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

Whether you file an annual tax form as an employee or a quarterly filing because you are self employed, there is a sinking feeling when you get to the bottom line and discover that you owe the IRS money. When a taxpayer discovers that they have not paid enough taxes through the year, they are often faced with the burden of coming up with money to meet these obligations and this results in a lot of additional stress. Unfortunately, the IRS is relentless in pursing those who owe money meaning taxpayers need to be aware of what options are open to them if they owe the IRS money and cannot pay. The first thing that a taxpayer should do is file their tax return, even if they cannot pay what is owed.

When a taxpayer finds themselves in a financial situation that is temporary, it may be worth considering filing an extension which will allow the taxpayer an additional six months before the filing needs to be complete. It is important to note that this will not prevent additional penalties and fees, however if payment can be made within the six month period (including penalties) then it may be worth considering. Once a filing is complete, it is possible to pursue other options.

Contact the IRS

After filing a tax return when money is owed to the IRS, the taxpayer should contact the IRS immediately. In some cases, contacting the IRS can help reduce the overall amount that will be owed. It is important to remember that owing the IRS means that taxpayers will be accruing penalties as well as late charges on all monies owed. This can result in owing far more than if it had been paid all at one time. The IRS telephone number for tax issues is 1-800-829-1040. Taxpayers should have a copy of their tax return as well as their social security number when calling. While contacting the IRS will not prevent you from owing additional monies, it can mean that you may be able to negotiate some reductions in what is owed. Remember, penalties begin the day your filing is due so putting this call off is not beneficial to you in any manner.

Pay what you can

Another important thing to remember is if a taxpayer has the means to pay part of what is owed to the IRS it should be included with the tax filing. This will reduce the total amount owed and reduce penalties and fees that will be charged by the IRS. Even if the amount that is owed is substantially more than what can be paid, it will still reduce the overall indebtedness and result in lower penalties and fees. The IRS assesses late payment fees, penalties and interest on all amounts that are overdue; the IRS considers any amounts owed to be overdue the date of the filing.

Payment options

Taxpayers who are suffering a temporary inability to pay their taxes should explore the various options available to them. One of these options is an installment payment that the IRS offers all taxpayers. Form 9465 should be filed along with supporting documents (you can download the PDF). This should be used by taxpayers who anticipate needing more than 120 days (4 months) to pay the amounts due. This service is not free, taxpayers must include the fee with this agreement which ranges from $43 to $105 as well as a monthly fee to use the installment agreement.

Another possibility that some taxpayers will be eligible for is called an offer in compromise. This is available only under very specific circumstances including a mistake by the IRS or if the taxpayer does not have the means to pay the bill over a long period of time. There are numerous forms that must be filed for this option including Form 433-A which presents a case for the doubt of liability. This can be used in cases of injured spouses or if the taxpayer feels that the IRS has made an error in billing them for amounts owed. These must be accompanied by a fee unless the taxpayer meets the low income requirements set by the IRS. In the event that the taxpayer does meet these requirements, then form Form 656-A should be filed rather than 656.

Generally, the IRS encourages taxpayers to borrow money to pay their debts since the fees associated with credit card loans or home equity loans are generally lower than what the IRS charges for installment agreements or settlement agreements.  Taxpayers who are concerned about their liability and feel that they need assistance should contact the IRS using form F911 (download PDF) which is a taxpayer advocate request. These advocates will help the taxpayer work through the issues with the IRS and resolve them. This service is free to most taxpayers.

It is important to understand that while some tax preparation services may advise a taxpayer to consider filing for bankruptcy, the only time that taxes may be wiped out by bankruptcy is (a) if they are more than three years old and (b) the taxpayer has not entered into a previous payment agreement. This is usually not a viable option for most taxpayers.

Owing the Internal Revenue Service money can cause a great deal of stress and can result in serious consequences including wage garnishment, tax liens on property and seizure of bank accounts. Taxpayers who are unable to pay taxes owed must take immediate steps to minimize the potential damage that can be caused by ignoring the problem. File your taxes, follow up with any notifications from the IRS and contact an advocate if you feel that you are not getting the assistance that is needed to resolve the issue.