What If I Can't Pay My Taxes?
7 Realistic Tax Options If You Can’t Pay Your IRS Tax Bill
Do you have a tax bill you can’t afford to pay? Are you worried and wondering, what if I can't pay my taxes? Maybe you're not even sure why you owe taxes. If you ignore the situation, it can get out of control quickly. However, the IRS is willing to work with most taxpayers who can’t pay taxes in full. Many states also have resolution frameworks for taxpayers in need.
To help people who cannot afford to pay their taxes, the IRS and many states offer different resolution options. To qualify for many of these options, you must apply and meet specific criteria.
Here’s a look at the most common options offered by the IRS as well as a few un-official options you may want to consider. The IRS usually requires that you file tax returns due before setting up an agreement with the IRS (and most states do too). Even if you cannot pay what your tax return states you owe, always file because the penalty for not doing so is 10x the penalty for not paying on time.
Table of Contents
- Official IRS Alternatives to Paying in Full or Late
- Non-IRS Sponsored Alternatives to Pay Taxes in Full
- What If You Can't Afford to Pay Your Taxes and Are Supposed to File?
- What Happens If I Can't Pay Taxes?
- I Owe State Taxes and Can't Pay
- Get Help If You Can't Afford to Pay Taxes
- Can You Go to Jail for Not Paying Taxes?
- Actionable Strategies for Dealing with Unpaid Taxes
- Free Legal Aid and Debt Consolidation Options
- How to Find the Best Tax Relief Help
Official IRS Alternatives to Paying Taxes in Full or Late
The IRS has programs for people who can't afford to pay their taxes. If you want to take advantage of one of these programs, you will need to submit paperwork and supporting documents to the IRS. A tax pro can help you navigate this process. Here is an overview of your options.
1) Set up a Short-Term Payment Extension
If you need a few months to pay, request a 180-day payment agreement. It is similar to setting up an installment agreement (discussed below) in that you will accrue interest and penalty charges. However, there is no fee to set it up. You can apply online as long as you owe less than $50,000.
2) Set up an IRS Installment Agreement
If you cannot pay in full, but you can make a payment every month to the IRS, an installment agreement (IA) is a great option. An IA, also known as a tax payment plan, lets you pay off your taxes in monthly payments. There are different plans based on how much you owe and how long you need. Here are the main options:
Guaranteed Installment Agreement
It is the quickest payment plan to obtain. It is for taxpayers who owe less than $10,000 and can pay back the entire amount in three years. The IRS guarantees it with a few qualifications to meet.
Streamlined Installment Agreement
This installment agreement is for taxpayers who owe $50,000 or less. It allows you to pay off your taxes owed in up to 72 months. You can apply online. Otherwise, you need to call the IRS directly, work with a tax professional, or fill out form 9465 and mail it to the IRS.
Non-Streamlined Installment Agreement
If you owe over $50,000, you can apply for a non-streamlined agreement. The IRS will file a lien against your assets, but you won't have to worry about other collection actions. As of 2023, you only have to provide a financial disclosure if you owe over $250,000 or if a revenue officer requests it. Your payment period can be as long as the collection statute expiration date for your tax debt.
Financially Verified Installment Agreement
If you owe $250,000 or more, you will probably have to either pay down the balance or verify financial information to obtain an installment agreement. To qualify, you have to provide detailed financial statements to the IRS. The agency wants to verify that you can make payments as scheduled.
Partial Payment Installment Agreement
If you can’t afford the minimum monthly payment on an installment agreement above, you may look into a partial payment installment agreement (PPIA). With this resolution, you make monthly IRS payments based on what you can afford to pay. If the taxes owed for a particular tax year is not paid off before the date the IRS can no longer legally collect (aka CSED date), the tax amount owed falls off. You must submit detailed financial records to qualify.
3) Settle Taxes With an Offer in Compromise
An offer in compromise is a tax settlement method where you settle your tax liabilities for less than you owe. To qualify, you need to prove that you will never be able to pay your tax bill or that the assessed tax was incorrect. The IRS is very strict with this option, and it can be hard to obtain without professional tax help.
4) Obtain Hardship Status (CNC Status)
Hardship status is when the IRS declares your account uncollectible. To qualify, you must prove that you don’t have any resources to cover your tax bill. The IRS has its own set of guidelines on how much people need to live. If you have less than the amount the IRS deems necessary for food, clothing, rent, transportation, etc., you may be able to obtain hardship status.
In many cases, if you have 25 dollars or less in disposable income per month, the IRS will grant you a CNC status. This stands for currently not collectible. It just means that you don't have money to pay so the IRS pauses collection action on your account.
Once you apply, the IRS reviews your situation. If the agency decides to approve a hardship status, it stops all collection activity. It is a temporary designation. The IRS revisits your account every year or 2 years, and if your financial situation improves, you have to pay.
