Updated on Monday, May 24, 2021
When you owe the IRS money that you canâ€™t pay, it can feel stressful and scary. The good news is you have options to pay off IRS debt, from enrolling in a repayment plan with the IRS to considering a partial payment agreement.
If you owe back taxes, read on for tips for paying off your IRS debt, as well as a rundown of what could happen if you donâ€™t take action to pay it off.
If you canâ€™t pay the amount you owe the IRS, filing your return without making a payment wonâ€™t help you avoid penalties and interest â€” and neither will filing an extension. Thatâ€™s why it is important to file on time and pay as much as you can to reduce the penalty and interest charges youâ€™ll face later.
If you owe the IRS money, here are six ways you can go about paying off IRS debt.
If the amount you owe the IRS is relatively low and you believe you can pay it off in 120 days or less, call the IRS and ask for a short-term extension of time to pay. There is no fee required to set up an extension.
Keep in mind that this is not a formal payment plan. Rather, the IRS will make a note on your account that youâ€™ve been granted additional time to pay the full amount. During this period, they will not take any collection action against you.
If you can pay your tax bill in 180 days or less, and you owe less than $100,000 in taxes â€” including penalties and interest â€” you might qualify for a short-term installment agreement.
You can apply for a short-term installment agreement with the IRS online, over the phone or by mail. If approved, you will be set up with a plan to pay off your balance. There are no set-up fees for this type of agreement. However, you will be on the hook for any accrued penalties and interest until the balance is paid off in full.
If you arenâ€™t able to pay your debt in full within 120 days, you consider contacting the IRS to arrange an installment agreement, also known as a long-term payment plan. With this agreement, you decide how much money you will pay each month and on what date you will make the payment. As long as your debt will be paid off within three years and you owe less than $10,000, the IRS typically will accept your payment plan.
You can apply for a long-term installment agreement if you owe $50,000 or less in combined tax, penalties and interest. Unlike short-term installment agreements, however, there is a setup fee that can range from $31 to $225 depending on whether you make payments online, over the phone, through the mail, and whether you make your payment via direct debit from a bank account or through another method.
What if you owe so much that you canâ€™t pay it off in a reasonable period of time? In that case, you may be eligible for a partial payment installment agreement. Like a regular installment agreement, you will make regular, agreed upon payments for a set period of time. However, the payments will not pay off the entire debt. After the agreement period ends, the remaining debt will be forgiven.
As you can imagine, the IRS doesnâ€™t take debt forgiveness lightly, so applying for a partial payment installment agreement is more complicated than applying for a regular installment agreement. Instead of letting you decide how much you can afford to pay each month, the IRS will calculate your monthly payment by taking into account your outstanding balance, the remaining statute of limitations for collecting the debt and the reasonable potential of collection.
To request a partial payment installment agreement, itâ€™s best to consult a tax professional with experience handling tax debts. Before the IRS approves a partial payment installment agreement, you will need to have filed all of your tax returns and be current on your income tax withholding or estimated payments.
Youâ€™ve probably heard the television commercials promising to help you â€śsettle your tax debt for pennies on the dollar.â€ť These ads refer to an offer in compromise (OIC), and theyâ€™re not as easy to get as those ads would have you believe.
With an OIC, you agree to a lump-sum or short-term payment plan of a lesser amount, to pay off a portion of your debt in exchange for the IRS forgiving the remainder of the debt. Unlike a partial installment agreement, an OIC might require liquidating assets. Also, unlike a partial payment agreement, you might only have to make a one-time payment.
To qualify, you must prove that you are unable to pay off the entire debt through an installment agreement or other means â€” in other words, this is generally a last resort payment option. It can be difficult to meet the income and asset guidelines to qualify for an OIC, so itâ€™s best suited for taxpayers with low income and very few assets.
You can check to see if you are eligible for an OIC by using the IRSâ€™s prequalifier tool. To apply, youâ€™ll need to complete Form 656 and Form 433-A and submit them along with an application fee of $205. Youâ€™ll also be asked to provide documentation to support the financial information provided in the forms.
Again, itâ€™s a good idea to get help from a tax professional with experience working with offers in compromise to help you complete the forms and walk you through the complex process. Be wary of tax resolution firms making promises that sound too good to be true. Check with the Better Business Bureau (BBB) and the state attorney generalâ€™s office for complaints before you pay a retainer.
