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What if you can’t pay your tax liability

April 15 has passed. You filed your taxes and you have a tax liability. What should you do if you don’t have the money to pay your tax liability?

Don’t panic. It happens to many and there are several ways to settle a debt with the IRS.

Ways to pay your tax liability:

  • Make a full payment – Pay your balance within 120 days
  • Installment Agreement – Make payments over time (greater than 120 days)
  • Offer in Compromise – Settle your tax debt for less than you owe

It’s also important to know that there is a penalty for failure to file a tax return at all. This means you should file your return whether or not you can make the full payment. It also means that taxes are due by April 15 even if you file an extension. It’s always in your best interest to pay in full as soon as you can to minimize any additional charges.

You may have also received an IRS notice about your tax liability. They sure do like to let you know when taxes are owed, don’t they?

Regardless of whether you receive a notice or not, what should you do if you can’t pay your tax liability?

Pay your tax liability

When you file your tax return, you should make any payment that you can by the April 15 deadline. Even if your tax bill seems way out of your budget, any payment can be helpful. Making a payment, no matter how small it might feel, will help to reduce any interest accrued on your tax liability.

There are several ways to do this.

  1. You can make a payment online directly with the IRS. Paying via a checking account has no extra costs associated with it. If you choose to use a credit card, then there are extra fees.
  2. You can also download the IRS app which allows you to make payments via your smartphone, check on your refund status and more.
  3. Most tax preparation software will allow you to submit payment information along with electronically filing your return. Ask your tax professional about this or look it up for whichever tax software you are using.
  4. You can also mail a check or money order with a copy of your tax return or payment voucher. Make the check payable to the United States Treasury and be sure to include your name, address, daytime phone number, social security number, tax year, and form or notice number (e.g., 2018 Form 1040) on the front of any payment.

Pay the full balance within 120 days

If you think you can pay your full balance within 120 days of the due date, the IRS has a great option for you. This option doesn’t eliminate interest and penalties which start accruing the day the payment is late even with a payment plan in place. Be sure to account for the extra interest and penalty when considering the payment in full option.

This payment option is available to individuals who owe less than $100,000 in combined tax, penalties and interest.

Maybe you will be signing a contract shortly or are working on saving enough in the next couple of months. Whatever the reason, there are no set-up fees associated with paying your balance in full within 120 days of the due date.

This is called a full payment agreement with the IRS and you can establish this payment plan online directly with the IRS using their Online Payment Agreement application. The process is mostly self-explanatory and you will get an answer immediately upon completing the full application. You will need to answer some specific questions to verify your identity, etc.

In order to have this payment plan request considered, you must be current on all tax return filings. If you are in bankruptcy proceedings, then you most likely aren’t eligible for a payment plan.

What if you can’t pay within 120 days?

Pay the balance in more than 120 days

If you cannot pay your full balance within 120 days, then this is an option. It allows you to make automatic payments over time to pay your tax liability. Paying off your tax liability with this option is called an installment agreement.

Once again, penalties and interest will continue to accrue on any unpaid balance, so it’s in your best interest to pay your tax debt down as quickly as you possibly can. Installment agreements are available to taxpayers who owe $50,000 or less in combined tax, penalties and interest, and have filed all required returns.

There is a small set-up fee for this agreement ($31). However, for low-income taxpayers, the fee is reduced or possibly waived if you meet certain conditions. You can request an installment agreement online. Again, you’ll get an approval immediately upon completing the application process online.

You can also complete Form 9465 and mail it to the IRS. This option will take longer and might also involve more back and forth with the IRS in the case any information is missing or needs further explanation.

During the application process, you will specify the amount you can pay and the day of the month for automatic withdrawal.

What if you feel like you can’t meet your tax obligation even with an installment agreement in place?

Offer in Compromise

If you can’t pay in full with an installment agreement, you can propose a partial payment with an offer in compromise. This is an agreement between the taxpayer and the IRS to resolve any tax liability by paying a reduced amount. In order for the IRS to consider this option, you must have filed all tax returns and made all required estimated tax payments for the current year. Taxpayers in open bankruptcy proceedings aren’t eligible to enter into an offer in compromise. To confirm eligibility you can fill out the Offer in Compromise Pre-Qualifier tool on the IRS website.

In order for the IRS to accept an offer in compromise, it must believe that the amount offered is greater than any reasonable collection potential. The reasonable collection potential is how the IRS measures your ability to pay. The IRS takes into consideration all assets including RVs, autos, real estate, bank accounts, retirement accounts, and other property. In addition to all these assets and bank accounts, the IRS can also consider future income excluding reasonable amounts for basic living expenses. With that said, you really do need to show any hardship from paying your tax liability in order to qualify for an offer in compromise.

You may qualify for an offer in compromise under one of the following reasons:
  1. If there is any doubt as to the liability of the tax owed. This means you can show the tax liability is incorrect under the law.
  2. If the amount of tax liability is more than is fully collectible. This means that your assets, bank accounts, income and possibly future income are less than the full amount of tax owed.
  3. If the amount of tax due would create an economic hardship for the taxpayer, the IRS may accept an offer in compromise to settle the debt. This option shows there is no doubt as to the tax that is legally owed, but collecting the full amount would cause financial strains for the taxpayer. It is possible to show this with detailed financial records and any future income.

All forms and instructions for applying for an offer in compromise can be found in the IRS booklet Form 656. There is an application fee for an offer in compromise which once again can be waived for low-income individuals.

Tax Lien

Should you choose to ignore any tax liability or tax notice, the IRS can issue a tax lien against you or your property. This means the government is securing its debt with your assets. The best thing to avoid this is to respond to any notices from the IRS even if you think you can’t pay your tax liability.

There are options as stated above to avoid a lien. I highly recommend getting in touch with a tax resolution specialist to help you in this situation.

What question do you still have about paying your tax liability?