Non-IRS Sponsored Alternatives to Pay Taxes in Full
You don't necessarily have to work with the IRS. If you can't afford to pay your taxes, you may want to explore alternative options. Here are some ideas to consider if you don't qualify for one of the IRS programs or if you'd rather just deal with the situation on your own.
5) Borrow From Family and Friends
If you have friends or family who are willing to help, you may want to ask them for a loan to pay your taxes. A personal loan can be especially useful when you need short-term help. For instance, if you’re expecting a payment from a client, but your taxes are due before that, you may want to borrow from friends and family.
6) Take Out a Loan
You can use a loan to cover your tax liability. Make sure the interest rate is less than the interest rate you would pay with an IRS payment plan. If the interest rate is higher on the loan than with the IRS, you will end up paying more in the long run. The IRS’s interest rates change with the Federal short-term rate. Intuit provides an updated quarterly interest rate chart.
7) File Bankruptcy
If you are considering bankruptcy because you can't pay IRS taxes, you need to find out whether your tax amount is dischargeable by speaking to a bankruptcy attorney. Bankruptcy negatively impacts your credit score for years, and you cannot always discharge taxes in bankruptcy. The rules vary based on the chapter you are filing, the type of tax, and the age of the tax. Chapter 7 bankruptcy does provide a means to eliminate taxes owed but qualifications exist, and not all taxes qualify.
These are the two most common options:
With Chapter 7, you must liquidate all non-essential assets and use the funds to pay down your liabilities. If there are any remaining liabilities owed, the courts will discharge them. Taxes owed can only be discharged if they meet specific criteria or rules. If you are considering this as an option, it is best to speak with a bankruptcy attorney.
With Chapter 13, you make payments on your liabilities for three to five years. In some cases, if you have income taxes owed that are old enough to be considered a nonpriority tax obligation, they can be discharged. However, in most cases, the taxes take priority over many other debts when the courts set up your repayment plan.
What If You Can't Afford to Pay Your Taxes and Are Supposed to File?
What if you can't afford to pay taxes but you know that you're supposed to file a tax return? Many taxpayers find themselves in this situation every year. In some cases, the thought of a tax bill is just so stressful that they ignore the situation and they don't file. In other cases, they think they can't afford to file taxes and draw attention to their unpaid tax liability. They often think that they'll stay under the IRS's radar if they don't file. But the opposite is true.
If you don't file a tax return, the IRS will eventually find you. Remember your employer, clients that issue 1099s, investment firms, and banks often send income documents to the IRS. When the IRS receives these documents, it will realize that you haven't filed. This is never a good situation.
Even if you can't afford to pay your taxes, you should still file a return. The penalty for not filing a return is 10 times higher than the penalty for not paying your tax bill. Here's an example. If you owe $10,000, the non-filing penalty is $500 per month, but the non-payment penalty is only $50 per month. These penalties are added on every month. So if you're already behind, you should deal with your unfiled returns as quickly as you can.
At this point, you're probably wondering what happens if you can't pay taxes after you file a return. Well, it's not an ideal situation, but the IRS has a few options available to help you. You can set up an installment agreement, which allows you to make monthly payments on what you owe. You might also be able to get a temporary delay in payment if you can show that paying would cause undue economic hardship. If you're unable to pay what you owe, the IRS may also work with you to set up an offer in compromise, which would settle your debt for less than what you owe.
Of course, if you can't pay your taxes and don't file a return, you're opening yourself up to some serious penalties. As noted above, the failure-to-file penalty is much higher than the failure-to-pay penalty, so it's always best to file your return on time, even if you can't afford to pay what you owe. You can also be charged interest and penalties on the unpaid amount, and the IRS may even file a notice of federal tax lien, which could damage your credit score.
If you're having trouble paying your taxes, the best thing to do is to contact a tax pro directly to discuss your options. They may be able to work with you to find a solution that works for both of you.
What Happens If I Can't Pay Taxes?
If you are unable to pay the full amount of taxes you owe, you have several options. You can contact the IRS to set up a payment plan, which will allow you to make smaller payments over time. You can also apply for an offer in compromise, which is an agreement between you and the IRS to settle your tax debt for less than the full amount.
But what if you can't afford to pay your taxes at all? In this situation, you can request a temporary delay in payment. If you are facing financial hardship, the IRS may be willing to suspend collection actions on your account until your financial situation improves. This is not an easy program to qualify for. You need to provide extensive documentation to prove that you can't afford to pay. A tax attorney can help you navigate this IRS relief program.
However, if you do not contact the IRS or make any arrangements to pay your taxes, the agency may take collection action against you. This could include garnishing your wages, seizing your bank accounts, or placing a lien on your property. If you are facing collection action, it is important to contact a tax pro as soon as possible to discuss your options.
Paying your taxes is important, but if you are unable to do so, you need to learn about your options. The IRS is willing to work with taxpayers who are having difficulty paying their taxes, and there are a number of options available. But you have to be proactive. If you don't contact the IRS or work with a tax pro to resolve the situation, you risk losing your assets or facing other involuntary collection actions.
