What to do if you Owe the IRS Money and you can’t Pay

This year you got the message that you owe money. It isn’t a question of writing a check for $900, because you don’t have it. So what do you do?

The answer to that question is dependent on how much you owe, how soon you can pay it, or whether you can pay it at all.

The first thing to do is file the return. 

Typically, the penalty for filing late is .5% of the unpaid tax for each month or part of a month that the return is not filed, up to 25% of your unpaid tax.  In contrast, the penalty for paying late is usually one-half of one percent of your unpaid taxes for each month or part of a month after the due date. (This can also be levied up to 25% of your unpaid tax, but in most circumstances, the total penalties assessed will be much less if you file on time.) During the first 60 days, you will not be penalized more than the 5% for both of these penalties. After 60 days of not filing, however, the stakes rise. Then, the minimum penalty is either 135.00 or 100% of the tax, whichever is smaller.

So, file the return, and then the penalties will be there, but they will be lower. (If you can show reasonable cause instead of willful neglect, then the IRS may waive the penalty within a reasonable period of time.)

Filing an extension won’t help with the balance due if you pay late, and it won’t change any late fees or interest, but if you don’t have information enough to complete the return in an accurate manner, then filing an extension is the correct action. But if you already have all the information, then file the return now, it won’t make any difference in the amount that you owe, and it will be one more step out of the way toward getting the matter taken care of. An extension only works until October 15. After that, if you still haven’t filed, then you may be facing some serious penalties.

If you don’t file, the IRS will file for you. It will base your tax return on information that others have reported, and you won’t get the advantage of tax breaks that are coming to you that the IRS may not know about. If the IRS files a return for you, there will be full penalties for not filing, as well as penalties and interest for not paying on time.

If you can pay the balance within 120 days, then call the IRS at 1-800-829-1040, and follow the prompts. The IRS will guide you through how to pay, and where to send it.  If you will need more time, then an installment agreement may be appropriate. It costs money to set up an arrangement. The typical user fee is $105.00, reduced to $52.00 if you consent to a direct debit from your bank account. The reduced fee for certain low-income taxpayers is $45.00. Failure to comply with the terms of an installment agreement may result in the IRS formally attaching your property or attaching your wages. You can send in form 9465, or you can apply on-line. Either the opportunity to print out the form, or the on-line application is available at www.irs.gov. On the front page of the site, either search for “installment request,” or follow the prompts under “I need to>>”.

If you have an existing agreement, or if you are filing bankruptcy, then call 1-800-829-1040 and listen for instructions for the local insolvency function or for Offer in Compromise.

The IRS will consider an offer in compromise, that is, a full amount that is lower than the assessed tax, under three conditions. 

First, are you unable to pay within the established statutory period for collection? This condition requires you to be low-income with no collectible assets.

Second, are you truly liable for the tax assessed? Are there circumstances that have come to light that puts the amount that you owe in doubt?

Third, Can you demonstrate that the collection of the tax would be inequitable?  The tax is correct, and you have assets, but are there overriding circumstances (special needs children, existing medical emergencies) that will require these assets?   

There is no guarantee that an offer will be accepted in any of these three contingencies. There is a $150.00 application fee for an offer in compromise.  Any reduced assessment may be paid as a lump sum or in designated amounts over a 5 month, 24 month, or over the statutory period for collecting the tax. The IRS agent in charge of the transaction may make a counter offer, or deny the offer. Any offer made without the application fee will be returned. More information is available in Form 656-B, Offer in Compromise Booklet  on the IRS website.