So what happens if you owe the IRS and are unable to pay? There are multiple options for repayment. Here is a broad overview of options for individuals.
- The Obvious Answer
First, you can pay immediately in full. An obvious answer, but an option nonetheless.
- Short-Term Option
If you can’t pay the IRS now, but you can likely pay the tax bill in full within the next 180 days you might consider a short-term payment plan by calling the IRS and setting up a plan on the phone, by mail, or in-person. Please note that the IRS may accept plans for up to 120 days if the plan is set up through the IRS’s Online Payment Agreement. There is no fee to set up this plan, but penalties and interest will continue to accrue as long as there is an outstanding balance. These short-term plans are applicable to individuals that owe less than $100,000 in combined tax, penalties, and interest.
- Installment Agreement
Next, you should consider an installment agreement. One can apply for an installment agreement online, on the phone, or through the mail. If you can’t pay your tax bill within 120 days and your balance owed is less than $50,000, you can apply online. If your balance owed is more than $50,000, you’re probably going to have to file Form 9465. The IRS makes the application fee a little bit cheaper if you choose the online option and/or if you agree to direct debit payment each month. An online application with direct debit is only $31. If you don’t want the IRS pulling money out of your bank account each month, manual payment will increase the online application fee to $149. Low-income taxpayers might be able to waive this fee. The maximum term for an installment agreement is 72 months.
- Offer in Compromise
Next, we have an Offer in Compromise. This type of agreement can settle a tax debt for less than the full amount owed. Sounds like a good deal for the taxpayer, which it certainly can be, but there are several stipulations to consider. Generally, the application fee is $205, unless an individual establishes the low-income guidelines. Moreover, an initial payment is required to be sent with the offer. Again, this may be waived based on low-income guidelines. The application itself is somewhat intrusive and requires the taxpayer to list personal assets as well as income and expense details. When the IRS receives the offer, they will first determine whether you have filed all tax returns you are legally required to file. This is incredibly important. If you have not filed the appropriate returns, the IRS will apply your initial payment for the offer to whatever tax debt you owe and they will return your offer with your application fee. However, this return of the application fee does not happen overnight. This is all while penalty and interest continue to accrue. Next, the IRS requires that you have received a bill for at least one tax debt included on your offer. Generally, this is established without difficulty. Lastly, the IRS will also determine whether you have made all required estimated tax payments for the current year, if applicable. If you want to see if you might qualify for an offer in compromise, find the pre-qualifier link below.
- Temporary Delay on Collection
If the IRS determines that you can’t pay any of your debt due to financial hardship, the IRS may grant a “temporary delay on collection”. As the name states, this is temporary. Penalty and interest will continue to accrue, but you may be granted a temporary reprieve on paying any of the tax. The IRS will require proof that you are currently unable to make payment. A benefit of this delay is the temporary suspension of the collection procedure. This can mean the issuance of a levy and collection notices may be paused.
Conclusion
If you have received an IRS notice that states you owe money, the first order of business is to read the notice carefully. After you have read the notice, either respond to the IRS or retain a qualified individual to respond for you. Please see the below links for further useful information.
Taxpayer Bill of Rights: https://www.irs.gov/taxpayer-bill-of-rightsOffer in Compromise Pre-Qualification: https://irs.treasury.gov/oic_pre_qualifier/
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