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What Happens If I Can’t Pay My Taxes?

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In a Nutshell

Tax debt is a debt that keeps growing. The IRS has payment options available for those who are struggling. The quicker you resolve your issues with the IRS, the better off you will be. This article discusses the financial consequences of not paying taxes and tax payment options available to you if you can’t afford your tax bill right now.

Written by Attorney Kimberly Berson
Updated October 1, 2021

Every year, millions of taxpayers aren’t able to pay their taxes. If you are one of these Americans, you are not alone. Some individuals experience difficulty paying their income taxes when their filing status has changed due to a death of a spouse or a divorce. Others simply don’t have the money to pay their tax bill. If you find yourself facing a challenging tax situation, do not ignore it. 

Tax debt is a debt that keeps growing. The IRS has payment options available for those who are struggling. The quicker you resolve your issues with the IRS, the better off you will be. This article discusses the financial consequences of not paying taxes and tax payment options available to you if you can’t afford your tax bill right now. 

It’s Best To File Your Tax Return Even If You Can’t Pay What You Owe 

Most working Americans are required to file federal income tax returns and to pay federal taxes every year. The tax filing deadline is usually April 15th, “Tax Day.” This year, Tax Day is May 17th because of the coronavirus pandemic. A taxpayer who fails to file a tax return by the filing deadline will accrue tax penalties and interest. The failure-to-file penalty is 5% per month of the unpaid tax, but it will not exceed 25% of the amount of tax due. On top of that, if taxes are owed, late payment penalties are charged. The failure-to-pay penalty is one-half of one percent for each month that the tax remains unpaid, up to a maximum amount of 25% of the tax liability. 

Additionally, interest will be charged on unpaid taxes and penalties. Interest is even charged on the accrued interest. The IRS interest rate is the federal short-term rate plus 3%. Even if you don’t owe taxes, file a return. If you are entitled to a tax refund, you won’t receive the tax refund until you file a return. Overall, even if you can only make a partial payment, doing so will ultimately end up being much less expensive in the long run than making no payment at all.  

Can I Get A Tax Extension To File A Return? How Can I Get Tax Help?

If you can’t file your tax return by the due date, you may apply for an extension to file your return. This approach will help you avoid penalties and interest for a late-filed return. But, it will not prevent penalties and interest assessed for late payment. 

If you need tax help, you can hire a tax professional or a certified public accountant (CPA) to prepare your return. CPAs are busy during tax season so it is best to contact them several weeks before the tax due date, whenever possible. Some people prepare their tax returns by using tax preparation software like Turbotax. You can e-file your tax returns with the IRS. Tax liability may be paid by direct pay through your bank account, with a credit card, or a debit card. Finally, the IRS has contracted with three credit card companies to allow taxpayers to pay federal income taxes by credit card. 

The IRS Has Options For You 

If you are unable to pay your tax debt in full, the IRS has several payment options available for you if you need more time to pay your tax bill, one of the options offered by the IRS is an installment agreement. An installment agreement is a plan that allows you to pay unpaid taxes overtime via monthly payments. To take advantage of this option, you’ll need to complete an online application. You will be contacted if your request for an installment agreement is approved. Online payment plans include:

  • Short-term payment plans - payment period is four months or less and the total amount of tax bill is less than $100,000 in combined tax, penalty, and interest.

  • Long-term payment plans - the pay period is longer than four months, paid in monthly payments, and the tax liability is less than $50,000 in combined tax, penalty, and interest. If a long-term payment plan is approved, you may be charged a set-up fee. Long-term payment plans are between 6 and 72 months. 

With larger tax debts, you will need to file Form 9465. Also, some larger agreements or offline agreements may cause you to file a filing fee. 

What Is An Offer In Compromise?

Another payment option offered by the IRS is an Offer in Compromise (OIC). An OIC is an agreement between the IRS and the taxpayer wherein the IRS agrees to accept less than the full amount of the taxpayer’s tax liabilities. To qualify, the taxpayer must meet the following criteria: 

  • Has filed with all tax returns,

  • Has made all the required estimated tax payments for the current year, and

  • Has made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. 

