If you find out you owe the Internal Revenue Service (IRS) when preparing your tax return, there’s no need to panic. Failing to pay can increase penalties and interest on any tax balances due, but you do have options.
The IRS offers payment plans for people who owe taxes they can’t afford to pay immediately. The agency provides other options to help you as well.
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Request Up to 180 Days to Pay Your Tax Balance
The IRS can grant a short-term agreement or long-term payment plan—an installment agreement—for someone who needs more time to pay.
If you owe less than $100,000, including penalties and interest, you may qualify for a short-term payment option. While you do not need to make monthly payments, you will need to pay the amount due by the approved payment deadline. You can request up to 180 days to pay your taxes due by applying online, by phone or by mail with the IRS. There is no setup fee or additional cost for this option.
If you owe less than $50,000, which includes your unpaid tax balance and any penalties and interest, you can request a long-term payment option. This option allows you to make monthly payments for a longer period—up to 72 months.
Unlike the short-term option, the IRS requires you to pay a setup fee for a long-term plan. The fee starts at $31 if you allow the agency to withdraw the payment from your bank account monthly. Otherwise, it starts at $130. You can request the IRS waive or reduce the cost to $43 if you meet the agency’s low-income criteria and other conditions.
The fastest route to approval is to request to make your short- or long-term plan payment online. You can set up a payment option even if the IRS hasn’t assessed your tax balance and noted it on your account. After you make a request, the IRS will notify you of its approval; if you apply online, you may get approval immediately.
Request an Offer in Compromise
An offer in compromise (OIC) allows you to offer a lower amount to the IRS. If the offer is approved, the IRS will forgive the remaining balance. However, you must qualify for the OIC.
Before the IRS approves an OIC, it will consider a few factors, which include your ability to pay, your income, your expenses and your asset equity.
Your asset equity is determined by subtracting any amount owed to creditors or others from the value of an asset. For example, if your investment property is worth $250,000 and you have a mortgage of $175,000, your asset equity is $75,000.
The IRS requires you to be current with your tax return filings and estimated tax payments to qualify for an OIC. Also, if you are a business owner and have employees, the IRS requires you to make all federal employment tax payments for the current and past two quarters to qualify. You must also demonstrate that you are unable to pay the full balance through alternative options, such as an installment agreement or other financial means. If you are in the process of filing bankruptcy, you cannot enter into an OIC with the IRS.
You can use the IRS pre-qualifier tool to find out if you may be eligible. This tool guides you through questions about your financial information and tax filing status to determine a potential offer amount. But it should only be used for informational purposes. The IRS bases its decision on your completed application, Form 656, and its preliminary investigation.
You must submit your offer and a fee of $205 with your application. If the IRS does not accept the offer amount, it will apply the amount to your taxes due. The amount you submit, if accepted, will depend on which type of offer you make—a lump sum or a periodic payment option.
A lump sum option allows you to make an offer in five or fewer payments. If you choose this option, you must submit an initial payment equal to 20% of the amount offered. A periodic payment option allows you to pay within six to 24 months after the IRS approves the offer. However, you must include the first payment with the application.
Request a Suspension of Collection Activities
If you find that paying anything may cause you financial hardship, you can request that the IRS place your account in “currently not collectible” status until your financial condition improves. You may qualify if the IRS determines you cannot afford to pay any part of your debt.
This request does not make the debt disappear, but it can hold off any IRS enforcement activities, such as a tax levy. Nevertheless, the IRS may still file a tax lien while the account is suspended.
To request this status, you must contact the IRS by phone. The IRS may ask you to complete Form 433-F, “Collection Information Statement,” and provide evidence about your financial status. Evidence may include proof of your assets, monthly income and expenses.
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Request a Penalty Abatement to Reduce Your Tax Bill
You may also want to contact the IRS to see if you can have any penalties waived through the first-time penalty abatement program, reasonable cause relief or statutory exception. You may qualify for the first-time penalty abatement program if you have a history of good tax compliance. This means you:
- Have filed all tax returns or filed an extension,
- Have paid or made arrangements for any taxes due, and
- Have not had penalties assessed to your account for the prior three years
If you don’t qualify for the first-time penalty abatement, you may want to consider penalty relief through a reasonable cause. The IRS will consider your request if you can establish a reasonable cause such as:
- You experienced a fire, casualty, natural disaster or other adverse weather conditions.
- You are unable to obtain your financial or tax records.
- You or an immediate member of the taxpayer’s family were impacted by a serious illness or death.
Finally, you may also request penalty relief if you received incorrect written advice from the IRS. This is called statutory relief. You will need to file a Form 843, “Claim for Refund and Request for Abatement,” to request penalty relief. Your form should include the written advice you relied on as well as the amount of taxes and penalties related to the advice.
