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What to Do if You Owe the IRS and Can’t Pay Your Taxes
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What to Do if You Owe the IRS and Can’t Pay Your Taxes
Owing money to the IRS can be really stressful. I get it–I’ve been there. Maybe you lost your job or had unexpected medical bills. Or maybe you just didn’t plan well and withheld too little of your paycheck for taxes. Whatever the reason, owing taxes is no fun.
But don’t panic! There are options. The IRS doesn’t expect everyone to be able to pay all at once. They’re actually pretty understanding as long as you take some steps to get back on track.
In this article, I’ll walk you through what to do, step-by-step, if you get to tax time and realize you owe more than you can pay. I’ll also give some tips to avoid getting in this situation again next year.
First Steps If You Owe
If you know you’re going to owe taxes when you file your return, here are the first things you should do:
- File on time, even if you can’t pay in full. The penalties and interest will be lower if you file on time.
- Pay as much as you possibly can by the deadline. Even if it’s not the full amount, every bit helps.
- Request an extension if you need more time to file. But remember – this only gives you more time to file, not more time to pay. You still need to pay as much as possible by the original deadline.
I know that last part stinks. I wish the extension gave you more time to pay too. But it doesn’t, so do your best to scrape together whatever you can.
Payment Options with the IRS
Okay, so you’ve filed on time and paid what you could. But there’s still a balance due. Here are some options for paying off the rest over time:
Payment Plans
The IRS offers payment plans that let you pay your balance due over 6-72 months. This is probably the easiest and most common option. To set up a payment plan:
- Apply online if you owe less than $50,000. There’s an application on the IRS website that gives instant approval for up to 72 months to pay.
- For over $50,000 owed, you’ll need to fill out Form 9465. The IRS will review it and get back to you about your payment plan options.
One thing to note – there are fees to set up IRS payment plans. I think it’s like $31 to apply online and $107 for over $50,000 owed. The fees kinda stink, but it’s way better than getting penalties for not paying at all.
Offers in Compromise
This is where you offer to settle your tax debt for less than the full amount owed. The IRS will consider an offer in compromise if:
- You have no way to ever fully pay what you owe
- Paying in full would cause you economic hardship
It’s not easy to get an offer approved, but it can be done. You’ll need to fill out Form 656 and provide documentation of your financial situation. I’d recommend getting help from a tax pro for this, since the forms and process can be confusing.
Currently Not Collectible Status
If you truly have no ability to make payments due to financial hardship, the IRS may put your account in “currently not collectible” (CNC) status. This means they won’t try to collect from you for now. Interest and penalties keep accruing though. After your situation improves, the IRS will likely try to collect again.
To request CNC status, you’ll need to fill out Form 433-F and provide proof of your financial situation. The IRS will review it and decide if you qualify.
Avoiding Tax Debt in the Future
I definitely don’t want you to stress about this year’s taxes forever. But it is smart to put some things in place so you can avoid owing the IRS again down the road. Here are some tips:
- Review your withholding – Make sure enough taxes are being taken out of each paycheck. Use the IRS calculator if unsure.
- Make estimated payments – If you have side income without withholding, make quarterly estimated payments to the IRS.
- Build up an emergency fund – Try to have 3-6 months of expenses saved so you can tap it if needed for a tax bill.
- Get professional help – Work with a tax pro or CPA so you have expert advice.
I know that all sounds easier said than done. But even small steps in the right direction can make a big difference down the road. You’ve got this!
Let me know if you have any other questions. I’m happy to help however I can. Wishing you all the best!
-Sarah
References
Here are some helpful references I used for the information in this article: