As much as everyone may hope for a generous refund come tax season, there is also the possibility that you could end up owing money. And if you were not expecting that outcome from filing your taxes, or the bill is simply more than your bank account can handle, you may find yourself in the anxiety-provoking situation of having a tax bill that you aren’t able to cover.
So what should you do if you owe the IRS and can’t pay? For starters, make sure to follow through with filing, as “the fees for not filing a return are much higher than the fees for not paying your tax bill in full,” said Yahoo Finance. From there, you have some options to start getting that tax bill paid down and help create some breathing room for yourself.
Sign up for a payment plan
The good news is, the IRS does offer payment plans if you are not able to pay the full sum you owe upfront. The bad news is, “there’s no getting around interest and penalties,” said CNBC Select.
With the IRS’s short-term payment plan option, you will get up to 180 days to pay your full tax bill. However, this option “does carry a failure-to-pay penalty of 0.5% a month and interest will accrue on what you owe until the balance reaches 25% of the total due,” said CNBC Select.
If you don’t think you can pay off your tax bill within 180 days, you can also opt for a long-term payment plan. With this plan, known as an IRS installment agreement, “you agree to pay the IRS taxes you owe in monthly installments for up to 72 months,” said Yahoo Finance. You will have to pay a setup fee, and “as with a short-term plan, fees and interest continue to accrue while you’re making payments.”
To be eligible for either of the above payment plans, you need to meet certain criteria, such as owing under a certain amount (including penalties plus interest) and having filed all of your tax returns in past years, said U.S. News & World Report.
Apply for an offer in compromise
Another option if you are unable to pay your tax bill is to apply for an offer in compromise, which “lets you settle your tax debt” for less than you owe, said NerdWallet. It offers other benefits as well, such as “you will end up paying less than what you really owe” and you’ll be “avoiding collection calls and letters from the IRS.”
Effectively, with this approach, “you make an offer to the IRS on what you feel that you can pay, and if they accept it, that’s what you pay,” said U.S. News & World Report.
This may sound great — but in reality, “applying for an offer in compromise is a long process that involves a lot of documentation to prove you can’t afford your tax bill, a $205 application fee and an initial payment toward your bill,” said NerdWallet. Furthermore, “while your application is being considered, your payments and fees will be applied to your balance, which you will still need to pay off eventually — even if the IRS agrees to reduce it.” And lastly, said NerdWallet, “the IRS rejects most applications for offers in compromise,” so this is certainly not a surefire bet.
Ask to be put on ‘currently not collectible’ status
While this option won’t make your debt disappear (in fact, you will still owe payments, and both penalties and interest can continue to accrue), it can provide some financial protection. When you ask that the IRS put you into ‘currently not collectible status’ because you can’t pay your tax bill, it “means the IRS will temporarily delay collection until your financial situation improves.”
For this to happen, however, “the IRS must agree that you can’t afford to pay your living expenses and taxes,” said Yahoo Finance. Proving this requires extra work, and you will likely be asked to “provide information about your finances, including your income, expenses, and assets when you make this request.”