What To Do If You Owe The IRS And Can’t Pay

This article is more than 3 years old.

Tax day has come and gone. The rush and stress of having to get everything done may have left you exhausted. In addition to that stress, you may owe more on your tax return than you can afford to repay. That’s okay.

If you find yourself with income-tax debt, you aren’t alone. According to the U.S. Internal Revenue Service (IRS) Delinquent Collections Activities Data book, over 11 million Americans owed over $125 billion in back taxes, penalties and interest in 2019. That number can only grow as the economy weakens and small business owners continue to struggle.  

The good news is there are plenty of ways to resolve your tax debt. Here are the four most common:

1. Online Payment Agreements

Under the IRS’ Fresh Start initiative, individuals who owe $50,000 or less in income tax and businesses that owe $25,000 or less in payroll tax may qualify for an Online Payment Agreement. You can set up the payment for any amount you can afford as long as the debt is paid in full within 72 months (6 years). You can also modify installment agreements through the program as well. 

You may qualify to apply online for either of two types of plans:

  • Long-term payment plan (installment agreement): You owe $50,000 or less in assessed tax, penalties and interest, and filed all required returns.
  • Short-term payment plan (paying in 120 days or less): You owe less than $100,000 in combined tax, penalties and interest.

If you are a sole proprietor or independent contractor, you can apply for a payment plan as an individual. There will be some application fees: $31 to apply online and pay through automatic withdrawals or $149 to apply online and pay through another method (fees can be reduced for low-income applicants). 

2. Installment agreements 

If you need longer than 72 months to pay your debt or you owe more than $50,000 the IRS will request a Collection Information Statement (Form 433-A, Form 433-B or Form 433-F). These forms provide an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay on a regular basis. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. These financial statements also play an important role in the other resolutions you may obtain.

You can request the agreement by phone or by mailing Form 9465 to a service center. Be prepared for delays. Service centers are behind in processing installment agreements. The IRS is currently working to reopen its offices due to Covid-19 restrictions. Check IRS operations and services for the most up-to-date status.

Also keep in mind that interest and late-payment penalties continue to accrue on any unpaid taxes. However, the IRS halves the penalty assessed for failure to pay taxes while an installment agreement is in effect, reducing it from 0.5 percent per month to 0.25 percent. For the calendar quarter beginning July 1, 2020, the interest rate on underpaid taxes is three percent.

3. Currently-Not-Collectible Status

If your financial statement shows that your expenses outweigh your income, and you don’t have assets that can pay your debt in full, then you qualify for Current-Not-Collectible (CNC) status. In this resolution, you don’t have to pay anything towards your debt. It’s like a student loan forbearance; you don’t have to pay on the debt but interest and penalties continue to accrue. The IRS may also review your account in a year or two to see if your financial situation has improved to the point where you can make monthly payments. But during that time, they won’t take any collection action against you. In addition, it’s possible to remain in CNC for the entire period the IRS has to collect the debt — the collection statute expiration date (CSED) which is usually 10 years from the date the tax is assessed (barring any extension of the statute). For more information on CNC, see Internal Revenue Manual 5.16.1.

4. Offer in Compromise

The last resolution I want to cover is the offer in compromise. With this agreement, you pay the IRS only a percentage of what you owe. Once you pay that amount, the rest of your debt is forgiven. This type of resolution is the most attractive of all because you pay less than you owe and have more finality than you would with CNC.

Unfortunately, it’s not as easy as calling the IRS and offering whatever you want. You have to fill out a financial statement: this time a 433-A (OIC) for the self-employed or 433-B (OIC) for businesses. In addition, you have to complete Form 656, which outlines your offer amount and why you think the offer should be accepted. The offer amount is based on your disposable income and equity in assets. Lately, it has taken a long time to get the offers processed. In addition, in 2019, the IRS received 54,225 OICs and only accepted 17,890 (33%). 

However, if you think you qualify, it can be a great way to get a fresh start.

Other tricks of the trade

I know you may be anxious about your taxes now when the future is so uncertain. Here are a few other tips that may help you as well: 

  • File your tax returns: All of these arrangements require that you’ve filed all required tax returns. And the IRS may file a tax lien to protect its interest. 
  • Pay your estimated tax payments now. I know it may be tempting to try to use current funds to dig yourself out of last year’s obligations. But using that money to pay 2019 taxes may just deepen the hole you’re in for 2020. The best thing you can do is stop digging. Do your best to deal with the current year first, and then resolve past years debt the best you can. 
  • Sign up for an online tax account. If you haven’t signed up for an online account with the IRS, I suggest doing that right away. You can use the tool to view your payoff amount, review the balances for each tax year you owe, look up your payment history and view your current payments.  You can also select electronic payment options and get transcripts (including account and wage and income transcripts). 
  • Review your return: Your tax return is probably the last thing you want to look at right now, but with the details fresh in your mind, is actually the best time for a review. Why? First, you can catch mistakes. All of us, including professional tax preparers, can make errors. And even with the best tax preparation software, anyone can still transpose some numbers or forget to enter something altogether. Second, you can start planning for next year.  Use last year’s tax return as a guide to the types of deductions you’ll need to track this year.

I hope you’ll take some solace in understanding your options and the rules of the game. If you are still overwhelmed and need guidance, it’s best to contact a tax professional — either a lawyer, CPA or Enrolled Agent — who is authorized to represent you before the IRS.

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