Consider an IRS Payment Plan If You Can't Pay Your Taxes

It’s never good news to find out you owe taxes to Uncle Sam. It’s even worse to find out you can’t afford to make the payment.

If you’re in that situation, be sure to file the paperwork with the Internal Revenue Service by Tuesday, April 17. If you don’t, the IRS will charge you a penalty that amounts to 5 percent of the balance; each month that you don’t pay, it will add another 5 percent, up to 25 percent. That balance will also be subject to interest, which the IRS will adjust each quarter. The rate is currently 5 percent.

Then consider these options to help you pay:

Request a payment extension. If you haven’t applied for a payment extension before, this could be an option. After you file your tax forms on time without payment, the IRS will contact you to ask whether you would be able to pay within 120 days. If you choose this option, the agency will charge you a monthly fee of 0.5 percent of the amount owed. 

Make a partial payment. Even if you can’t pay the whole tax bill, pay as much as you can. This will cut down the size of the penalty and interest you’ll have to pay the IRS.

Ask for leniency due to hardship. You’ll need to prove that paying your tax debt would cause you a tremendous burden, perhaps forcing you to sell your home. But this could get you more time to make your payment, and in some cases the IRS will also waive any payment penalties. Read Application for Extension of Time for Payment of Tax Due to Undue Hardship to see whether you meet the requirements. 

There’s no rule book on the circumstances that qualify you for leniency. The IRS is getting tougher on what it agrees to. Ultimately it is based on facts and circumstances of each case.

Offer in Compromise

Apply for an “offer in compromise”. This is a way to reduce your tax debt permanently. The IRS says that an offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or if doing so creates a financial hardship. Typically the debt has to be at least three years old, Pon notes.

Before applying for an offer in compromise, the IRS requires applicants to have filed all their tax returns. So if you didn’t file in previous years, you will need to finish those missing returns. It also requires that you pay the current year’s estimated tax payments. Refer to the IRS’ Booklet 656-B, “Offer in Compromise” (PDF), for details on the application procedure. To see whether you could be a candidate, the IRS offers a prequalifier online tool. There’s an application fee.

Offers in compromise are rarely granted. You are asking the IRS to essentially erase what you owe them. Understandably, they do so under the rarest of circumstances. But if there is reason to believe you don’t owe what they say you owe or there is doubt as to whether IRS will ever collect from you—say, you’re terminally ill—then they will listen to plausible arguments to reduce your debt.

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At Nugent & Associates, we're not just number crunchers. Our people bring decades of invaluable certified public accounting and financial and tax expertise to you – offering tax and financial strategies to individuals such as yourself. If you have any questions or concerns about your own tax, financial or investment matters, please do not hesitate to contact us.

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