If you can’t pay your taxes, don’t panic. The remedies can be achieved with the IRS to help you avoid severe repercussions and get back on track. In this guide, you’ll learn what happens if you don’t pay your taxes, along with some feasible options to make payments over time.
What Can Happen If You Don’t Pay Your Taxes?
It’s not the end of the world if you can’t pay your taxes. But if you ignore that hefty tax bill and flat out avoid the IRS or state tax authorities, you’ll rack up interest and penalties that can add up over time. Even worse, the IRS could levy your bank accounts and garnish wages to collect what you owe.
A better idea: acknowledge your unpaid tax debt and seek viable solutions sooner than later.
What Can You Do If You Can’t Pay Your Taxes?
Here are some alternatives to resolve your federal tax liability if you can’t pay your bill all at once:
1. Get an Installment Agreement
The IRS offers installment agreements, or payment plans, that let you pay federal back taxes over an extended period. Your options are as follows:
- Short-Term Payment Plan: It’s available to taxpayers who owe less than $100,000 and can pay in full within 120 to 180 days. A setup fee does not apply, and you can remit payment using the Direct Pay feature that allows you to pay from your checking or savings account, by debit or credit card or using a check or money order. You can also enroll in the Electronic Federal Tax Payment System and pay by phone or online.
- Long-Term Payment Plan (or Installment Agreement): You could qualify if you owe $50,000 or less (including penalties and interest) and prefer to make monthly payments for up to six years (or 72 months). A payment plan of 24 months is also available to businesses that owe $25,000 or less (including penalties and interest) and are current on all tax filings.
- Partial Pay Installment Agreement: This resolution strategy may be much more complicated to achieve, but is a payment plan that is based on your current financial situation that would allow you to make small monthly payments that would not be large enough to satisfy the tax debt before it expired under the statute of limitations. This type of resolution typically requires the assistance of a tax professional.
To apply for an installment agreement, call the IRS at 1-800-829-1040 or visit the website for more information on how to move forward. You can also consult with a tax professional at a reputable firm if you need assistance applying, negotiating more extended terms, or are having trouble navigating the application process.
If you have unpaid state taxes, check with your state’s department of taxation or revenue to inquire about payment plans. They generally vary from state to state.
2. Request an Offer in Compromise (OIC)
An OIC lets you settle your unpaid federal tax debt for a fraction of what you owe. For example, you could qualify for a settlement on one of these premises:
- Doubt as to Collectibility: You cannot repay what you owe within the statutory period because your income and assets are insufficient.
- Doubt as to Liability: You have legitimate doubt to believe that you owe the tax liability assessed by the IRS and should get an OIC because the tax examiner misinterpreted the tax code. Or you have new evidence to prove the tax examiner made an error or failed to evaluate your findings.
- Exceptional Circumstances (Effective Tax Administration): You’re dealing with an extenuating circumstance that warrants the acceptance of an OIC. However, the burden of proof is on the taxpayer to prove that paying the unpaid tax debt would be unfair, inequitable or cause severe financial hardship.
(Quick note: You should also be current on your tax return filings and mandatory estimated tax payments for the current year and have a bill for at least one of the tax debts you’ll include in your proposed OIC).
Once you’ve selected a reason why you’re requesting an OIC, the next step is to complete these forms:
- Form 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals
- Form 433-B (OIC) Collection Information Statement for Businesses
- Form 656 (Offer in Compromise)
When preparing your documents for submissions, you’ll also need to calculate the initial payment using one of the following:
- Lump-Sum Cash: You’ll pay 20 percent of the settlement amount, followed by five or fewer payments to cover the remaining balance.
- Periodic Payment: You’ll pay the equivalent of one monthly payment per the terms of your proposed OIC.
The amount you come up with should be included in the package you send to the IRS. You also want to include the $205 application fee or pay it online using the Electronic Federal Tax Payment System (EFTPS) to prevent your application from being rejected. (If you meet the Low-Income Certification guidelines, you could be exempt from paying the application fee). Most importantly, be sure to make copies of the documents you complete before sending the originals to the IRS.
Be mindful that the acceptance rate for OICs is very low, and the application process is challenging. So, you could be better off hiring a professional or tax relief firm to do the legwork for you.
3. Currently Non-Collectible Status
Based on your current financial situation, the IRS can decide to put your file on hold for a period of time. Typically for individuals it is 2 years and for businesses it is 1 year. If you show that you simply do not have the ability to pay the debt, and your bills are at or below the national standard of living in your area, the IRS may put you in a CNC status. You may need the help of a tax firm to help achieve this, however, if you owe a significant amount of money to the IRS. Most states do not offer this status.
4. Pay with a Credit Card or Borrow the Money
If an installment agreement or OIC doesn’t work for you, you can charge the balance to a credit card or borrow the money from a friend or family member as a last resort. Both options can have serious consequences, though.
Paying with a credit card means you’ll likely fork over a sizable chunk of interest unless you figure out how to pay the balance off fast or use a card with an interest-free promotional period. And if you borrow the money and have trouble repaying it, you could sever a valuable relationship.
5. Request a Consultation with a Tax Relief Company
The thought of handling an unpaid tax bill on your own can be scary and overwhelming. Fortunately, there are tax experts who are available to help you get the relief you deserve.
