Tax season is stressful no matter what, but you may feel especially anxious if you are having a tough year financially. If you owe money to the government but are not able to pay the allotted amount on time, there’s no need to panic. Below are four options to help you navigate any collection issues and find a way forward. The right option for you will depend on a number of factors, including the amount owed, your income, and any other outstanding debt.
1. Extension of Time To Pay:
This is a good option for those who anticipate a higher income in the coming months, as the extension can provide taxpayers with an additional 6 months to pay the owed amount on a tax return or up to 18 months for a tax deficiency. To be eligible, you must demonstrate that you would risk undue hardship if you paid your taxes on time. According to the IRS, this means that paying your taxes on time would result in a substantial financial loss (such as selling the property at a low price inconsistent with market trends). You should file for this extension as soon as you become aware of your inability to pay. Be sure to complete the request before the due date listed on your tax return. If approved, the extension can range between 6-18 months. Note that it will not be approved if any of the following are determined by the IRS:
- Intentional disregard of rules
- Intent to evade tax
Note that in order to avoid further penalties, you must pay the owed amount before the end of the extension period.
2. Installment Agreements:
This option—part of the IRS Fresh Start Initiative—allows taxpayers to pay back owed taxes in smaller installments over a period of time, rather than in a single lump sum. To be eligible, you must owe $50,000 or less. The maximum installment period spans 6 years, although eligible candidates may want to choose shorter timeframes since the outstanding amount does accrue interest over time. If approved for IRS payment arrangement, you will sign an agreement promising to provide a monthly payment deducted from a checking account.
3. Offer in Compromise:
If you are not eligible for either of the options above, you may apply for what is called an offer in compromise. This is an IRS estimate that is determined to be the maximum amount you can provide within a reasonable time period. While the IRS is reviewing your finances (a process that can take up to 2 years) all other tax activities are frozen and any payment you provide will go towards the tax liability. To be eligible, you must prove to have tried other options (including extensions and installments) and prove that you are not in the process of filing for bankruptcy. If you are considering this option, your choices include:
- Paying 20% of the proposed amount with the application followed by the remaining amount in up to five payments
- Submitting an initial amount and begin paying a set amount in monthly payments while the compromise is under review (the same monthly installments will continue if it is approved).
4. Currently Not Collectible Status:
This is a last-resort status determined by the IRS if they find that you are not able to provide your owed taxes on time and determine that you are not eligible for an extension, installments, or an offer of compromise. The owed amount is not forgiven; rather, the IRS agrees to delay collection until your finances improve. Unfortunately, under this suspension, interest will continue to accrue on the owed amount. To be eligible for this option, you need to demonstrate that paying taxes would result in financial hardship. In other words, you are not able to pay for basic living expenses at the same time. For up to 10 years, the IRS can regularly assess your finances to determine whether you are able to pay for the taxes and basic living expenses through assets or loans.