Five Options for When You Owe Taxes – and Can’t Pay 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.
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.
Example: Bob gets extra time to take out a home equity line
Bob files his 2017 return and owes $12,312. He can’t pay the bill, but he can set up a home equity line of credit and borrow against his home equity to pay off the tax balance.
Bob needs some time to get approved for his HELOC and pay the IRS. Bob calls the IRS to ask for a 120-day extension of time to pay. The IRS grants Bob’s request and gives him a payoff amount for 120 days, including his failure to pay penalties (0.5% per month) and interest (currently, 5%). Bob gets the HELOC, borrows the funds, and pays the IRS before the 120 days are up.
Simple monthly payment plans are easy to set up
You can get a “streamlined” payment plan if you owe $50,000 or less and you can pay off your tax balance in 72 months. Streamlined installment 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 bills between $25,001 and $50,000, you’ll need to pay by direct debit or 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.
Example: Bob sets up a payment plan and asks for penalty relief
Bob files his 2017 return and owes $36,000. He owes for 2017 because he sold investment land and made a lot of money on it. Bob doesn’t think he’ll owe again in 2018 when he files his return.
He can’t pay the bill and needs a payment plan. Bob calls the IRS and asks for a payment agreement. He gets payment terms of $500 a month for 72 months. Bob must have his payments directly debited from his bank account to avoid a lien (because he owes more than $25,000). He will also pay an accrued failure to pay penalty (at 0.25% per month) and interest on the balance.
Bob completes and sends Form 433D (installment agreement paperwork) to the IRS and monitors his mail to make sure the IRS sets up his payment arrangement. Next month, Bob gets confirmation from the IRS that his direct debit payment plan is set up. The following month, the IRS begins automatically taking payments from his account. Bob will continue to make payments, including forfeiting his future tax refunds to pay down the balance, until he pays the taxes off.
At the end of the payment plan, Bob will contact the IRS to ask for first-time penalty abatement for his 2017 failure to pay penalty, totaling $3,012. Learn more about first-time abatement.
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. 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.
Special pilot program avoids the extra paperwork
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 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.
Another strategy: Pay the balance down and get a streamlined agreement
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 their balance to less than $50,000. Then, they can request a streamlined agreement for the rest of the balance.
Example: Bob proves his financial situation to the IRS and gets a payment plan
Bob files his 2017 return and owes $51,019 . He owes for 2017 because he sold investment land and made a lot of money on it. Bob doesn’t think he’ll owe again in 2018 when he files his return.
Bob is only working part-time. He can’t pay his tax bill and doesn’t have any assets to borrow against or sell to pay the IRS. Bob gets together all his documents to understand his average monthly income (paystubs, deposits in bank accounts, etc.) and expenses (mortgage, utilities, car payment, medical bills, health insurance, etc.).
Bob determines that his monthly disposable income would be $300 a month (based on IRS expense limitations). He completes Form 433F, Collection Information Statement, gathers all his supporting documentation, and calls the IRS to explain the situation. While he’s on the phone, Bob faxes the IRS his Form 433F, plus the documents the IRS requests, including the last three months of his paystubs and a copy of the last three months of his checking and savings account statements.
The IRS preliminarily approves his installment agreement of $300 a month, but won’t finalize it until Bob sends in proof of his health insurance that he pays each month. Bob sends the requested information and gets a letter from the IRS in two months stating that his payment plan is approved. Bob starts making his payments each month and continues until his situation changes and he can pay off the balance.
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 a temporary “pause” on your tax bill collection until your situation gets better. CNC status strictly limits your expenses to necessary living expenses, set by the IRS. The IRS will check back 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 likely documents to prove your hardship.
Example: Bob proves his financial hardship to the IRS and gets temporary CNC status
Bob files his 2017 return and owes $8,019. Bob owed because he collected unemployment compensation and didn’t have any federal income taxes withheld. Bob’s unemployment will run out soon, and he doesn’t think he will owe when he files his 2018 return.
Bob doesn’t have any assets to borrow against or sell to pay the IRS. He gathers all his documents to understand his average monthly income (unemployment documents, paystubs, deposits in bank accounts, etc.) and expenses (mortgage, utilities, car payment, medical bills, health insurance, etc.). Bob determines that his monthly disposable income is zero (based on IRS expense limitations).
Bob completes Form 433F, Collection Information Statement, gathers all his supporting documentation, and calls the IRS to explain the situation. He sends the IRS his Form 433F, plus documents the IRS requests, including the last three months of his unemployment income and a copy of the last three months of his savings and checking account statements.
The IRS preliminarily approves his currently not collectible status, but won’t finalize it until Bob sends proof of his health insurance that he pays each month. Bob sends the requested information and gets a letter from the IRS in two months stating that his currently not collectible status is approved. Bob doesn’t have to pay the IRS until his situation changes.
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.
Example: Bob proves his financial hardship to the IRS and settles his tax debt
Bob files his 2017 return, and the IRS takes his refund of $619 to pay down his tax balances from previous years. He owes $31,017 for years 2011 to 2014. He owes the taxes because he used to be self-employed and didn’t make required estimated tax payments.
Bob is employed now at a minimum-wage job that he has had for two years. Bob has trouble meeting his monthly expenses, and his only asset is his car, which is worth $3,000. He has been in currently not collectible status with the IRS since 2015, and his financial situation hasn’t improved.
Bob gathers all his documents to understand his average monthly income (paystubs, deposits in bank accounts, etc.) and expenses (mortgage, utilities, car payment, medical bills, health insurance, etc.). Bob also lists all the assets he owns:
- Personal effects worth about $2,000
- $350 in his bank account
- Equity in his car totaling $3,000
Bob has no other assets. He determines that his monthly disposable income is zero (based on IRS expense limitations). Bob completes his offer in compromise package, Form 656, and determines that he qualifies for an OIC. He also determines that his offer amount would be $1 (offer amounts have to be $1 or greater), based on having no monthly disposable income and no assets.
His current assets are specifically excluded because of IRS rules. Bob submits his OIC forms and supporting documentation to the IRS. Bob’s income meets the low-income fees waiver, so he doesn’t have to pay the $196 OIC application fee.
The IRS investigated and approves Bob’s OIC six months later. Bob gets confirmation from the IRS, pays the $1 for his OIC acceptance, and agrees to file and pay his taxes for the next five years according to the terms of the OIC. The IRS writes off the remaining taxes owed, and Bob owes no more taxes, as long as he keeps the terms of the OIC. The IRS releases all tax liens.
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’re not sure what’s best for your situation, it’s a good idea to get help from a tax pro, who can also contact the IRS for you to request any simple or complex payment agreement you need. Learn more about H&R Block’s Tax Audit & Notice Services. Or make an appointment for a free consultation with a local tax professional by calling 855-536-6504.
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