolve your debt based on your financial situation. So take a deep breath and tackle this one step at a time. It may take some time and effort, but you can get your tax problem resolved!