What if I Can't Pay My Taxes?

Getting a tax refund may feel like the norm, but not everyone wants a refund. It's often better to break even or to owe a small amount than to give the government a free loan all year. 

Sometimes, though, you might end up owing more than you planned. This could happen if you had too little income withheld from your paychecks during the year, or if you're self-employed and didn’t make correct estimated tax payments. It might also happen if you've settled debts and owe taxes on the forgiven amount.

Typical debt relief strategies like debt settlement are generally off the table when you owe the IRS. But the federal government offers several other ways to handle your tax debt if you can't pay it off all at once.

Ask the IRS to Delay Collection

If you can’t pay tax debt because of a temporary financial setback, you can ask the IRS to delay collection. You will still owe the debt, but the government may give you some time before it expects payment. 

To ask for a delay, fill out Form 433 and provide the government with details about your monthly income, expenses, and assets. 

Note that, even if the IRS gives you extra time to pay, your balance will typically continue to grow due to penalties and interest. You can keep this to a minimum by paying as quickly as possible.

Set Up a Payment Plan

When you owe a large sum, setting up a payment plan with the IRS might be your best option. You can apply for one of these plans online.

There are two payment plan types: short-term and long-term. Short-term plans give you 180 days to pay what you owe. You don't have to make regular monthly installments, but you are expected to pay back the full balance by the end of the 180-day period. This option is generally available to those who owe $100,000 or less in taxes (including penalties and interest).

Long-term payment plans give you more than 180 days to pay back what you owe, but they require monthly payments. This option may be available if you have $50,000 or less in tax debt, including penalties and interest.

Make an Offer in Compromise (OIC)

An offer in compromise (OIC) is basically the IRS version of debt settlement. You make the IRS an offer that's less than what you owe. It considers the offer and, if it accepts, you're off the hook for the rest.

To do this, you must have made all estimated tax payments (if applicable), and filed all tax returns. You also can't be in an open bankruptcy proceeding. 

You'll pay an application fee for an OIC. If the IRS determines you're ineligible, it refunds this fee. It may also be waived for certain low-income borrowers. You'll need to provide the IRS with a detailed look at your finances. This includes your:

• Ability to pay

• Income

• Expenses

• Asset equity

The IRS has a prequalifier tool to help you get a sense of whether an OIC is the right move before you go through the trouble of submitting an application.

To apply, you submit an initial payment along with your OIC paperwork and application fee. There are two ways to do this:

• If you intend to pay a lump sum for your OIC, you must submit an initial payment of 20% of the total offer amount, then pay the remaining balance in five or fewer payments.

• If you offer to make periodic payments to the IRS, your application must include the first monthly payment. You must also continue making payments as outlined in your OIC while the government considers your offer.

What to Do If You Disagree with the Amount of Your Tax Bill

Though it’s uncommon, tax bills can sometimes happen because of inaccurate information in your tax return. If you get a bill that doesn't seem accurate, reach out to the IRS promptly for clarification. 

You can call or visit your local IRS office. Bring a copy of your bill and tax return, along with any other documentation that helps you show that the tax bill is incorrect. The IRS reviews the information and, if it determines you're correct, updates your account.

Acting Promptly Is Your Best Move

To minimize how much you owe, reach out to the IRS as soon as you receive your bill. Coming up with a plan can reduce your stress, and paying promptly minimizes the penalties and interest charges.

Once you've got your tax debt under control, take steps to ensure it doesn't happen again. This might mean working with a tax professional, or setting aside money on your own so you can pay any future bills in full.