What happens when you owe the IRS more money than you can afford to pay by the due date?
If that’s the case, you have options. But each one has its own benefits and drawbacks, and not everyone qualifies for all options. It can be a lot to sort through.
The simplest and most common solution is to set up a single monthly repayment plan, called an installment agreement. But there are also other paths you can take to repaying your tax debt, including:
- A 120-day full payment agreement
- An offer in compromise (paying less than you owe)
- A partial payment installment agreement
- Deferring your payment temporarily
Before getting into the details, here are a few things to keep in mind about repaying the IRS:
- It’s always better to pay your taxes back sooner rather than later if you can manage it—because the penalties and interest rates are high.
- The IRS has a 10-year window of collections—meaning your tax debts expire after 10 years. If you’re close to your 10-year expiration date, it could affect what options you’re eligible for and how much you have to pay per month.
- You may have to provide the IRS with detailed financial documents to determine whether you qualify for some types of payment plans.
- If you owe more than a year’s worth of taxes, you’ll have to include all of it in your installment agreement.
- Some installment agreements come with a federal tax lien. This is a public record of your tax debt that can negatively affect your credit.
- Even if you can’t pay your taxes by the due date, it’s important to file your taxes on time—because you’ll also be subject to separate fees and penalties for failing to file on time.
When You Just Need a Little More Time
If you can’t make the full payment immediately, you may qualify for extra time to pay—up to 120 days.
If you qualify, you won’t be hit with a separate fee—but interest will accrue until the balance is paid in full, and you may also be responsible for penalties.
You can apply online for a payment plan on the IRS.gov website. They provide more details on how the process works here.
When You Need More Than 120 Days
If you can’t pay within 120 days, you may qualify to set up a monthly installment plan that lasts longer.
Most people who opt for a monthly installment plan have to pay a user fee on top of other fines, penalties, and interest; however, this can be reduced or waived for some low-income taxpayers.
Generally, you get to decide how much you can pay per month, and pick your own monthly due date. However, the longer you take to pay off your bill, the more interest will accrue.
Some people, such as those who aren’t current on other payment and filing requirements and those in open bankruptcy, may not be eligible.
You can get more detailed information on IRS payment plans here.
When You Can’t Afford to Pay The Whole Bill
If the amount you owe is too much to pay even with an installment agreement, you may be able to get your amount reduced using an Offer in Compromise or a Partial Payment Installment Agreement.
A Partial Payment Installment Agreement is a plan to pay less than the full amount by the end of your collection period in monthly installments. An Offer in Compromise involves paying an agreed-upon lump sum that is less than your total amount due.
Both of these options have pros and cons. With the Partial Payment Installment Agreement, your collection period will usually end in about ten years—and you will have a tax lien on your credit record for all that time.
With Offers in Compromise, you may end up paying less overall—including in interest and penalties. But the IRS will expect you to leverage all your assets, including home equity, to pay off what you owe—and it may not accept your offer.
Check out the IRS website for more information about Offers in Compromise and Partial Payment Installment Plans.
When You’re Suffering Major Financial Hardship
If you are suffering financial hardship and can’t afford to pay any of your tax bill while also meeting basic living expenses, you can request a temporary delay in collections.
Under this agreement, the IRS holds off on collecting until you have the ability to pay—and it will mark your account as temporarily non-collectible until your financial situation improve. You may have a lien filed against your account.
This option won’t make your debt disappear, and it won’t stop interest and penalties from accruing. You’ll have to provide proof of your financial status, including an account of your income and expenses.
You can find out more about the process, and how to get started requesting a temporary stay in collections, by visiting here.