When You Can't Pay Income Taxes

Here are some options if you have trouble paying your income taxes.

If you can't pay your income taxes, the IRS provides several options to deal with the debt. Read on to learn about them.

(For more information about income tax debt, see our Back Taxes & Tax Debt area.)

Charging Income Tax Debt to a Credit Card

If you cannot pay the IRS taxes you owe, the IRS will encourage you to charge the extra amount on your credit card. This may be a bad idea, because the interest on your credit card will probably be a lot higher than the interest and penalties the IRS will charge if you reach an agreement with them.

IRS Installment Agreement

If you owe the IRS up to $10,000 and you have not been in tax trouble recently, you are entitled to an installment agreement to pay your taxes. Interest and a penalty are added to your tax debt each month. You can have up to three years to pay what you owe.

You have the right to an installment agreement if all of the following are true:

  • You owe $10,000 or less.
  • You’ve paid your income tax and filed returns on time for the past five years.
  • You haven’t entered into an installment agreement with the IRS during that period.
  • The IRS determines that you can’t pay the full amount of tax you owe when it’s due.
  • You agree to pay the full amount within three years.

(To learn more, see IRS Installment Payment Plans.)

Even if the amount you owe exceeds $10,000, or it will take you more than three years to pay, or you’ve defaulted on an agreement with the IRS in the past, the taxman might still be willing to negotiate a payment plan if you can convince the agency that you’ll stick with it.

Offer in Compromise

If you cannot afford an installment agreement, you can make an “offer in compromise.” This means that you make a lump sum offer to the IRS to settle what you owe. The IRS will accept an offer in compromise in only three situations:

  • There’s a doubt that the assessed tax is correct.
  • You may not have the ability to pay the full amount owed.
  • You could pay the full amount, but doing so would cause you economic hardship.

 You must also meet all of the following:

  • You have filed all required federal tax returns before you apply for a compromise.
  • You are not in bankruptcy. (If you are in bankruptcy, any compromise would need to be negotiated in connection with the bankruptcy.)
  • You submit with your offer an application fee (currently $150) and a payment equal to either your first proposed payment (if you propose periodic payments) or 20% of your offer amount (if you propose a cash or lump sum offer) or you qualify for the low-income exception and submit Form  656A.
  • You submit required financial information.

 (To learn more, see Using an Offer in Compromise to Settle a Tax Bill.)

Using Bankruptcy to Discharge or Help Pay Your Tax Debt

Finally, you may be able to eliminate, reduce, or spread out your IRS debt by filing for bankruptcy. For details, see Tax Debts in Chapter 7 Bankruptcy and Tax Debts in Chapter 13 Bankruptcy.

For more articles on managing debts and dealing with particular debts, see the articles in Dealing With Debt: When You Can't Pay Your Bills.  

This is an excerpt from Nolo's  Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

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