Have you ever completed your tax return only to discover a significant sum of taxes are owed to Uncle Sam? According to this article by CNN Money, the majority of Americans avoid this fate (nearly 8 of 10 filers receive federal refunds). Nevertheless, finding yourself in this position can be troubling, and it may even catch you off-guard. The root cause of such a predicament could be a seemingly inconsequential transaction or isolated occurrence(such as the sale of stock). On the other hand, it can result from an anticipated occurrence that produced ambiguous tax ramifications (maybe you transitioned from an employee into a business owner). Whatever the cause, do not panic if you can’t immediately pay the balance in full. There are options available to aid in satisfying your tax obligation.
If you can’t pay a tax liability by the due date of your return, there are generally three alternatives available:
- Installment Agreement,
- Offer in Compromise, and
- Request for Delay in Collection
Option 1 – Installment Agreement
An installment agreement with the Internal Revenue Service (IRS) provides additional time to pay your tax bill in smaller monetary increments. This is generally the best alternative for resolving an outstanding debt for the following reasons:
- You receive the additional time necessary for satisfying the debt,
- Payment amounts are reduced to meet your budget,
- Additional penalties and interest (i.e., finance charges) are known at the outset, and
- Amount of debt is not reduced, minimizing adverse consequences to your credit history
The most common methods to apply for an installment agreement include:
- Online. If you owe less than$50,000, you can use the Online Payment Agreement application on the IRS website. Click here to view an instructional video for completing the application.
- By Mail. Complete IRS Form 9465, Installment Agreement Request, and mail to the address on your tax bill.
Option 2 – Offer in Compromise
If you can’t pay your tax liability in full or through installments, you may be eligible for an offer in compromise. It is important to note that requesting an offer in compromise means you’re seeking to settle a debt for less than the full amount owed. This alternative may result in adverse consequences, including:
- A blemish on your credit history (i.e., credit report), and/or
- Forgiveness of debt income attributable to the difference in total debt and the reduced amount accepted by the IRS
The IRS reserves the right to determine eligibility for an offer in compromise, and they may accept your request if:
- They agree that your tax debt may not be accurate,
- You have insufficient assets and income to pay the amount due, or
- Because of your exceptional circumstances, paying the amount due would cause an unjust economic hardship.
To apply for an Offer in Compromise, complete one of the following forms:
- Form 656-L, Offer in Compromise (Doubt as to Liability). Use this form if you think your tax debt is not accurate.
- Form 656, Offer in Compromise. Complete this if you’re unable to pay the amount due, you have an economic hardship, or you have another special circumstance that would cause paying the amount due to be unjust.
Option 3 – Request for Delay in Collection
If you can’t pay any of the amount due because it would prevent you from meeting basic living expenses, you can request the Revenue Service delay collection proceedings until you are able to pay. This may prompt a request to complete a Collection Information Statement and provide proof of your financial status. In addition, delaying collections will not prevent the accrual of penalties and interest, nor will it prevent a Notice of Federal Tax Lien against your property. Receiving a delay in IRS collection proceedings simply affords you additional time to pay your full tax liability.
–Pay Your Tax Bill in Installments by John S. Wood, C.P.A.