Do you owe money to the IRS that you can’t afford to pay? You’re not alone. At the end of the 2017 fiscal year, more than 14,000 taxpayers had delinquent accounts with the IRS, with a total balance of assessed tax, penalties, and interest of $131,117,254. Yikes!
While any debt can be stressful, tax debt can cause big problems in a hurry. Unlike other creditors, the IRS has the power to take money from your paycheck or bank account, seize your property, and revoke your passport.
Fortunately, the IRS offers many options for taxpayers who want to make good on their tax debts.
Options for Dealing With IRS Tax Debt
Obviously, the best way to pay your tax debt is in full and by the due date. However, that’s not always possible. Here are a few easy options for paying the tax you owe.
1. Payment in Full Within 120 Days
You just filed your tax return and realized you owe more than you have in your bank account. Don’t panic; pay as much as you can now. If you can afford to pay the rest within four months (120 days), this is the easiest way to handle your tax bill.
To take advantage of this arrangement, call the IRS at 1-800-829-1040 or use their Online Payment Agreement.
The IRS doesn’t charge a fee for this arrangement, but penalties and interest will continue to accrue until your balance is paid off. For that reason, it’s a good idea to pay as much as you can, when you can, instead of waiting until the end of the 120 days to make a payment.
2. Installment Agreement
What happens if you need more than 120 days? In that case, the IRS offers several types of installment agreements. You can apply for an installment agreement using the phone number or link provided above, or via mail by completing Form 9465.
When you apply for an installment agreement, you tell the IRS how much you can afford to pay each month, and the IRS will either approve or deny your request. If the IRS approves your payment plan, it will add a fee to your tax bill. The fee depends on:
- Whether you apply online, by phone, or by mail (online applications carry lower fees)
- Whether you make payments via direct debit from your checking account or another payment option (direct debit comes with lower fees)
Low-income taxpayers may be eligible to have their fees lowered or waived by completing Form 13844.
You’ve probably seen TV commercials promising you can settle your IRS debt for “pennies on the dollar.” The formal name for this process is “offer-in-compromise.” Sounds pretty good, right?
While it’s true the IRS does sometimes let taxpayers off the hook after paying a small portion of what they actually owe, it’s not easy to qualify for this.
In general, before accepting an offer-in-compromise, the IRS must determine that it can collect more from you through a settlement than it would over the remaining collection statute, which is typically 10 years.
Getting this determination is more difficult than most people believe. First, you must have filed all required tax returns. If you’ve avoided filing returns for a few years, the IRS will automatically reject your application. It will return your application fee, but keep any initial payment included with your application and apply it to your balance due.
Second, not only do you have to prove that you don’t have enough money to pay your debt now, but you also have to show that there’s no real chance you’ll earn enough money to pay back the debt in the foreseeable future. If you’re disabled or in extreme financial circumstances, work with a tax professional who will perform an analysis of your financial situation and walk you through preparing and submitting the right documentation with your offer.
You’ll find step-by-step instructions and all of the forms needed for requesting an offer-in-compromise on Form 656-B.
4. “Currently Not Collectible” Status
So what happens if you can’t afford to pay your tax debt, but the IRS won’t agree to an offer-in-compromise? In that case, your best bet may be letting the 10-year statute of limitations for debt collection run its course.
You can avoid having the IRS levy your wages and bank accounts and pursue other collection methods during this time by getting your debt placed into “currently not collectible” (CNC) status.
To get CNC status, you have to demonstrate to the IRS that you cannot pay reasonable living expenses and your tax debt at the same time. Like with an offer-in-compromise, the IRS requires extensive financial information and supporting documentation. And they’ll refuse to grant CNC status if they believe you have assets that could be sold to pay the debt.
What Happens When You Ignore IRS Collections
Whether you’re on an installment agreement or working on applying for an offer-in-compromise or CNC status, it’s crucial to stay in touch with the IRS and never ignore notices you receive about your past-due balance.
Ignoring IRS notices can lead to some pretty severe consequences. Here’s a step-by-step look at what happens when you ignore an IRS collection notice.
Step #1: Your Account Becomes Delinquent
When the IRS sends a bill and you don’t respond, your account becomes delinquent, and the IRS may turn your debt over to their Automated Collections System (ACS). An ACS representative will attempt to contact you by phone or in person to work out a payment solution.
Step #2: Notice of Federal Tax Lien
Next, the IRS may file a federal tax lien, even if you set up an installment agreement. A lien is a public notice to your creditors that’s filed with the county in which you live, conduct business, or own property.
A lien is a matter of public record and may lower your credit score. If you try to sell property while the lien is in effect, the IRS has first dibs on the proceeds. A lien can even make it difficult to refinance your mortgage. Once the IRS files a lien, it won’t release it until you pay your balance in full.
Step #3: Opportunity to Request a Hearing
Next, you’ll have a chance to request a hearing with the Office of Appeals. You’ll receive a Final Notice of Intent to Levy and Notice of Your Right to a Hearing from the IRS.
You have 30 days to request an appeals hearing by filing Form 12153 and providing information about why you believe the IRS should not pursue a lien or levy against you.
Step #4: Enforced Collection Action
If you miss the 30-day window to request a hearing and don’t try to work out a payment solution, the IRS will begin collection proceedings, including levying your wages or bank accounts. In some cases, the IRS may even seize and sell your property.
Once the IRS levies your bank account, it can take as much money as you have in your account to satisfy your debt. You might not even realize it until you try to purchase groceries or make a mortgage payment and realize there’s no money in your account.
Step #5: Passport Restriction
The IRS reserves this step for people who owe more than $50,000 in unpaid taxes, penalties, and interest and who the IRS considers “seriously delinquent.” The IRS will notify the State Department to deny, revoke, or limit the use of your passport until you get in good standing with the IRS, either by paying your tax bill in full or setting up an installment agreement.
Once the State Department revokes your passport, there’s no quick fix. Even if you pay the balance due in full, the IRS has 30 days to notify the State Department.
If you owe money to the IRS, you might be desperate for help. But watch out for companies that promise you they can help eliminate your IRS debt without first reviewing your financial situation. Too often, these companies take an upfront fee and file some paperwork on your behalf, only to have your application rejected because you don’t qualify for an offer-in-compromise. The money you’ll spend trying to get out of paying your taxes is better spent paying down your tax debt.
If you owe money to the IRS, make arrangements to pay it off as soon as possible. Even if it means selling assets or taking a second job, the IRS is not a creditor you want to mess around with.