What to Do When You Can’t Pay IRS Tax Debts

If you receive a tax bill for more than you anticipated, your first instinct is to panic. Of all of the people to whom you could potentially owe money to, the dreaded IRS is one of the most terrifying.  They will expect to be prioritized above other debts, because they have powers that other credit lenders do not have.  Here are some options for facing up to the situation and finding the extra money to pay off the debt.

1. Don’t postpone sending your tax return. If you can’t pay an unexpected tax debt, it’s tempting to put off sending your tax return. Unless the IRS can prove that you are intentionally trying to get out of paying your tax bill, they can’t prosecute you for not paying your tax bill.  If you delay sending your tax return or don’t submit it at all, you risk the IRS putting you into the tax-dodging category.

2. Re-plan your debt repayments. A tax debt may be the newest debt that you’ve gained, but that doesn’t mean that it should be put at the bottom of your priority list. The IRS will expect you to put a tax debt before any other debts, even if this means falling behind on other debt repayments or racking up more debt to pay it off. This will require you to re-evaluate any debt repayment plans that you already have in place.

3. Consider Offer In Compromise agreements. If you’re already struggling to make ends meet and won’t be able to repay your tax debt without sliding into severe financial difficulties, an Offer in Compromise agreement may be the answer. To apply, you need to fill in the IRS Form 656 Offer In Compromise application form and detail how dire your situation would be if you were forced to repay your tax debt in full in the near future. If you’re approved for an OIC Agreement, you’ll need to offer a series of fixed payments or one lump sum towards the repayment of your tax debt in line with the maximum that you can afford to offer.  Getting the IRS to agree to these agreements is VERY rare, so don’t count on it, but they will agree to an OIC if you have absolutely no assets and no real hope of drastically increasing your income.

4. Look for temporary additional income.  You may want to look for a part-time or weekend job to help you get together enough extra cash to repay your tax debt. If that’s out of the question, try selling some stuff on eBay, Craigslist, or in a garage sale to scrounge up enough money to repay the tax bill.

5. Look at streamlined installment plans. If you are running out of other options for repaying your tax debt, you can apply for a streamlined installment plan through the IRS Form 9645 Installment Agreement Request. The IRS will use the information given on this form to decide whether to offer you the opportunity to pay off your tax debt in regular installments over a period of five years (with interest added on top). To qualify, your debt needs to be less than $25,000 and you need to have the means of repaying it (plus interest) within the five year period. There is a $102 charge if you’re approved, which is usually deducted from your first installment repayment.

6. Use your credit card(s). If the tax debt isn’t too significant, you may consider using your credit card to pay it off. This may increase your credit card debt, but it will leave you free to focus on paying your card(s) off without having to worry about when the IRS will come calling. However, this should only be a last resort option!

Above all, it’s vital to get in touch with the IRS as soon you realize that you’re in a position to fully pay off your tax debt. They can offer advice on the best repayment option and if nothing else, it signals to them that you are not purposefully dodging the repayment and willing to work with them.

  • Zach @College for 10k

    FYI – The third item references a #7, but there is no #7 on the list.

    Interesting list nonetheless. I had an IRS debt last year that I paid off on my credit card to get the reward points on my card. Good choice as I ended up with a good number of points :)

    • Andrew (Admin)

      Appreciate the feedback Zach. Sorry about that. It’s now been fixed!

  • Kate

    What Zach said.

    I actually found this list really confusing! #3 is a last resort – so then why is it listed third, shouldn’t it be listed lsat? But then #4 is what you do if you have no other options, so is it the last resort? I thought maybe #7 would make this clearer but there is no #7!

    • Andrew (Admin)

      Hey Kate…sorry for any confusion…I think the order as it stands now makes more sense. Appreciate you letting us know your thoughts!

