4 Steps to Take If You Can’t Pay Your Tax Bill
If you're struggling to pay your tax bill, it's important to know your options and we recommend taking these steps.
What to Do If You Can't Pay Your Tax Bill
You completed your taxes, and you find you owe the IRS thousands. Don't panic! You can handle the situation by taking immediate action.
Important: While an extension can give you more time to submit your tax return, it doesn't extend the deadline to pay the taxes you owe, so you'll still incur interests and penalties.
1. File Your Tax Return Anyway
Many people delay filing their tax returns until they can raise the cash to pay the bill. However, this approach is a mistake. The IRS has two different penalties:
- Failure to file: The failure to file penalty applies if you don't file your return by the due date. The minimum penalty is $525, but it can be 5% of the tax due for each month or partial month your return is late, up to a maximum of 25%.
- Failure to pay: The failure to pay penalty applies if you don't pay the tax you owe when it's due. If you don't pay what's owed on the amount shown on your tax return, the penalty is 0.5% of the unpaid taxes for each month or part of the month your tax bill is unpaid — significantly less than the failure to file penalty.
2. Understand What You Owe
Next, take a close look at your tax bill. Review how much the principal is, and how much interest and penalties will accumulate. Interest on unpaid taxes usually starts building starting from the original due date.
3. Pay What You can
Even if you can't afford to pay the full amount you owe, try to pay what you can by the tax deadline. Every dollar you send to the IRS ahead of the deadline reduces your principal balance, so less interest and penalties will build. You can make payments online via direct debit or credit card.
4. Set Up an IRS Payment Plan
If your tax bill is more than you can afford to pay in a few weeks, you may be eligible for a payment plan through the IRS. There are two options:
- Short-Term Plan (180 days or less): If you need less than six months to pay the bill, a short-term plan is your best option. You can qualify for the short-term plan if you owe less than $100,000. There is no setup fee; however, there are penalties and interest charges.
- Long-Term Agreement: A long-term payment plan is a good choice if you need six months or more to pay off your bill. There is an initial $22 setup fee (low income tax filers may be eligible for a fee waiver), plus penalties and interest. For more details on which plan type fits your situation, including low-income fee waivers, TaxRise's installment agreement guide breaks down each option.
You can apply for an IRS payment plan online.
Other Options
If a payment installment agreement is still out of reach with your budget, you might be eligible for one of the following programs:
- Find Out If you Qualify for an Offer in Compromise: An Offer in Compromise (OIC) allows you to settle your tax bill for less than you owe. The IRS considers your ability to pay, income, and your expenses to determine your eligibility. In general, OIC is reserved for taxpayers with significant financial hardships.
- Request Temporary Relief If You're In "Not Collectible" Status: If paying your tax bill would make you unable to afford basic living expenses like rent or utilities, you can request that the IRS place your account into "Not Collectible" status. This status delays collections efforts until you're on better financial footing (but interest and penalties still apply).
Get Help for Next Year
Taxes are complicated. If you're overwhelmed, or need help adjusting your withholdings so you don't run into this problem again, reach out to a certified public accountant (CPA). They can review your finances and tax situation, and help you negotiate the best possible outcome with the IRS.
You can use the National Association of State Boards of Accountancy's database to find a CPA near you.
Real solutions for tax debt relief!
FAQs
What happens if I don't pay my taxes in full?
If you don't pay your tax bill by the due date, the IRS will charge you interest and penalties on the outstanding balance. If you don't make any payments, the IRS can issue a tax lien against your property.
Will the IRS forgive my tax debt?
The IRS rarely forgives tax debt. However, if you have a significant financial hardship, such as a serious illness and costly medical bills, you may be eligible for an OIC and settle your debt for less than you owe.
How long can I take to pay off my tax bill?
With a short-term plan, you have up to 180 days to pay your bill. With a long-term agreement, you can make payments for up to 72 months.