Can't Pay Your Tax Bill? Your Options with the IRS

Cannot pay your tax bill - IRS payment options explained by Robert Allen Bautista, Kansas City tax preparerOwing the IRS money you do not have is stressful, but it is one of the most fixable problems in taxes. The biggest mistake people make is doing nothing. Here are your options, in the order I would think about them.

1. File on time, even if you cannot pay

The penalty for not filing is much larger than the penalty for not paying. Failure to file is generally 5% of the unpaid tax per month, up to 25%. Failure to pay is generally 0.5% per month, also capped at 25%. Filing on time (or filing an extension) stops the bigger penalty from building. Interest still runs on any balance, so pay whatever you can with the return.

2. Short-term payment plan (up to 180 days)

If you can pay in full within about six months, ask for a short-term plan. You can request it online through your IRS account. There is generally no setup fee, though penalties and interest continue until the balance is paid.

3. Long-term installment agreement

If you need longer, a monthly installment agreement spreads the balance out. Individuals who owe $50,000 or less in combined tax, penalties, and interest can usually apply online. Setup fees are lower if you apply online and pay by direct debit, and lower-income taxpayers may qualify for reduced or waived fees. While an installment agreement is in place, the failure-to-pay penalty rate is generally cut in half, to 0.25% per month.

Two rules matter: keep making the payments, and file and pay future returns on time. Missing either can put the agreement in default.

4. Currently Not Collectible status

If paying anything would leave you unable to cover basic living expenses, the IRS can mark your account "currently not collectible." Collection pauses, though interest and penalties continue and the IRS may keep future refunds. You will need to show your income and expenses.

5. Offer in compromise

An offer in compromise settles the debt for less than the full amount. It is real, but it is not for everyone. The IRS looks at your income, expenses, and assets to decide what it could realistically collect. Use the IRS pre-qualifier tool before paying anyone who promises to settle your debt for "pennies on the dollar."

6. Ask for penalty relief

If you have a clean record for the prior three years, you may qualify for first-time penalty abatement, which can remove failure-to-file and failure-to-pay penalties for one year. If something outside your control caused the problem, such as a serious illness or a disaster, reasonable cause relief may apply. Penalty relief does not erase the tax itself, but it can take a real bite out of the balance.

What not to do

  • Do not ignore IRS letters. Each one has a deadline, and the later notices carry more serious consequences.
  • Do not put tax debt on a high-interest credit card without comparing the cost to an installment agreement.
  • Do not pay upfront fees to a company that guarantees a settlement before reviewing your finances.

Bottom line

File on time, pay what you can, and set up a plan before the IRS sets one for you. Most balances can be handled with a payment plan and, often, some penalty relief.

General information, not tax advice for your specific situation.

Robert Allen Bautista, independent tax preparer and accountant, Kansas City — robertallenbautista.wixsite.com/taxpro

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