While many taxpayers look forward to receiving a check from the IRS each year, some face the unexpected reality they actually owe money. While this may not always amount to much, occasionally things get overlooked or circumstances change mid-year which can lead to larger sums. So, what should you do if you’re unable to pay your taxes?
Don’t panic! If you can’t pay the full amount of taxes you owe, you should still file your return by the deadline and pay as much as you can to avoid the large penalties and interest for late filing. You could also contact the IRS to discuss your payment options. They may be able to provide some relief such as a short-term extension to pay, an installment agreement, an offer in compromise or temporarily delaying collection by reporting your account as “currently not collectible” until you are able to pay. In some unusual cases, the IRS may even be willing to waive penalties, although you’ll still accrue interest charges on unpaid tax bills.
Request an Installment Agreement
This is the easiest way to settle tax debts. With an installment agreement, you’ll be required to pay monthly payments towards the tax amount owed in a period of less than 6 years. With this agreement you’ll end up paying more than the original amount owed but it’s a great option if you can’t afford to pay off the debt in full but are able to pay it off over time. Installment agreements for smaller amounts, and agreements which pay off quickly, are much easier to set up than larger or longer-term deals - although almost any sort of a deal can be worked out, depending on your financial situation. If you can truly only afford to pay a little on a big debt, that's all they can force you to pay.
Offer in Compromise
This option allows you to reach a “compromise” with the IRS on the tax amount owed – often for much less than the original amount. If you’ve ever heard the saying, "Settling for Pennies on the Dollar", this is what an Offer in Compromise is. It should come as no surprise this is the most difficult way to settle with the IRS. They have strict requirements to qualify for an Offer in Compromise which includes filing all your unfiled tax returns and making all required estimated tax payments. You are also ineligible if you’re in an open bankruptcy proceeding.
The purpose of an Offer in Compromise is to agree on an amount that maximizes the collection potential of the IRS. Basically, this means the IRS will only settle if you can prove that your offer will be more advantageous for them then pursuing the many effective tools they have to collect tax debts over time. An Offer could be a good choice if your total assets are significantly less than the amount of tax debt you owe, and your income is such that it's clear you will never be able to pay off the debt.
Buy More Time
If you need to buy more time to pay the total amount due, it can easily be done by using your understanding of the IRS system to your advantage. Essentially, when taxes are unpaid it triggers the automated IRS notification system. Once this happens, the IRS will begin sending a series of letters before it begins the collection process. Typically, the IRS sends an original assessment letter stating the amount of tax owed plus any interest and penalties. Next, it will send a series of two CP Letters (computer notices noted by a CP number in upper right). Once you start receiving the CP letters you have roughly 3 months before the IRS takes collection action if nothing is done on your part.
To delay the IRS and buy yourself more time, all you have to do is contact the IRS and tell them you can't pay the amount in full at the current time and ask for a 45-day extension. Once the 45 days is up and you haven't done anything, the process will begin again right where it left off and you’ll receive another letter. You must pay off the taxes owed before the IRS takes action against you, so this option is only good for someone who may not have the money right away but knows they will have it in the very near future.
Get “Currently Not Collectible” Status
The IRS may place certain delinquent tax cases in a “currently-not-collectible” (CNC) status after its agents have determined they’re unable to collect the taxes from the delinquent taxpayer.
For example, let’s assume a taxpayer falls behind in filing their returns, paying taxes, or both. The IRS will eventually attempt to collect the taxes and/or missing tax returns through its notice process, by phone calls, or in-person visits. If these attempts fail, the IRS will begin enforced collection action which may include garnishing wages or seizing bank accounts and other assets.
If at any point during this process the taxpayer demonstrates payment of their tax bill would create an “economic hardship” on the taxpayer, the IRS may close the collection case by placing the taxpayer’s account in “CNC” status. In most cases, the IRS will not even consider this status until the taxpayer is in compliance. If the IRS does allow a case to be closed CNC, it will usually be re-opened and returned to active collection status if the taxpayer fails to file a tax return in the future, accrues a new tax liability, or the taxpayer’s financial situation changes sufficiently to allow payments to be made against the tax debt.
It’s worth pointing out that CNC status is only a temporary solution and not an option for permanent tax relief. The tax is not forgiven or compromised, and interest and penalties continue to accrue. You should also note it's incumbent on you to prove that paying the taxes will create an economic hardship, which means you’ll have to engage in extensive financial disclosure and documentation for the IRS to accept this option. They won’t just take your word for it! However, if you're truly strapped for cash this can be a much quicker, easier and cheaper option than an Offer in Compromise.
Hire a Tax Specialist
Tax specialists are by far the best way to resolve tax debt issues. The policies and procedures which the IRS uses to handle collection cases are constantly changing, as well as being subject to the local “interpretation” of whatever IRS agent you happen to be talking to that day. An experienced tax specialist knows the rules, understands tax law and has the most current information about what relief options may be available. As such, they’re able to use this information to your advantage.
William D. Truax and his friendly team of Enrolled Agents (EAs) and licensed tax preparers have been helping individuals and businesses address tax debt and compliancy issues for over 30 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.
If you need assistance or have questions about paying your taxes, please contact us today for a FREE consultation. The longer you wait, the more you may owe!