Options for Paying Tax Debt
If you cannot afford to pay your taxes, the solution is not to put the taxes on your credit card which you also will have trouble repaying. As described below, the IRS will give you a better deal than putting the tax payment on your credit card. Interest rates will be lower, there will not be a processing fee to pay, and you may even get the IRS to reduce your obligation.
When you file a return but cannot afford to pay the taxes due, you will generally have three options in dealing with the IRS:
- ● Enter into a monthly installment agreement;
- ● Negotiate for a smaller tax bill by seeking an “offer-in-compromise”; or
- ● Request a hardship determination, called “currently not collectible” status.
All of these options require IRS approval, although the IRS allows almost every taxpayer that owes less than $50,000 to enter into an installment agreement through a streamlined process available on their website. If the IRS does not grant approval for any one of the three options, you then have the right to seek an appeal or ask for a review of your case. These actions often require you to submit IRS forms, that are available at www.irs.gov.
The Installment Agreement. The IRS allows you to pay taxes you owe in monthly installments. If you owe less than $50,000, you have up to 72 months to pay; if you owe between $50,001 and $100,000, you have up to 84 months to pay.
If you have filed all of your tax returns, you can apply through the IRS website for a monthly payment plan. The IRS imposes a “user fee” of $149 ($43 for low-income taxpayers) to set up an online installment agreement, but the fee is reduced to $31 if you set up the agreement through the IRS website and you agree to pay using direct debit from your bank account.
The IRS charges a higher fee, $225, for requesting an installment agreement by mail or by phone. You can mail a Form 9465: Installment Agreement Request, to the IRS, or attach a copy to your return if you haven’t filed it yet. You may also call the IRS at the phone number on your bill or notice to request an installment agreement. Be sure to ask for written confirmation of the installment plan you negotiated.
Penalties and interest will continue to accrue until the entire balance is paid in full. The interest rate will be the federal short-term rate (presently under 1%) plus 3%, which is a lower rate than most rates for unsecured loans and credit cards. If you have an installment plan, the penalty for late payment is only one-quarter of 1% for each month. The IRS will waive penalties if you qualify under its First Time Penalty Abatement policy, or if you have a valid reason for your late payment or late filing. Use a Form 843 to request penalty abatement.
Generally, if you owe less than $25,000 and your installment agreement will fully pay the debt in six years or less, the IRS will not file lien against you. The IRS cannot execute a levy while the installment plan is in effect. (See Steps the IRS Can Take to Force Payment, below.)
Offer-in-Compromise. The IRS may accept payment for less than what you actually owe through its “offer-in-compromise” program. Reduced payment is permitted when the IRS determines that, under established financial guidelines, the taxpayer cannot afford to pay the full amount of taxes owed or where an exceptional circumstance exists such that collection of the tax would create an economic hardship or would be unfair and inequitable (for example, the assets that could be used to pay the tax debt are needed to pay for the long-term care of a seriously ill person).
There are special IRS forms you must fill out to request an “offer-in-compromise.” The Form 656 booklet contains all of the required forms, including the very important collection information statement, Form 433-A (OIC). You will also need to pay an application or “user” fee (currently $205) plus make a first payment of 20% of your offer amount (or the first payment of a proposed payment plan), unless your income is below a certain amount and you complete Form 656-A. Generally, an offer will only be accepted when the amount offered equals or exceeds your net equity in assets, plus your ability to make installment payments from future income.
It takes about six to twelve months for the IRS to review an offer-in-compromise. During that period, you will not be expected to make any payments on your tax debt. However, interest and penalties will continue to add up, so if your offer-in-compromise is rejected, you tax bill will grow during the time the IRS has your offer-in-compromise under review.
Non-Collectible Status. You may be eligible for a temporary hardship determination from the IRS, called “currently not collectible” (CNC) status. The IRS will only grant you this status if you do not have any assets you could use to pay your tax debt and you do not have any income left after “allowable expenses.”
Allowable expenses are listed on the IRS website (use the search box to find, “Collection Financial Standards”) and are used by the IRS to determine allowable monthly living expenses. If your monthly income is less than the allowable living expenses, you will be eligible for the non-collectible status and the IRS will put your account on hold.
CNC status is not permanent, and does not mean the tax debt is forgiven or reduced. This status can change if your financial circumstances improve, if you file another return with a balance due, or if you do not file a tax return when you are required to do so. The IRS will monitor your tax returns and remove the hardship status if your returns suggest a significant financial improvement. Also, interest and penalties will continue to add up during this time.
To apply for CNC status, you should call the IRS at 800-829-7650 and specifically ask to be placed into “currently non-collectible status.” If you do not ask for the status, the agent will generally ask you to set up a payment plan. When you ask for non-collectible status, the agent may send a Form 433-F: Collection Information Statement, for you to fill out, but in most cases, the agent will simply ask you questions in order to gather the relevant information to make the “currently not collectible” determination during the phone call.
If the IRS grants CNC status and you owe more than $10,000, it may file a lien with the county recorder’s office (or similar agency) even if you do not own any property. Generally, the lien will not appear on your credit report.