Tax Prep & Planning

5 Options For When You Owe – And Can’t Pay Taxes Right Away

Every year, millions of people file a tax return and owe. Most people pay the tax with their return, after the first IRS notice, or after getting an extension to pay from the IRS. But the rest need to make other arrangements to pay their outstanding tax bills.

Most people who need to set up an arrangement with the IRS get an extension of time to pay or they set up a payment plan. If you have a large tax bill or you’re in a financial hardship situation, you’ll need to set up a more complicated arrangement with the IRS. Here’s more about your options when you owe taxes and can’t pay.

1 – An extension gives you 120 days to get all the funds together

If you just need some extra time to pay, your best option is a 120-day extension to pay your full tax bill. To request a payment extension, call the IRS, use the IRS online payment agreement application, or get a tax professional to contact the IRS for you.

If you’ve waited too long and have been getting notices about your balance from IRS Collection, you can only get an extra 60 days to pay. The IRS grants extensions to individual and business taxpayers.

2 – Simple monthly payment plans are easy to set up

Streamlined agreements are available if you owe $50,000 or less and can pay the full tax balance in 72 months. These agreements require less paperwork than other types of IRS agreements. Most of the time, you’ll only need your employment and banking information to set up the agreement.

Another advantage of streamlined agreements: The IRS won’t file a federal tax lien on tax bills of $25,000 or less. For amounts between $25,001 and $50,000, you’ll need to pay by direct debit or by payroll deduction to avoid a lien filing.

To get a streamlined agreement, you can call the IRS, use the IRS online payment agreement application, or get a tax professional to contact the IRS and set up the agreement for you.

3 – More complicated payment plans mean more paperwork

If you owe more than $50,000 or don’t meet the streamlined installment agreement terms, you’ll need to ask the IRS for an agreement based on your “ability to pay.” This basically means the IRS will need you to submit documents to prove your expenses and paint your financial picture. Then, the IRS will tell you how much you can pay from equity in your assets (like IRA or stock funds) and on a monthly basis.

For all nonstreamlined agreements, the IRS will file a tax lien if you owe more than $10,000.

For taxpayers who owe between $50,000 and $100,000, the IRS has a pilot installment agreement program that allows you to pay your balance over 84 months if you agree to a direct debit or payroll deduction. There’s some good news and bad news with this pilot. The good news: You won’t have to provide detailed financial information to prove your ability to pay. The bad news: The IRS will probably file a tax lien.

Sometimes, people who owe more than $50,000 will request an extension of time to get a loan or use their assets to pay down the balance to less than $50,000. Then, they can request a streamlined agreement for the rest of the balance.

To request a nonstreamlined agreement, you’ll need to call, write, or visit the IRS in person. Or, you can get a tax pro to help.

4 – A special status allows people with few assets and income to defer payment

If you can’t pay the IRS, you can request currently not collectible (CNC) status, which is deferred payment. CNC status strictly limits your expenses to necessary living expenses, set by the IRS. CNC status is usually temporary. The IRS checks on your financial situation every year.

For CNC status, the IRS will file a tax lien if you owe more than $10,000. To request CNC status, you’ll need to call, write, or visit the IRS in person. Or, you can get a tax pro to help. You’ll have to provide the IRS with your financial information, and documents to prove your hardship, to request CNC status.

5 – You can settle your tax debt if you’re in severe financial hardship

If you have few assets, little monthly income, and little or no prospects for future income, you may want to consider requesting an offer in compromise (OIC). An OIC allows you and the IRS to agree to settle your tax debt for less than the full amount you owe.

OICs are relatively rare. You’ll qualify only if you can’t pay all the taxes you owe with your assets or through a monthly payment plan before the collection statute expires. If you qualify, you’ll also need to be able to pay the “offer” amount to settle the debt.

Remember: This program is not for the temporarily distressed. Viable businesses and taxpayers with short-term financial hardships are generally not good candidates for the OIC.

How to Get Help

You may be one of many who need an alternative payment arrangement from the IRS this year. First, look to the most common options for people with a short-term inability to pay: a payment extension or a streamlined installment agreement.

If you can’t meet the terms for one of these options, you’ll need to examine your financial situation and set up an agreement based on your ability to pay.

If you want a tax advisor to contact the IRS for you – for a simple or complex issue – Block Advisors is here to help. Learn more about our personal tax services here.

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