  • http://www.yourfinances101.com/blog David/Yourfinances101

    My first piece of advice would be–contact them! Don’t avoid them–call them and see what they can offer. I’d imagine they would work with you

  • http://www.backtaxeshelp.com/tax-blog/ Manuel Davis

    Great post. One thing that really needs to always be stressed if you are in a situation like this is how important it is to be honest and upfront with the IRS. If you cannot pay, they will work with you. The people that get into the most trouble are the ones that avoid the IRS. If you work with the IRS you will end up paying less than if you tried to avoid them. The normal failure to pay penalty is .5%, this penalty will be reduce to .25% if you work out a payment plan with the IRS. Once you realize you cannot pay, take action and get the problem in the open.

  • http://madsaver.com Mac

    Yep, definitely be honest & forthright with the IRS. If you let them know the situation without hiding any information, they’ll be more willing to work with you. This goes for all debts. Always try to pay whatever you can and act in good faith. With the economy as-is, creditors are willing to listen more than ever before.

  • Jeff Waugh

    I’ve not filed taxes in three years, as I was let go after getting involved with the Kenneth Lay Family ( of Enron Fame ) They had acquired the patent rights to a product that I personally got on the market for a private group of inventors. Over an 8 year period, I had sold the inventors out of their own product some 11 times, often having to wire transfer up to $25K to them, just to get them to continue making their product. On the 11th time, I believe I had sent them an order to ship out 6000 gallons of our product, only to find out they only shipped 250. When I contacted the inventor to ask why this continued to happen, I was simply told they weren’t making enough money, and therefore, weren’t going to make it any longer, thus causing me to have to refund close to $30K, and endure being cussed out on a daily basis for about 6 months, as there had been numerous world records broken by people using it. Not to mention, in multiple tests, two with Tulsa Public School District, involving 30 gas, 30 diesel buses. The gas powered ones, showed an average gain in fuel economy of 23.8%, whereas the diesels showed just under 20%. This coupled with average reductions in overall emissions of between 80 to 90%, drops in engine temperature of about 20-25 degrees F., along with reductions in metal wear ranging from 40 to 65%. One of the top known pilots in the world, finally agreed to try it in his Cessna, gained 5 knots of air speed, 400 RPM, and he sent me a copy of his oil analysis showing a drop of between 48 to 62%. I know, it sounds far too good to be true, as I’ve been in automotive, primarily teaching, and didn’t believe it at first, until I saw some of the various university studies on it. I became friends with a local banker, who upon seeing data out of a mining company, I think with 3,000 HP Cummins Diesel engines, where it showed the engine with our technology in it, more than doubled the normal lifespan between rebuilds, and even at that, all it needed was gaskets, as the compression was higher than what it was new. I’ve been challenged with law suits 3 times from a top Nascar racer’s attorneys for mentioning that he was using it. The only problem is, it can’t be detected shy of using metallurgical X-Ray equipment like (SEM) Scanning Electron Microscope etc. I didn’t have the funds to fight them, but knew the truth, and had to make 3 or 4 retractions in the papers. Since then, I’ve seen countless world records broken, a local guy with a 38ft. cigarette boat, who had never raced in his life, that had a dealership with perhaps 25-30 boats. He said if this is so good, why haven’t I ever heard of it before? I told him that anyone that raced, kept very tight lipped about it. His first time out, he went from 87 MPH to 95 MPH, then had to go up two prop sizes due to the RPM gain. Then, 3 months later, he went to St. Petersburg, FL, won the 1999 World Offshore World Championships in Outlaw Class 3. A few weeks later, his parts guy called me to tell me Steve wasn’t telling me the whole truth, that this was his first time of ever racing, then asked me if I knew how much it costs to play that game, to which I didn’t. He informed me that there wasn’t one out there, spending less than about $1M per year, and that first time rookies, certainly don’t win. Then he informed me that his boss not only won, but his lap time was 2/10ths of a second faster than the guys in the F-2 Class, 2 classes above him. A little over a year later, i saw a half page article in the local paper, stating that in addition to winning the ’99 World Championship, he went entirely unbeaten the entire 2000 season, was winning until a wire fell off a kill switch. I went to have a talk with him, after he had assured me that if this did only half of what I told it could, he would certainly help get my name out there. But this time, instead of 25-30 boats, 2 employees, he had just under a $4M inventory along with all the bells and whistles to go along with it. I came up, said “Hello Steve, how’ve you been. He said, “do I know you”, I mentioned the facts, then he immediately wanted to get away from all his employees. I asked him if he remembered saying what he would do, if it only did half of what I told him it would, to which he remembered, but said, “Jeff, you understand, racing is racing, and i just simply can’t go out and let anyone know what my secret is. Unfortunately, the inventors wouldn’t speak with my investors for a $5M purchase price for the patents ( no one ever said inventors were good buisnessmen ! ) A year later, the Lay Family Investment Group acquired them for 1/10th of that, and begged me to come run the company as their National Sales Director. I did, grew it from my roughly 50-55 retailers up to around 800, along with distribution networks throughout the US, Canada and Sweden, as my largest market at that time, was in snowmobiles. I got the worlds largest Polaris dealer, the top Arctic Cat engine builder, not to mention, quite a few of the very top players, and the top guy in the world in Freestyling. At the end of my 4th year of traveling 30-40 weeks per year, I was let go. Now, when I’ve agreed to accept jobs paying 1/10th of what I had been, I’m far too often being told I’m far too overqualified, and they would love to have me, but feel that I would just use them as a stepping stone, only to go onto something bigger and better.

