What to Do When You Can’t Pay Your Tax Bill

Learn IRS payment options when you can’t pay in full.

For the 2017 tax season, the IRS expected that about 70 percent of taxpayers would be in a position to receive tax refunds, which means approximately 30 percent of taxpayers probably had to open their wallets to the U.S. Treasury at tax time — a scenario that’s likely to repeat in 2018. As painful as withholding tax from your paychecks during the year can be, finding out that you owe the IRS money can be worse. Discover helpful information and tax tips you can use to avoid late filing penalties when you can’t pay taxes.

What If I Can’t Pay My Taxes?

“If you can’t pay your taxes, your points of action should be based on your current financial status and how much you owe,” said Ted Kleinman, a certified public accountant and owner of US Tax Help. “The worst thing to do is [to] not take any action or to react in a delayed fashion.”

Here are six steps you should take if you can’t pay a tax bill:

1. File Your Tax Return

Don’t think that you can hide from the IRS by not filing an income tax return “The No. 1 thing you should not do is not file simply because you can’t pay,” said Bill Smith, the managing director of CBIZ MHM’s national tax office. “It’s a crime not to file a return.”

Plus, you will be charged a failure-to-file penalty of 5 percent on the amount you owe for each month your return is late, Smith said. The penalty won’t exceed 25 percent of what you owe, however.

For those who file but don’t pay, the IRS will enact a smaller penalty of 0.5 percent on what you owe each month until you pay in full. By filing, you give yourself more time to pay with a reduced penalty.

In either case, though, you will be charged interest on the amount you owe. The rate, which compounds daily, is determined quarterly and is based on the federal short-term rate plus 3 percent.

Check Out: 10 Most Common IRS Tax Forms Explained 

2. Pay What You Can

Even if you cannot pay your entire tax bill, pay a portion of it to reduce the amount of money that accrues interest and penalties. For example, if your tax bill is $2,200 and you pay nothing, you’ll accrue interest and penalties on the entire amount. But, if you can afford to pay $1,100 now, you can cut your interest and penalties in half. Make sure to direct the IRS to apply any payment you send directly to your tax bill first, not to the penalty or interest, Smith said.

3. Contact the IRS

Rather than avoiding your tax responsibility, call the IRS at 800-829-1040 to explain your situation, and determine which payment options might work best in your situation. The IRS might be able to provide temporary relief, such as delaying collections activity on your account so that you can meet your basic living expenses. Even so, this solution will not eliminate your debt, and although the IRS might be able to waive some of the penalties, it cannot waive interest.

4. Apply for a Full-Payment Agreement

For short-term issues in which you will be able to pay your entire tax bill within 120 days, including any interest and penalties, apply for a full-payment agreement. Interest and penalties will still accrue until you fully pay, but there is no additional fee to apply. Apply via the IRS website or by phone at 800-829-1040.

5. Sign Up for an Installment Agreement

To get more than 120 days to pay your tax debt of less than $50,000, apply for an installment agreement either online through the IRS Online Payment Agreement site or via Form 9465. By using the agreement, you’ll make monthly payments to satisfy your debt via your bank account, payroll deductions, online payments or with cash at a retail partner.

You’ll also have to pay a fee that ranges from $107 if you pay via direct debit from your bank account to $225 for a standard installment or payroll deduction. But, if your taxable income is equal to or less than 250 percent of the poverty guidelines, you can apply for a reduced fee of $43 with Form 13844.

Learn: How to Get on an IRS Payment Plan

6. Make an Offer in Compromise

An Offer in Compromise is an offer you make to the IRS to pay less than you owe in exchange for releasing you from the remaining debt. An OIC isn’t an old-fashioned negotiation, however, and getting an offer accepted isn’t easy, said Smith. For the IRS to accept, the offer must meet one of three criteria:

  • The IRS is unsure that you owe the taxes.
  • The IRS doesn’t think the amount owed is fully collectible, such as if your assets and income are less than you owe.
  • The IRS finds that requiring full payment would be ineffective or inequitable because of truly exceptional circumstances.

Typically, the fee to apply is $186 but can be waived if your taxable income is equal to or less than 250 percent of the poverty guidelines. You must be current with your tax filings for the IRS to even consider your application, however.

When your offer is accepted, there are still ongoing conditions: You must file tax returns and make on-time payments for the next five years, said Kleinman. Failing to live up to this obligation can cause the offer in compromise to default and the matter to be sent to collections, he said.

Consequences of Not Paying Taxes

You will receive a letter from the IRS if you fail to pay the taxes you owe. The letter will state the amount you owe, including interest and penalties and request payment.

Failure to respond to the IRS requests can result in collections actions by the IRS, including filing a tax lien on your property or offsetting other refunds to which you might be entitled. A federal tax lien gives the IRS a claim against all of your property, and, if the IRS files a Notice of Federal Tax Lien in the public records, it can also hurt your credit score.

Smith said that in most cases of failure to pay, you have some time before anything particularly bad happens.

“The IRS isn’t an efficiency machine,” said Smith. It could take up to a year after you get an initial bill to get a notice that the IRS is taking collections actions.

Up Next: 9 Tips for Dealing With a Delinquent Tax Return

Going Forward

Your tax bill could be bigger than it has to be if you’re not taking all the tax deductions and credits you qualify for. Hiring a professional could help you reduce what you owe, but make sure you use someone reputable, said Smith. Additionally, if you have low income, you could qualify for representation by a tax professional associated with a low-income taxpayer clinic, according to the Taxpayer Advocate Service.

Cameron Huddleston contributed to the reporting for this article.