Owe IRS More or Less than $10,000? Implications & Options
If you owe back taxes, your options vary depending on how much you owe. Generally, the IRS splits taxes owed into the following categories: less than $10,000, $10,000 to $50,000, and over $50,000. Here’s a look at what to expect in each situation and tips on what to do if you cannot afford to pay taxes.
What If I Owe Less Than $10,000 to the IRS
When you owe the IRS several thousand dollars, it can feel stressful, but in most cases, you don’t need to worry that much. Since implementing the Fresh Start Initiative in 2011, the IRS has stopped issuing tax liens for most taxpayers who owe less than $10,000. However, there are exceptions.
If you repeatedly ignore notices or demands for payments, the IRS may decide to put a lien on your assets. A lien is basically a legal claim to your assets. If you sell your assets, the IRS has a right to the proceeds. To avoid this risk, you need to contact the IRS to set up a payment arrangement. Luckily, you automatically qualify for a Guaranteed Installment Agreement when you owe less than $10,000 in tax.
What If I Owe Less Than $50,000 to the IRS
If someone says “I owe the IRS $20,000” or “I owe the IRS $30,000”, their situation is going to be different than someone who owes less than $10,000. If you owe IRS over $10,000 in tax but less than $50,000, you fall into an intermediary category. In this range, the IRS is a lot more likely to issue a tax lien, but it’s also relatively easy to get a payment arrangement approved.
In particular, when you owe less than $50,000 to the IRS, you can qualify for a Streamlined Installment Agreement. You can apply for this payment plan online or by using Form 9465 (Installment Agreement Request).
Luckily, you don’t have to provide a lot of information on your application. The IRS only wants to know how much you owe and how much you can afford to pay per month. If you owe less than $50,000, the IRS will automatically approve your payment arrangement as long as you can pay off your balance in 72 months or less.
When the collection statute expiration date (CSED) falls before the end of the 72-month period, you need to pay off your taxes sooner or sign a waiver to move back the expiration date.
If you can’t afford to pay your taxes owed in 72 months, you need to fill out Form 433-A or 433-F (Collection Information Statement). These forms require extremely detailed financial information, and they allow you to request a longer time to make payments, an offer in compromise, or other hardship arrangements.
Special Considerations for People Who Owe $25,000 to $50,000
The IRS has some special rules for people who owe between $25,000 and $50,000 and want to set up installment plans. If your tax amount owed falls in this range, you have to set up automatic payments when requesting a payment plan.
The IRS can withdraw automatic payments from your bank account, or if you are employed, the IRS can take payments directly from your paycheck. For the latter option, you also need to complete Form 2159 (Payroll Deduction Agreement). This is called a Direct Debit Installment Agreement, and at this level of taxes owed, acceptance is automatic.
If you don’t want to make automatic payments, you also have to file Forms 433-A or 433-F (Collection Information Statement).
Additionally, if you owe between $25,000 and $50,000 and you have defaulted on a payment agreement in the past, you need to provide the IRS with some extra details when you apply for the new installment agreement. That includes your marital status, number of dependents, net income, and payment schedule. The IRS also wants to know about your car payments, health insurance premiums, and court-ordered payments such as repayments for a Chapter 13 bankruptcy or child support payments.
Basically, this information reassures the IRS that you won’t default on the new agreement. However, as of late 2017, the IRS is considering getting rid of this requirement for extra information.
What If I Owe More Than $50,000 - $100,000+
Taxpayers who owe IRS over $50,000 may face tax liens as described above, and if you don’t work out a payment plan with the IRS, you may also face tax levies. That’s when the IRS takes your assets and sells them to cover your taxes owed—it’s one of the most serious collection actions used by the agency.
Starting in 2018, the IRS may also take away your passport if you owe more than $50,000 in taxes. Once the State Department has revoked your passport, you can return to the United States if you are out of the country, but after that, you can’t travel internationally until you resolve your taxes owed.
Usually, if you owe more than $50,000 in taxes, you have to provide the IRS with detailed financial statements to qualify for a payment plan. However, from late 2016 to September 2018, the IRS rolled out a pilot program to offer Streamlined Installment Agreements to people with over $50,000 but less than $100,000 in taxes. That includes 90% of the people who owe money to the IRS. So if you owe over $100,000, then you won't qualify for a streamlined installment agreement..
Under this experimental program, taxpayers can make payments for up to 84 months (or the number of months required to pay off the taxes by the Collection Statute Expiration Date, whichever period is shorter). As long as you make payments through direct debit or a payroll deduction, you don’t have to fill out a Collection Information Statement. The IRS plans to make a final determination on whether or not to continue this program in late 2017 or early 2018.
What If I Owe Taxes for My Business
The rules for business taxes are slightly different from the rules for individual taxpayers. Active businesses can only qualify for streamlined agreements if they owe less than $25,000 in tax.
However, sole proprietors who are out of business can qualify for the Streamlined Installment Agreement if they owe the IRS between $50,0001 and $100,000. If your business owes more than that, you need to provide detailed financial information to get a payment plan approved.
Alternatives to Payment Plans
Regardless of how much you owe the IRS, if you can’t afford to make payments, there are other options. For example, you may want to apply for an Offer in Compromise. That’s when you pay less than the total balance due. Or if you believe the tax debt is due exclusively to your spouse or former spouse, you might want to apply for innocent spouse relief -- look at FAQs about innocent spouse relief now.
If you truly don’t have enough money to pay anything, you can ask the IRS to label your account as temporarily uncollectible. For taxpayers with less than $10,000 in taxes, the IRS doesn’t require a lot of financial information or paperwork for this option, and in fact, since the implementation of the Fresh Start Initiative, acceptance rates have been at an all-time high.
Even if you owe more than $10,000, the IRS offers a simplified application process for these programs. When reviewing your application for an Offer in Compromise, the IRS looks at your future earning potential.
In the past, if you applied for a lump sum Offer in Compromise, the IRS looked at four years of future income. Now, the IRS just takes one year of future earnings into account. If you want to make payments on your settlement, this is called a short-term periodic Offer in Compromise. The IRS used to consider five years of income for this option, but now the agency only looks at two years of future income.
Whether you owe the IRS $20,000, $40,000, $100,000, or any other amount, you need to meet certain criteria for the IRS to work with you. In particular, you need to stay compliant with future obligations. That means filling your tax returns and paying estimated taxes. If you own a business, you also need to make sure you submit payroll taxes and withholding for your employees.
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