    But as to the IRS, I ended up oweing about $10K my last year, and didn’t file the next two years. Recently, I’ve started a dialog with them, spoken with 12 different agents, never got the same story from any two people, my wife had her wages garnished, due to me not filing, but now, hopefully, after them taking her last refund of $5K, we still owe them. It’s truly astonishing when so many in our own administration, and I’m sure of many in the past, that have gone 5-10 years without paying, using the “Turbo Tax” excuse, but to date, I’ve heard of 5 people using the same one as the head of our treasury department, IRS etc. being told weeks before they let his name out for the position, that he hadn’t paid for 2 years, so he promptly paid the $40K (+/-), no fines, no penalties, no late fees etc., and he’s only one of many. Then it was found out that he not only owed for those two years the administration told him about, but for another 4 I think. Again, no penalties, fees, late charges etc. But when ordinary citizens have tried this, which they have, they’re all laughed at, and said, sorry, the “Turbo Tax” law doesn’t work any longer. With over 150,000 pages of IRS rules, how could any two people know the right answer, other than to collect as much as you can. So, I would strongly suggest you use one of those companies that claim to cure your tax problems, however, check them out thoroughly first, as there’s far too many scams out there, only to be ripped off by another entity. I learned many years ago, when I owned a $600K house in the mid 80’s, that it’s more than worth it to get a good tax accountant, one that’s preferably worked for the IRS, as I was told by one, that with that much tax code, that there’s simply too much “grey area that can be argued in a variation of ways, but he wouldn’t do anything to cast a red light on me, but that I could legally write off far more than I was at the time. For the first time in my life, I got a $6,500 refund, and my largest check that year, which was an accumulation of sales that all hit at once, was about $39,000 for the week, and I did get ticked off, when I saw them take a little over $19K out of it just for taxes. Then to see our own lawmakers, who don’t pay SS taxes etc. and always wondered why on earth would someone spend $3M to get a job that only pays you say, $175K per year, along with all the perks, but then they get something like 85-90% of that for the rest of their lives, along with all their “GOLDEN PARACHUTES”, and are set for life ! Just don’t take what the IRS tells you as gospel, as gospel! Best of luck to all !

  • http://www.mytaxdebt.com.au/tax-debt-help/if-insolvency-is-unavoidable/ business liquidation

    If you’ve fallen on hard times, you can have the IRS place you on a temporary Currently Not Collectible list. While you’re on the list, the IRS will not contact you for collection purposes. Periodically, you will need to prove your situation and re-qualify for the Currently Not Collectible list.