What are your options when you are late paying the IRS?

If you don’t pay, the IRS sends you a bill (in IRS-speak, a notice). This begins the collection process. The IRS usually allows at least 10 days to pay the delinquent tax. You can pay with plastic, via American Express, MasterCard, Visa or Discover cards (however, there is a fee charged by each vendor). The IRS also accepts money orders or checks. You can also pay electronically (see IRS Publication 966.)

If you do nothing, your account is delinquent and will usually be turned over to the Automated Collection System (ACS). At this point, the IRS personnel will contact you to arrange a payment plan. If no plan can be arranged, the account may be turned over to an agent for collection. The agent will try to settle the account with the taxpayer. If you are in financial straights, you have five potential options to keep the IRS off your back: (1) enter into an installment agreement; (2) arrange for a delay in collection; (3) submit an Offer in Compromise; (4) submit an “Application for Taxpayer Assistance Order (TAO) to Relieve Hardship"; or (5) bankruptcy. Read our section Tax Audits, Liens and Levies for more information on collection process and procedures of the IRS.

Installment agreements

The IRS will take regular monthly payments if you cannot immediately ante up the full tax bill. You can get up to 60 months to pay off the balance. You can pick the monthly amount and even the date you will make payment. You can pay by check or use a direct payroll deduction or electronic funds withdrawal. There is a $107 service fee to set up a new direct debit agreement ($31 with an online payment agreement), $225 for other new installment agreements, and a $149 fee for setting up an online payment agreement. Interest and a reduced late payment penalty are added to your tax bill. To apply, use Form 9465 to the front of your return. Normally the IRS will get back to you within 30 days.

In fact, the IRS cannot turn down your request for an installment if you owe less than $10,000, you previously filed and paid taxes for the previous 5 years, and you can convince the agency that you cannot settle your debt all at once. For more information on installment agreements, refer to IRS Publication 594.

Partial payments installment agreement:Taxpayers may also use an installment plan to make partial payments on outstanding tax liabilities, but must submit detailed supporting information about your ability to pay. The IRS can evaluate the payment arrangement every two years.

Extension of time

Financially strapped taxpayers can get a short extension of time to pay up to 120 days (https://www.irs.gov/taxtopics/tc202). Taxpayers generally will pay less in penalties and interest than if the debt were repaid through an installment agreement.

Delaying collection

If your financial condition is so bad and you are unable to pay even a small monthly amount, the IRS may give you a bit of breathing room until you get back on your feet financially to make payments at a later time. However, if the IRS does delay collection, your debt will increase because the IRS adds penalties and interest until you pay the full amount. During a temporary delay, the IRS will review your ability to pay, and may also file a Notice of Federal Tax Lien. For more information, refer to IRS Publication 594.

Submitting an Offer in Compromise (OIC)

Another way to strike a deal with the IRS is through an offer in compromise (OIC, for short). This contractual arrangement between you and the folks at the IRS allows you to negotiate the amount owed and pay less than 100% of what’s due.

The IRS generally entertains an OIC when there is doubt as to liability, doubt as to collectibility or based on economic hardship or special circumstances.

In making an OIC, you may propose to make a lump sum payment, a fixed monthly payment, or a combination. Generally, it is to the taxpayer’s advantage to pay the amount in the shortest time possible because longer payment terms will require a larger offer amount. Applicants must put down a 20% partial payment if they choose a lump sum offer or begin making monthly payments if they elect one of the other options.

There is a $186 application fee for OIC proposals. The offer is submitted on Form 656, Offer in Compromise and accompanied by a financial statement, Form 433-A. The upfront service fee can be waived if you have little or no income (i.e., below the poverty guidelines).

While the IRS is entertaining your offer, it will thoroughly scrutinize your financial situation and future earnings potential to determine your ability to pay the bill over time. And interest keeps accruing during the negotiation period. . An offer submitted to the IRS that does not meet the payment requirements is returned to the taxpayer as unprocessable and you are out the $150 service charge. An offer is deemed accepted if the IRS does not make a decision within two years from the date the offer was submitted.

The OIC process is neither easy nor assured as relatively few offers are accepted each year. Working out an Offer in Compromise is very technical, time-consuming, and a complex process, and negotiations with the IRS can be arduous. For this option, you really need to seek professional help, from a CPA or even better, from a tax attorney who knows the ins and outs of the process.

For more information, refer to Tax Topic 204.

Hardship Appeal

At any time before or during collection actions, if you believe a pending collection action will create a “significant hardship”, you may apply for relief by filing IRS Form 911, "Application for Taxpayer Assistance Order (ATAO) to Relieve Hardship." The form is filed with the Taxpayer Advocate’s office located in your state of residence. (To find out where one is located, call the National Taxpayer Advocate Hotline at 1-877-777-4778.) The Taxpayer Advocate will review the application and, if appropriate, halt the adverse collection actions, if only temporarily.

What constitutes a significant hardship is (1) facing an immediate thread of adverse action, (2) a delay of more than 30 days in resolving your account problems or not receiving a response by the date promised, (3) incurring significant costs, (4) suffering a irreparable injury or long-term adverse impact, (5) failure in the way the IRS procedures or systems are intended to operate. Examples of a significant hardship are the loss of housing, transportation, food, or buying needed medications, or shut-off of utilities.

For more information, refer to IRS Publication 1546.

Bankruptcy

If all else fails, bankruptcy is another way to clear your tax debt.

Under the bankruptcy laws, income tax debts can be wiped out (discharged) in both a Chapter 7 and Chapter 13 bankruptcy. Generally speaking, you can discharge past due taxes under both chapters if (1) the taxes are more than 3 years old, (2) you filed a timely, non-fraudulent income tax return, (3) you are not guilty of tax evasion, and (4) the tax was assessed by the IRS at least 240 days before bankruptcy. Tax debts arising from unfiled returns or from a fraudulent return are not discharged.

If you cannot escape paying, you may be able to enter into a favorable repayment plan for the taxes with the bankruptcy trustee.

Related Topics

--Tax Liens
--Tax Levy
--Time to Partner With a Tax Attorney
--You Can Avoid Taxes, Just Don’t Evade or Outright Dodge Them
--Private Debt Collection Agencies