Options When You Are Unable to Pay Your Tax Bill
by Larson Gross
ARTICLE | April 18, 2023
Tax season is upon us again, and this time of year can be stressful for many taxpayers. Not only do you have to gather all your financial documents for your tax return, but you also have to face the possibility of owing money to the IRS. If you are in this situation and can’t pay your entire tax bill immediately, don’t panic – you have options.
Check if you qualify for Disaster Relief
If you live in an area declared a federally recognized disaster area, you may be eligible for a tax relief extension. The IRS website provides a list of areas that have received disaster relief filing extensions. Even if not directly affected by the disaster, you may still qualify for an extension. For instance, taxpayers in many parts of California, Alabama, and Georgia may have until October 16, 2023, to file various federal individual and business tax returns and make tax payments.
File your return or request an extension
Regardless of your ability to pay, you must still file your tax return or an extension. By filing for an extension, you can avoid the failure-to-file penalty, which can be up to 25% of the total tax owed.
Make a partial payment if possible
It’s wise to pay as much as possible by the April 18, 2023 deadline to avoid incurring additional interest and penalties for failure to pay. Even if you filed an extension, it does not extend the time to pay taxes.
The interest rate charged for unpaid tax is determined every three months and varies based on the type of tax. Interest is compounded daily, so taxpayers can minimize their interest charges by paying their taxes as soon as possible. For the second quarter of 2023, the interest rate for underpayments is 7%. For large corporate underpayments, the interest rate jumps to 9%.
Options for repayment
Generally, it’s always better to be proactive rather than ignoring the issue and allowing the tax debt to accrue. For those who are unable to pay, the following are four options to consider:
Option 1: Short-Term and Long-Term Payment Plans
One option for taxpayers who can’t pay their tax liability in full is to apply for a payment plan. The IRS offers short and long-term payment plans that allow taxpayers to pay their tax debt over time.
Short-term payment plans are available for taxpayers who can pay their tax debt within 120 days. The total amount owed must be less than $100,000 in combined tax, penalties, and interest.
Long-term payment plans are for taxpayers who need more than 120 days to pay their debt, provided that their total debt amount, including taxes, penalties, and interest, does not exceed $50,000. While there is a setup fee for all agreements beyond the 120-day limit, taxpayers may have the option to apply for a reduced setup fee.
You can apply for a payment plan through the IRS website or by submitting Form 9465, Installment Agreement Request. Once your application is approved, you’ll receive a notification and can start making payments according to the agreed-upon schedule.
It’s important to know that even if the IRS approves your request for a payment plan, applicable interest and penalties will continue to accrue until you fully pay the outstanding balance. Also, taxpayers subject to a payment plan must agree to remain current with all future tax obligations. If you fail to make timely payments or have an outstanding amount due in a future year, it may be considered a default of your payment plan agreement.
Option 2: Offer in Compromise
Another option is to make an offer in compromise (OIC). An OIC is an agreement between the taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed. This option is generally available to taxpayers who are experiencing financial hardship and can’t pay their tax debt in full or through a payment plan.
To be eligible for an OIC, you must meet specific requirements, including filing all required tax returns, making all estimated tax payments for the current year, and making all required federal tax deposits for the current quarter if you’re a business owner with employees. You also can’t be in an open bankruptcy proceeding.
When evaluating your request, the IRS will consider your unique financial situation, including your income, expenses, assets, and ability to pay. If your offer is accepted, you’ll need to pay the agreed-upon amount and comply with all tax laws while the agreement is in effect.
To determine if you’re eligible for an offer in compromise, you can use the IRS’s Offer in Compromise Pre-Qualifier Tool. This tool will ask you a series of questions about your financial situation and help you determine if you qualify. You will also be required to pay an application fee unless you qualify for a waiver.
Option 3: Temporarily Delay Collection
If you’re experiencing severe financial hardship and can’t pay any of your tax debt, you can request that the IRS temporarily delay collection until your financial situation improves. This option is known as “currently not collectible” status.
To qualify for this status, you may need to provide the IRS with a detailed financial statement, including information about your income, expenses, assets, and debts. The IRS will review your situation and, if approved, temporarily suspend collection actions against you. However, interest and penalties will continue to accrue on your tax debt until it’s paid in full, and the IRS may still file a Notice of Federal Tax Lien against you.
Keep in mind that the IRS will periodically review your financial situation while your account is in a not collectible status. If your finances improve, they may resume collection actions.
Option 4: Pay by Credit Card or Loan
Another option to consider if you can’t pay your taxes in full is to use a credit card or obtain a loan to cover the amount owed. Though this may not be ideal, the interest rate and fees charged by a credit card company or bank may be lower than the combined interest and penalties applied by the IRS for unpaid tax debts.
Before choosing this option, compare the costs and weigh the pros and cons of using a credit card or taking out a loan to pay your taxes.
Falling behind on your taxes can be stressful, but it’s essential to know that options are available to help you manage your tax debt. Whether you opt for a payment plan, an Offer in Compromise, or temporarily delaying collection, it’s crucial to communicate with the IRS and explore the alternatives that best suit your financial situation.
While this article provides an overview of options, it is not a substitute for speaking with one of our expert advisors. Please contact our office if you need assistance. We’d be happy to discuss your unique situation.
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