Managing Debt

Tax Debt: What To Do If You Can’t Pay Your Taxes

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Option #5: Request a Short-term Extension

If you can come up with the money you need to pay your tax bill within the next four months, you may be eligible for a short-term extension to pay — up to 120 days. (This is different than the extension to file that gives you additional time to file your tax return.) You will have to file a completed Form 1127 along with a statement explaining why paying now would be a financial hardship for you. There is no fee associated with this form.

Estill warns that the IRS does not approve the majority of these requests. Form 1127 is complicated and requires you to provide the IRS with a detailed list of your assets, along with your itemized spending and income for the last three months. He says that most taxpayers will be better off requesting an installment agreement or an offer in compromise, or finding another way to pay.

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Option #6: Request an Offer in Compromise

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt. It essentially allows you to settle your debt for less than you owe, under certain circumstances. An Offer in Compromise might be used if there is a reasonable doubt that the tax liability is correct, if there is doubt the taxpayer could pay the tax debt, or if paying the tax would create an economic hardship for the taxpayer. Historically, it’s been very difficult to get an OIC approved. In the past, the IRS said it resolved less than 1% of all balance due accounts through an OIC program.

In early 2011, however, the IRS announced it was expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.

The new streamlined OIC allows taxpayers with annual incomes up to $100,000 to resolve up to $50,000 in tax debt (up from $25,000 or less previously). This does not mean you cannot try to get an OIC if you make more than $100,000 or owe more than $50,000. It simply means you won’t be eligible for the streamlined program.

If you apply for an OIC, you’ll have to submit Form 656 and include a $150 fee (waived for low-income taxpayers).

If you propose a lump sum offer that will resolve the debt in five or fewer installments, you must include a non-refundable payment of 20 percent of the offer when you file Form 656. (There are additional OIC payment options available to small businesses.) If you propose a “periodic payment offer” (six or more installments), you must pay the first proposed installment payment with your application, and make additional non-refundable payments while the IRS evaluates the offer. (Payments may be waived for certain low-income taxpayers, or where there is a doubt as to the liability.)

The IRS generally has 24 months to accept or reject your offer, or negotiate a further compromise.

Should you get help applying for an Offer in Compromise? You may have seen ads on television or online from companies promising to help you settle your tax bill. These ads are usually offering services to help filing for an OIC. Be careful. The IRS warns that some companies are collecting excessive fees from consumers who will never qualify for these programs. The IRS says you can complete all the paperwork on your own by following the instructions found at the IRS website.

On the other hand, getting an OIC approved can be difficult. Estill recommends you consult with a CPA, Enrolled Agent or tax attorney who does a lot of work in this area and is familiar with the process. “The more you owe, the more likely you are to get an OIC,” he says.

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Option #7: Apply for Currently Non-collectible Status

If you can’t afford an installment agreement or an Offer in Compromise, and have no other way to pay the taxes you owe, you may be able to get a temporary reprieve by applying for currently non-collectible status, says Estill. You’ll typically have to complete a Form 433-F detailing your financial situation. “If you qualify you may be able to put your tax bill on hold,” says Estill, “and the IRS would reevaluate it again in a year.” He says you can call the IRS and explain your situation to find out whether you qualify. Interest and penalties will continue to accrue, however, making this a potentially expensive option.

Look Forward

Once you’ve figured out how to resolve this year’s tax bill, make sure you adjust your withholding or increase your estimated tax payments. You don’t want to be in the same situation next year!

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Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Mark Randall Guardian Tax

    There are also other options if you can not pay your taxes. Usually people can get one some type of payment plan with the IRS so that they pay some every month rather than just one lump sum. This will help prevent tax problems and make it so you hopefully don’t have to charge the tax on your credit card.

  • Nunuv Yerbiznezz

    What about filing for an extension? If it’s still possible, it’s legal and defers your due date for three months.

  • Check DaFacts

    Filing an extension does not extend the date to pay, only the date to file. The form you file to extend requires you to estimate and pay the tax due, and if you estimate too low, you will pay a penalty and interest on the shortage.

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