The IRS Offers Alternatives When You Can’t Pay Your Tax Bill

If you can’t pay your tax bill, you’re not the only one. In fact, you’re one of more than 15 million people who owe the IRS. Each year, millions of taxpayers have to make payments or other arrangements for their tax bill.

What kind of other arrangements?

The IRS offers several options for people who can’t pay. These range from short extensions of time to more complex agreements for people who owe large sums or have financial hardship situations.

Most of the time, people just need a few extra weeks to get the money together, or they set up a monthly payment plan with the IRS.

Here’s a little more about each type of IRS payment option. To see which option may be best for you, learn more about what to do when you can’t pay your taxes.

1. You can request an extension of time to pay of up to 120 days.

What it is: If you just need some extra time to pay, your best option is probably a 120-day extension to pay your entire tax bill. The IRS grants extensions to individual and business taxpayers.

Ways to request it:

  • Call the IRS.
  • Use the online payment agreement application at IRS.gov.
  • Authorize a tax pro to request the agreement for you, using a dedicated IRS practitioner phone line.

Tip: If the IRS Collection function is handling your case (you’ll know if you receive a Final Notice of Intent to Levy), you can only get an extension of up to 60 days.   

2. Streamlined installment agreements are simple payment plans

What it is: If you owe $50,000 or less and can pay your full tax bill within 72 months, you can request a streamlined installment agreement. It’s called “streamlined” because these agreements require less paperwork and they’re pretty simple to request.

Ways to request it:

  • Call the IRS.
  • Use the online payment agreement application at IRS.gov.
  • Authorize a tax pro to request the agreement for you, using a dedicated IRS practitioner phone line.

Tip: In a streamlined installment agreement, the IRS won’t file a federal tax lien on amounts of $25,000 or less. For amounts between $25,001 and $50,000, the IRS requires you to pay by direct debit to avoid a lien filing.

3. Other “nonstreamlined” installment agreements are more complicated

What it is: If you owe more than $50,000 or can’t pay your tax bill within 72 months, you’ll need to arrange to pay the IRS based on your ability to pay. This means you’ll need to provide documents to the IRS showing your full financial picture.

The IRS will use the information to determine how much you can pay from equity in your assets and through a monthly installment agreement.

First, the IRS will usually ask you to pay as much as you can with equity in your assets

Examples of your assets could be funds in an IRA or value in the stock you own. The IRS can also ask you to take out a loan on your assets, such as a home equity line of credit.

Often, people request an extension of time from the IRS to get a loan or use their assets to reduce their tax bill to less than $50,000. Then, they can secure a streamlined agreement for the remaining balance.

If you still owe more than $50,000, you’ll need to set up a payment plan based on your ability to pay

You’ll have to make monthly payments based on your income and expenses. You will use a Collection Information Statement (Form 433-A or 433-B) to detail your finances and propose a monthly payment amount.

If you can pay the entire tax bill within 72 months, you may be able to establish what is informally called a conditional installment agreement. This agreement allows you to make payments based on your actual monthly income and expenses (instead of IRS standards). But if you can’t pay within 72 months, or if the IRS determines that your expenses are excessive, the IRS can set limits on your household expenses, such as housing, food, and vehicle costs.

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

Ways to request it:

  • Call the IRS.
  • Write to the IRS.
  • Authorize a tax pro to request the agreement for you.

Tip:  Right now, the IRS has a special program that allows you to avoid a lot of financial paperwork if you owe between $50,000 and $100,000, and you can pay off your tax balance in 84 months or less. One catch: The IRS will file a tax lien. This special program is available until Sept. 30, 2018.

4. Currently not collectible status means you can’t pay … right now

What it is: If you can’t pay the IRS, you can request currently not collectible (CNC) status. However, when the IRS determines your ability to pay, the IRS will set strict limits on the amounts that you can pay for necessary living expenses. These limits are called the IRS collection financial standards. For example, for 2018, a family of four in Orange County, CA, will be limited to $3,286 in housing and utilities expenses.

CNC status is usually temporary. The IRS checks your tax records periodically to determine whether your financial situation has improved and you can start paying. For CNC status, the IRS will file a tax lien if you owe more than $10,000.

Ways to request it:

  • Call the IRS.
  • Write to the IRS.
  • Authorize a tax pro to request the agreement for you.

5. Offers in compromise are for rare financial hardship situations.

What it is: If your assets, monthly income, and prospects for future income offer the IRS little hope that you’ll ever be able to pay your tax bill, you may want to consider requesting an offer in compromise (OIC).

OICs allows you and the IRS to agree to settle your tax debt for less than the full amount you owe.

You’ll qualify only if you can’t pay all the taxes you owe with equity in your assets or with monthly installment payments before the collection statute expires. If you qualify, you’ll also have to be able to pay the offer amount, which will vary based on your situation and the type of OIC. 

How to request it:  To obtain an OIC, you must apply with IRS Form 656 and provide the IRS with a full financial picture of your ability to pay. IRS personnel who specialize in this program will review your application.

Unless you meet the IRS low-income criteria (found in the Form 656 booklet), you’ll have to pay an application fee (currently $186), plus a down payment, and possibly continuous payments of the offer amount (depending on the type of OIC payment option you select).

Tips: First, be wary. This program is not for people who are temporarily distressed. Viable businesses and people with short-term financial hardships are generally not good candidates for the OIC. Second, the OIC rules can be complicated, and the process can take several months to complete. Because there are nonrefundable fees involved, it’s important to consult a tax professional who understands the OIC program before you apply.

How to figure out your best payment option

You may be one of many people who need an alternative payment option this tax season. First, look to the most common alternatives for people who can’t pay in the short-term: an extension or a streamlined installment agreement.

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

Learn all the steps to take to investigate your situation and request the right payment agreement when you can’t pay your taxes.

Or, get expert help from a tax pro trained in tax problem solving. Learn more about H&R Block Tax Audit & Notice Services, and sign up for a free consultation.

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