Understanding Your Options if You’re in Debt to the IRS

Every year, there are a large number of people who can’t afford to pay the IRS all the tax debts that they owe. Even though the quickest solution for your overdue taxes is to pay the full amount right away, sometimes circumstances prevent that from happening. The unfortunate truth about IRS debts is that the interest will continue to accrue on what you owe, even as you pay it down, and the penalties don’t go away. Therefore, it’s important to be aware of all options available to you. If you find yourself unable to pay your debt, or if you are already in debt with the IRS, read on for our summary of those options below.


  • Short-Term Extension


The short-term extension option is available if you owe less than $100,000 to the IRS. There are no application fees and it will give you 120 days to pay in full.


  • Installment Agreements


An installment agreement is a payment plan with the IRS where you pay off your tax debt in increments by making monthly payments over a period of time (up to 72 months). In order to qualify, the IRS will need to make sure that you really don’t have the ability to pay off your taxes right away. To do this, it’s required that you file all applicable tax returns and the general rule is that you must disclose all of your cash and assets. This is because you are not eligible for an installment plan if you have enough cash, equity in your house or other assets, the ability to borrow the amount owed, or funds in a retirement account that covers your debts. However, you may be able to arrange for an installment agreement under the IRS’ Fresh Start initiative without disclosing your assets if you owe less than $100,000.  

There are several different types of agreements you can apply for based on your current debt situation. Each installment plan also has an application fee associated with it. An experienced tax professional or attorney can help select the right plan for you.


  • The “Offer in Compromise”


An offer in compromise (OIC) acts like a settlement with the IRS by allowing you to settle your tax debt for less than the full amount that you owe.

The process is fairly simple. If you select this route, you offer to pay a portion of your taxes immediately or over two years. The IRS will then drop whatever amount is left in your debt. However, the IRS will not accept just any offer you make. They will take your income, your expenses, your asset equity, and your ability to pay into account. If they determine that you are able to pay your full debt through a short-term extension or installment agreement, then they will reject your OIC. In essence, the OIC is plan B after short-term extensions, installment agreements, and any other alternatives you may have are exhausted. And, like an installment agreement, there is an application fee. Lastly, this option has a lot of strict eligibility requirements so it’s a very good idea to speak with an experienced tax professional in order to determine if it is available to you.


  • Request a Temporary Delay of the Collection Process


Another option is requesting that the IRS temporarily delay the collection process. If you can’t pay your debts to them, the IRS may label your account as one from which they are unable to collect (“currently not collectible”). If they deem it so, the IRS will delay collecting on your account, but this doesn’t reduce the amount you owe to them. It also has no effect on the penalties and interest that will continue to accrue until you’ve paid the entire amount that you owe.

It is also important to note that the IRS can file a ‘Notice of Federal Tax Lien’ during the delay period in order to protect their interest in your assets. Therefore, in order to determine if this option is available to you, it is again important to speak with an experienced tax professional or attorney.


  • Request an Extension of Time to Pay based on Hardship


The final option if you are unable to pay your tax debt is part of what the IRS calls its “Fresh Start” initiative. Under this option, “eligible individuals may request an extension of time to pay and have their late payment penalties waived. This option is reserved only for taxpayers who would experience “undue hardship” if forced to pay their taxes by the due date.” quoted from the US Tax Center. Extensions can apply to both the tax amount shown on your return or a tax deficiency (i.e. the amount owed after your return is reviewed by the IRS).

The term “undue hardship” requires proof that you will suffer a true financial crisis if forced to pay your taxes on the date they’ve specified. An example of undue hardship is when you’ve lost your job and would not have enough money to reasonably live so that you can pay your taxes. However, you must prove it by providing the IRS with a detailed explanation, whatever the case may be. If you are granted an extension, you can get up to 6 more months to pay the amount shown on your return or up to 18 months to pay a deficiency.

Consult an experienced tax attorney.

If you fail you to pay off your tax debt and don’t take steps to get rid of it, the IRS has several options. In addition to penalties and fees, the IRS can cancel your passport, place a lien against your property, or even garnish your wages. It is for these reasons that it is essential to speak with an experienced tax attorney to determine the best way to alleviate your debt.