I Owe State Taxes and Can't Pay
If you owe state taxes and can't pay them, you have options. Most states offer payment plans as well as other tax relief options. Depending on the rules in your state, you may be able to apply for an offer in compromise, get innocent spouse relief, or qualify for hardship status. All of the states with income taxes offer different relief and payment options. So, it's important to work with a tax professional who has an in-depth understanding of the rules in your state.
To learn more about what to do if you can't afford to pay state taxes, check out TaxCure's guide to state taxes. On this page, you'll find links to pages with more information on state tax relief programs. Many of these pages have links to forms that you can use to apply for programs if you can't afford to pay your state taxes. You can also use TaxCure to search for a local tax pro who has experience with unpaid taxes in your state.
Get Help If You Can't Afford to Pay Taxes
Regardless of your specific financial situation, there is a way for you to work with the IRS or your state. There are even more options than the ones outlined above. If you owe federal or state taxes and can’t pay in full, it is a good idea to work with a tax professional. It’s critical to get ahead of your problem to avoid unnecessary penalties, interest, levies, garnishment, or tax liens. Start your search below for a professional who can help you with your unique tax problem. In most cases, you start with a consultation. This gives you the chance to say, "I can't pay my taxes. What do I do?" Then, the tax pro will gather more details and discuss the best options for your situation.
Can You Go to Jail for Not Paying Taxes?
Generally, simply owing taxes does not lead to imprisonment. Jail time is usually reserved for more serious tax offenses, such as tax fraud or evasion. These are criminal acts where there is a willful attempt to evade tax laws or defraud the IRS. For example, intentionally not filing a tax return, filing a false return, or deliberately failing to report all income can be considered criminal offenses and might result in prosecution and, potentially, imprisonment. However, if you owe taxes but have not committed fraud or evasion, the IRS usually does not pursue criminal charges. Instead, they focus on collecting the owed taxes through civil actions, which can include penalties, interest, liens, and levies. It's crucial for those struggling with unpaid taxes to file their returns, communicate openly with the IRS, and seek resolution options to avoid escalating the situation to a criminal level.
Actionable Strategies for Dealing with Unpaid Taxes
While unpaid taxes is a situation that no one wants to find themselves in, it’s important to take the actions that you can, when you can. Being proactive is key to resolving the issue.
The first step is to ensure that you still file your tax returns on time. Filing your return, even if you cannot pay the taxes owed, helps to avoid the significantly higher penalties associated with not filing. After filing, immediately explore the variety of payment options offered by the IRS. These include short-term extensions, installment agreements, and offers in compromise. A short-term extension allows you up to 180 days to pay your tax debt and might be a viable option if you expect to have the funds soon. For longer-term solutions, consider installment agreements, which enable you to pay your debt over time.
For those with more substantial debt or limited financial means, an Offer in Compromise (OIC) could be a suitable choice. This program allows you to settle your tax debt for less than the full amount owed, but it requires proof of inability to pay the full amount. It's essential to provide accurate financial information to the IRS to support your claim. In cases of severe financial hardship, you might be eligible for Currently Not Collectible (CNC) status, which puts a temporary halt on IRS collections until your financial situation improves. However, remember that interest and penalties may still accrue during this period.
In situations where IRS-sponsored programs don't align with your circumstances, consider non-IRS alternatives like borrowing from friends or family, personal loans, or, as a last resort, bankruptcy. Importantly, always seek advice from a tax professional. They can provide guidance tailored to your specific situation, help negotiate with the IRS on your behalf, and ensure you don't overlook any potential solutions. Being proactive and informed about your options can significantly alleviate the stress and financial burden of unpaid taxes. Remember, the worst action is inaction, so take steps immediately to address your tax liability.
Free Legal Aid and Debt Consolidation Options
Many nonprofit organizations and legal aid societies offer assistance to those facing tax issues. These organizations typically provide free or low-cost services, including legal advice, representation in negotiations with the IRS, and help with preparing necessary documents. Additionally, universities with law schools often have tax clinics where law students, supervised by experienced tax attorneys, offer free tax assistance to low-income individuals. It's essential to seek out these resources in your community or state, as they can provide valuable guidance and support in navigating complex tax situations.
For broader financial challenges, debt consolidation resources might be beneficial. These services can help you consolidate multiple debts into a single, more manageable payment, often with a lower interest rate. Nonprofit credit counseling agencies are a good starting point, as they often offer free consultations and can advise on whether debt consolidation is appropriate for your situation. They can also help you understand the impact on your credit score and provide tools and strategies for better financial management.
How to Find the Best Tax Relief Help
Plain and simple, try to go local and find the best tax relief professional. Not all tax professionals help with tax problems. At TaxCure, we have created a network of tax professionals from around the country that specialize in helping with tax problems. You can be assured that you can find great help using TaxCure on your tax professional search to resolve your tax problems.