There is a 10-year statute of limitations on tax debt collection, so if you are having serious financial issues and canâ€™t pay at all, letting that statute run out may be an option. To do this, youâ€™ll need to get your tax debt in currently-not-collectible (CNC) status by demonstrating that you cannot pay both reasonable living expenses and your tax debt.
To request CNC status, the IRS will ask you to provide financial information on Form 433-A or Form 433-F and provide documentation to support amounts listed on the statement. If you have any assets that the IRS believes could be sold to pay your debt, they may not grant CNC status.
While your account is in CNC status, the IRS will not pursue collection. However, if you are owed any tax refunds on returns filed while your account is in CNC status, the IRS may keep your refunds and apply them to your debt. They may also file a Notice of Federal Tax Lien, which can affect your credit score and your ability to sell your property or other assets.
The IRS will review your income annually to see if your situation has improved. If you maintain CNC status until the 10-year statute of limitations runs out, you may no longer be required to make payments, regardless of whether your financial situation improves later on.
If you owe a lot more than you expected, take a moment to review your completed return carefully to look for errors. Make sure you didnâ€™t accidentally enter the same income twice or forget an important deduction, and make sure you answered all of the questions correctly. One missed question or checkbox can cause you to miss out on valuable tax benefits. Also, compare this yearâ€™s return to last yearâ€™s. If your tax bill went up drastically even though your situation hasnâ€™t really changed, find out why.
Occasionally, taxpayers receive notices from the IRS indicating an amount due that they donâ€™t agree with. Donâ€™t feel like you have to pay an amount you donâ€™t believe you owe just because it comes on IRS letterhead. Each notice will include a section detailing how to respond.
Itâ€™s possible the IRS may have made an error in matching up 1099s or W-2s, and the amount owed would need to be adjusted. Send a letter via certified mail in response, with a full explanation. If you need help, you can consult a CPA or tax advisor, but if you follow the guidelines provided by the IRS, you should be able to respond appropriately and have the fees resolved or adjusted.
If your taxes are not paid on time and you do not communicate with the IRS, they can issue a Notice of Levy. An IRS levy permits the legal seizure of your property. They may garnish your wages or seize any of the following to satisfy the debt:
Many IRS notices are only sent via U.S. mail, so be sure you check your mail and read all IRS correspondence.
Whatever your situation, itâ€™s important to remain in contact with the IRS to show you intend to repay your debt. Itâ€™s best not to ignore IRS notices, especially given the IRS is willing to coordinate payment plans and the consequences of ignoring your debts are serious.
There are penalties: If you donâ€™t file your taxes, the penalty is at least 5% of the amount owed. If you donâ€™t pay the taxes you owe in full by the due date, you will be charged a failure-to-pay penalty. This penalty is 0.50% of the tax you owe if you donâ€™t pay by the due date, or it is 0.25% if you have an approved installment agreement. If owed taxes arenâ€™t paid within 10 days of a notice of levy, youâ€™ll owe a 1% of the taxes not paid in penalties.
Itâ€™s crucial to keep the IRS in the loop: If your ability to pay the agreed upon amount changes later on, youâ€™ll need to call the IRS immediately. When you miss a payment, your agreement goes into default and the IRS can start taking collection action. For example, if your agreement calls for a $300 payment and you lose your job and arenâ€™t able to make the payment, call the IRS before you miss a payment. They may be able to reduce your monthly payment amount to reflect your current financial situation.
A filing extension does not give you more time to pay back your IRS debt: Some people mistakenly believe that if they extend their tax return, they will have additional time to pay the amount due with their return. But an extension is just an extension of time to file, not to pay. Youâ€™re still obligated to calculate the amount youâ€™ll owe and pay that amount by April 15, even if youâ€™re not yet ready to file.
The IRS does not report tax debt to the credit bureaus so owing back taxes will not affect your credit score. However, the IRS may file a tax lien against you, which is public information. Although the debt wonâ€™t appear on your credit report, lenders and credit card issues may still see the lien and make lending decisions accordingly.
Your taxes are generally due by the tax deadline, which is usually April 15. You can file an extension if you need more time to file, but this does not change the date in which taxes are due. You can set up an installment agreement if you cannot pay your balance in full by the due date.
If you arenâ€™t sure if you owe the IRS money, you can create an account online and check your balance. You can also request transcripts online and make payments to the IRS.
If you die before you pay off your debt to the IRS, the person responsible for your estate will receive a notice from the IRS. Because itâ€™s a federal debt, any amount you owe will be paid from the estate before any other debt.