Pay as Much You Can Right Away

Even if you can’t pay everything that you owe, filing your return on time and making a partial payment when you do so can be a big step in the right direction, so it’s a good idea to pay as much as you can as early as you can. After all, every dollar you pay reduces the late payment penalty and cuts down on interest charges. 

Ignoring the problem won’t make it go away, and no matter what you owe, it’s better to pay a little than to make no payment. 

Furthermore, making a payment right away can make you look more favorable to the IRS. If you need to work out a payment plan at some point in the future, the fact that you made a partial payment in good faith may show the revenue officer that they can trust you to follow through with a formal arrangement. 

Having said that, however, if you are facing financial difficulties and cannot make even a partial payment, that’s okay, too. Your first priority should be keeping yourself and your family healthy and safe. Nevertheless, you should contact the IRS immediately. In many cases, there are steps they can take to help ease your burden. 

Request an Extension

The IRS may grant you a short additional period of 60-120 days to pay your taxes in full. Call the IRS at 800-829-1040 or use the IRS Online Payment Agreement application to apply for an extension. 

Payment extensions are designed for those experiencing legitimate financial hardship. If you can’t pay your tax bill simply because you splurged and spent the money on something like a new TV, the IRS is unlikely to look kindly on your extension request. 

It’s also important to remember that you should still file your returns on time even if you need an extension to pay what you owe. Delaying your initial filing will only prolong the issue, not resolve it, and filing late will result in even more penalties.

Apply for an Installment Plan — and Stick to It

If you can pay your tax bill over a more extended period of time, a payment plan is one of the best options available. You may even qualify for a self-service, online payment plan (including an installment agreement) that allows you to pay off your outstanding balance over time. 

The installment plan is intended for people who need more than 120 days to settle their debt. It requires monthly payments and applies when the amount owed is less than $50,000 (including tax, penalties, and interest combined). 

To get started, file Form 965, Installment Agreement Request. You can file it by itself or attach it to your tax return. You can also request an extension using the IRS Online Payment Agreement application instead of filing Form 9465. 

If approved, you may have up to 72 months to pay. Take note that the interest and penalty will accrue during this time, although penalties may be abated.

If the amount you owe is between $25,000 and $50,000, you must agree to payments by direct debit and provide bank information. If you owe $10,000 or less, and the IRS agrees that you are not able to pay in full, they will approve your request automatically provided:

  • You agree to pay in full within three years
  • You have no other IRS installment agreements in place
  • You have filed on time and paid your taxes for the previous five years
  • You agree to comply with the tax laws

If you owe more than $50,000, you must attach Form 433- F, Collection Information Statement, to Form 9465 to determine the monthly payment amount.

Request an Offer in Compromise

An offer in compromise allows you to settle your tax debt for less than the total amount you owe and may be a valid option if you are unable to pay or if paying would create a financial hardship.

The IRS considers your specific circumstances when determining your eligibility, including your ability to pay, income, expenses, and asset equity.

Generally, they will approve an offer in compromise when the amount offered represents the most they can reasonably expect to collect in the near future. However, this process is long, complicated, and not cheap in and of itself, considering application fees. What’s more, the IRS rejects most offers of compromise. If you are in any way capable of paying your tax debt in full, they are unlikely to approve you. Therefore, you should explore all other options first and consider this a last resort.

“Currently not collectible” status

If the IRS agrees that it would not be possible for you to pay your tax bill and your living expenses at the same time, they may place you into something called “currently not collectible” status. 

Generally, this means the IRS won’t try to collect your debt until after your financial situation improves. However, this is just a temporary label; eventually, you will still need to pay your liability. 

What Happens if You Don’t Pay or Pay Late?

When it comes to paying your taxes, the rule of thumb is: Better late than never!

Late fees, interest, and penalties will only increase, so it’s generally better to pay it immediately than continue to delay no matter how overdue your payment is. If you are proactive and set up an installment plan, the IRS may even choose to lower your monthly penalty.

On the other hand, if you do not make any effort to settle your debt, you could find yourself subjected to IRS enforcement actions, such as garnished wages, liens on your property, or worse.

Long story short?

It is always better to approach the situation the right way no matter your circumstances.

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