Owing the IRS But Cannot Pay

What to do if you owe the IRS money but cannot afford to pay?

There are five options:

  1. Ask the IRS for a short-term deferment up to 120 days.
  2. Set up an installment agreement to make monthly payments.
  3. Negotiate an offer-in-compromise to settle the past due taxes with IRS.
  4. Discharge the past due taxes by filing for bankruptcy.
  5. Ask the IRS to place your account in currently-not-collectible status.

Before we get to how to fix the problem, we need to understand what’s going on.

First, consider the amount you owe the IRS and how quickly you will be able to pay it off. Paying the tax all at once helps save you money by limiting late penalties and interest charges added by the IRS. That’s because the IRS calculates late payment penalties and interest up through the date of payment. So the sooner you pay off the tax debt, the less penalties and interest you will pay.

The IRS will let people pay over time. Just be aware that interest and late charges will continue to be added to the outstanding balance until everything is paid in full.

There are three crucial factors to identify in this first step:

  • How much is owed to the IRS? It is helpful to know both the total amount due and the amount due for each tax year.
  • How much can you afford to pay?
  • And how much time do you need to pay?

Once you have these factors sorted out, then you can review your options and find an option that is a good fit for your needs.

Option 1: Ask the IRS for a short-term deferment

The IRS can grant taxpayers a short-term extension of time to pay. The IRS will give people up to 120 days to pay in full. During the deferment period, the IRS will not take any aggressive collection actions, such as garnishing wages or levying bank accounts. Late charges and penalties will continue to accrue. And the IRS will expect payment in full by the end of the deferment.

Bottom line: this is the perfect option if someone needs a little bit of time to come up with the cash.

Option 2: Pay Over Time Through an Installment Agreement

An installment agreement is a formal agreement to pay the IRS over time. There are three basic types of installment agreements for individual taxpayers:

Guaranteed installment agreements

  • The person owes $10,000 or less, and the balance will be paid off in three years or less.
  • The minimum payment the IRS will accept is the total balance divided by 30.
  • IRS will not file a federal tax lien, which means your tax debt won’t show up on your credit report.
  • The IRS will not ask you to provide information about your current financial situation.

Streamlined installment agreements

  • The person owes $50,000 or less.
  • The minimum payment the IRS will accept is the total balance divided by 72.
  • The IRS will not file a federal tax lien, which means the tax debt will not show up on the taxpayer’s credit report.
  • The IRS will not ask you to provide information about your current financial situation.

Non-streamlined installment agreements

  • These are installment agreements that do not fall into the first two categories.
  • That means, either the person owes more than $50,000; or the person cannot afford to make the minimum monthly payment.
  • The IRS will ask lots of questions about a person’s assets, income, and monthly living expenses.
  • The IRS will analyze this financial information to figure out how much a person can reasonably afford to pay each month towards their past due taxes.
  • Approval is not automatic. The IRS will review all the facts and circumstances before deciding to accept or to reject a non-streamlined plan.
  • The IRS often will file a federal tax lien. A tax lien will show up on a person’s credit report and often results in a lower credit score.

Do be aware that the IRS charges a user fee to set up these plans, ranging from $31 to $225. This is a one-time fee paid to the IRS. The user fee is deducted from your first payment.

Option 3: Offer-in-compromise

Taxpayers can propose to pay the IRS less than the full amount owed.

The taxpayer agrees to pay the IRS a specific amount, either as a lump sum or as monthly payments over 2 years. (This is the “offer” part of an offer-in-compromise.)

In return, the IRS will consider the balance paid-in-full. (This is the “compromise” part.)

Approval is not automatic. The IRS at its discretion may accept an offer-in-compromise. The IRS will analyze your financial situation to determine if the amount being offered is more than the IRS could reasonably expect to collect from the person.

The IRS uses a mathematical formula to figure out how much the offer amount should be. This is the quick sale value of all a person’s assets, plus the amount by which a person’s income exceeds their basic living expenses over a 12-month or 24-month time frame. The result of this calculation is the minimum amount that the taxpayer should propose to offer the IRS.

Option 4: Bankruptcy

Income taxes can sometimes be discharged in bankruptcy. Not all tax debts qualify for discharge, however. Payroll taxes, for example, cannot be discharged. Only income taxes can be discharged.

Furthermore, the tax debt related to a particular year must be “old enough” to qualify for discharge. Here we need to analyze the tax debt for each tax year for which a person owes. For each tax year, we ask the same questions:

  • When was the due date for filing the tax return for that particular year? Is that due date at least three years prior to the date the person files for bankruptcy?
  • When what the tax return for that particular year filed? Was the return filed at least two years prior to the date the person files for bankruptcy?
  • When was the date tax was assessed for that particular year? Is that assessment date at least 240 days prior to the date the person files for bankruptcy?

If the tax debts for a particular year meet these time requirements, those debts can be potentially discharged in bankruptcy.

Taxpayers are urged to seek the advice of an attorney when considering bankruptcy.

Option 5: Currently-Not-Collectible Status

People who are struggling to make ends meet may be eligible to defer making payments on their past due taxes to the IRS. This deferral or forbearance program is called “currently-not-collectible status.” Under this program, the IRS will not require the person to make any payments on their past due taxes until their financial situation improves.

To qualify for such a deferral, the person needs to have little or no money left over every month after paying essential living expenses such as rent, groceries, utilities, and medical care.

The key benefit: the IRS will not take any collection action. The IRS will not levy bank accounts. Nor will the IRS garnish wages, Social Security benefits, or other sources of income. The most the IRS is allowed to do is mail a letter once a year reminding the taxpayer of how much is owed, and

The downside: the IRS will often file a tax lien. Although this protects the government, a tax lien is a public record, and will show up on your credit report. This can lower a person’s credit score.

The IRS will also keep future tax refunds. Those refunds will be used to pay down the outstanding balance. The IRS can also intercept state tax refunds as well.

Currently-non-collectible status can be an appropriate option for people who are experiencing a temporary financial set back, such as being unemployed. It’s also a good option for people with modest incomes who don’t have a lot of money left over after paying for basic living expenses.

Next Steps

  • Make a list of how much you owe by year.
  • Tally up your income and expenses for the month. Figure out how much you can afford to pay the IRS.
  • Consult with a tax professional to review which options are best for your situation.

Of course, we would love to help you! The tax professionals at Recover.tax believe you can take control of your finances. We stand ready, willing and able, to assist you. Contact us today.