It is not easy to get an OIC. The taxpayer must show the amount that they are offering to pay the IRS is equal to or greater than the reasonable collection potential. The taxpayer must demonstrate that if the IRS was to start collection proceedings against the taxpayer, it would receive equal or less than the amount the taxpayer is offering to pay. Before making a determination, the IRS will evaluate your property, such as your real property, automobiles, bank accounts, and other assets. Your future income (minus basic living expenses) will also be examined. If the IRS agrees to an OIC, it may offer you a payment plan up to 24 months to pay your tax debt.  

How Do I Apply for an Offer in Compromise (OIC)?

To apply for an OIC, taxpayers need to complete tax forms such as Form 656 Offer in Compromise, Form 433-A (OIC), and/or Form 433-B. For more information about the forms see the IRS website. The application fee for an OIC is $205. This fee may be waived if you are a low-income taxpayer. The IRS takes six months to two years to process OICs. Nearly half of the applications are rejected. This option is best if you have large tax debts due accrued over multiple tax periods.

What Is A Partial Payment Installment Agreement (PPIA)?

A partial payment installment plan may be available to you wherein you’ll only pay back a portion of the amount owed. You will have to show that you can’t pay the full amount of the tax debt. Similar to an OIC, you’ll need to complete a 433 form. The payment period may extend up to 72 months or until the collection statute expiration date (“CSED”). The IRS CSED is the last day the IRS has to collect on an assessed tax debt, penalties, and interest. The CSED is 10 years from the date of assessment. 

Unlike the OIC, the IRS reviews PPIAs every 2 years. If your financial condition improves, it will increase your payments. After you request a PPIA, you will likely receive a response within 30 days. 

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What Is A “Currently Not Collectable” Status?

In some circumstances, if the IRS agrees that you can’t pay both your taxes and your basic living expenses, it may place your account in a Currently Not Collectible (CNC) status. The IRS will not try to collect from you while your account is classified in this way. But, you will still be charged interest and penalties. This is a temporary status for most people. The IRS will review your finances and if your financial condition improves, it will restart the collection process.

The IRS Will Use Debt Collection Tactics If You Fail To Pay Or Work Out An Agreement

If you don’t work things out with the IRS, it will start collection activities. If you don’t file a tax return and pay your taxes, the IRS will send you a series of notices. You may receive a call from the IRS employee at the Internal Revenue Service Center. You may get an in-person visit from the IRS local office. If you haven’t filed a return, the IRS will prepare a Substitute for Return (SFR) against you that will calculate the tax you owe. The tax assessment will be unfavorable because it won’t include any additional exemptions that you may be eligible for, expenses, etc. You may not be given tax credits such as the child tax credit. Tax credits help to reduce your tax liability. If the IRS has filed the SFR against you, you can still file a return and the IRS will usually rely on your return to calculate tax liability overall.

If you don’t pay your tax debt after you have received notices from the IRS, you will receive notices of intent to levy or record a notice of federal tax lien. A federal tax lien on your property allows the IRS to go after your property to pay back taxes. The IRS could go after your bank account or garnish your wages. The notices will provide you with your collection due process rights. You will have thirty days to request a hearing before they levy. Even if the IRS has a federal tax lien when you receive the letters, it won’t levy until after the thirty days or after your hearing has been held. If you are a sole proprietor, it could levy or go after your accounts receivable. Fortunately, the IRS will not garnish stimulus payments to satisfy unpaid taxes.

Let’s Summarize…

Failure to pay your tax liability by the tax deadline can be costly. Tax debt is a debt that continues to grow until you resolve it. You will be charged penalties and interest which will significantly increase your tax bill. If you can’t pay your taxes by the tax deadline, contact the IRS immediately to work out a solution. Many American taxpayers need a workout to help pay their income taxes. The IRS has many options that may help you pay your tax liability, such as an installment agreement, an offer in compromise, or a partial installment agreement. Seek those options as soon as possible to limit your overall tax debt.

Written By:

Attorney Kimberly Berson


Kimberly Berson is an attorney with over twenty-five years of legal experience and a specialty in bankruptcy law and bankruptcy litigation. Additionally, Kim is an instructor in the paralegal certificate program at Hofstra Law School where she teaches Bankruptcy Law, Contracts La... read more about Attorney Kimberly Berson

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