It’s a moment that can cause your stomach to drop and your heart to race: you calculate your taxes and discover that you owe the IRS more money than you have available. Each year, countless taxpayers find themselves in this daunting situation, grappling with the reality that they can’t pay their tax bill in full. If you’re facing this predicament, it’s crucial to understand that you’re not without options. Taking proactive steps can help you manage your tax liability and alleviate the stress associated with owing money to the IRS.
Here’s a strategic guide on what you should do if you can’t pay the IRS what you owe in taxes:
1. Don’t Ignore The Problem
The worst thing you can do is nothing at all. Ignoring tax bills will lead to interest and penalty charges, and potentially more severe consequences like liens against your property or wage garnishment. If you can’t pay in full, you should still file your tax return on time to avoid a late filing penalty.
Once you’ve acknowledged the issue, it’s time to talk about debt resolution with the IRS. You can contact them directly to discuss your situation. They are often more amenable to working with taxpayers who show initiative in resolving their debts than with those who avoid the issue.
2. Explore Payment Plan Options
The IRS offers payment plans, known as installment agreements, which allow you to pay off your tax debt over time. There are short-term plans (paying within 120 days) and long-term plans (paying in more than 120 days).
If you owe $50,000 or less in combined tax, penalties, and interest, you can apply for an installment agreement online. Be aware that while this approach can offer relief, interest and penalties will continue to accrue until the debt is paid in full.
3. Consider An Offer In Compromise
An Offer in Compromise (OIC) might be a viable option if you’re unable to pay your tax debt in full or doing so creates a financial hardship. An OIC allows you to settle your tax debt for less than the full amount you owe.
The IRS will consider your ability to pay, income, expenses, and asset equity. They typically approve an OIC when the amount offered represents the most they can expect to collect within a reasonable period. The process can be complex and may require professional help to navigate.
4. Check If You Qualify For ‘Currently Not Collectible’ Status
If paying your tax debt would prevent you from covering basic living expenses, you can apply for Currently Not Collectible (CNC) status. While this doesn’t erase what you owe, it does put a temporary halt on collections. The IRS will periodically review your income to see if your financial situation has improved. Interest and penalties, however, will continue to accrue even when your account is in CNC status.
5. Use A Credit Card Or Loan With Caution
Paying your tax debt with a credit card or personal loan is an option, but it should be approached with caution. If you can secure a loan or a credit card with a lower interest rate than what the IRS charges for late payment, this may save you money in the long run. However, be mindful of creating new debt problems and ensure you have a repayment plan that won’t put you in a worse financial position.
6. Seek Professional Help
If your tax situation is complex or you owe a significant amount, it might be wise to seek the advice of a tax professional. Tax attorneys, certified public accountants (CPAs), and enrolled agents can provide guidance on how best to handle your tax debt. They are skilled in IRS negotiations and can help you understand all the options available to you.
7. Prevent Future Tax Debt
Finally, take steps to avoid future tax debt. Adjust your withholding if you’re an employee or make estimated tax payments if you’re self-employed. Create a budget that includes setting aside money for taxes. Planning ahead can help ensure you’re not caught off-guard at tax time again.
Conclusion
Owing money to the IRS can be intimidating, but facing the situation head-on with a clear strategy can help you find a resolution and mitigate the anxiety and potential financial harm. Remember that the IRS would rather work with you to settle your debts than pursue more aggressive collection actions.
Utilizing payment plans, understanding relief programs like an Offer in Compromise, or seeking Currently Not Collectible status are all steps that can lead to a manageable solution. If you’re overwhelmed, don’t hesitate to seek professional advice. The key is to take action early and communicate openly with the IRS. With a proactive approach, you can navigate the complexities of tax debt and work toward a fresh financial start.