What To Do If You Owe The IRS And Can’t Pay

Question of the Week

What To Do If You Owe The IRS And Can’t Pay

Tax day has come and gone. The rush and stress of having to get everything done may have left you exhausted. In addition to that stress, you may owe more on your tax return than you can afford to repay. That’s okay.

If you find yourself with income-tax debt, you aren’t alone. According to the U.S. Internal Revenue Service (IRS) Delinquent Collections Activities Data book, over 11 million Americans owed over $125 billion in back taxes, penalties and interest in 2019. That number can only grow as the economy weakens and small business owners continue to struggle.

The good news is there are plenty of ways to resolve your tax debt. Here are the four most common:


1.  Online Payment Agreements

Under the IRS’ Fresh Start initiative, individuals who owe $50,000 or less in income tax and businesses that owe $25,000 or less in payroll tax may qualify for an Online Payment Agreement. You can set up the payment for any amount you can afford as long as the debt is paid in full within 72 months (6 years). You can also modify installment agreements through the program as well.

You may qualify to apply online for either of two types of plans:

  • Long-term payment plan (installment agreement): You owe $50,000 or less in assessed tax, penalties and interest, and filed all required returns.
  • Short-term payment plan (paying in 120 days or less): You owe less than $100,000 in combined tax, penalties and interest.

If you are a sole proprietor or independent contractor, you can apply for a payment plan as an individual. There will be some application fees: $31 to apply online and pay through automatic withdrawals or $149 to apply online and pay through another method (fees can be reduced for low-income applicants).


2. Installment agreements

If you need longer than 72 months to pay your debt or you owe more than $50,000 the IRS will request a Collection Information Statement (Form 433-A, Form 433-B or Form 433-F). These forms provide an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay on a regular basis. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. These financial statements also play an important role in the other resolutions you may obtain.

You can request the agreement by phone or by mailing Form 9465 to a service center. Be prepared for delays. Service centers are behind in processing installment agreements. The IRS is currently working to reopen its offices due to Covid-19 restrictions. Check IRS operations and services for the most up-to-date status.

Also keep in mind that interest and late-payment penalties continue to accrue on any unpaid taxes. However, the IRS halves the penalty assessed for failure to pay taxes while an installment agreement is in effect, reducing it from 0.5 percent per month to 0.25 percent. For the calendar quarter beginning July 1, 2020, the interest rate on underpaid taxes is three percent.

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Quote of the Week

“If there is no struggle, there is no progress.” – Frederick Douglass


Task of the Week

I know you may be anxious about your taxes now when the future is so uncertain. Here are four things you can do this weekend to help put you in a better place:

  • Make sure all of your tax returns are filed: All of these arrangements require that you’ve filed all required tax returns.
  • Pay your estimated tax payments now: Using current money you need for 2020 taxes to pay 2019 taxes may just deepen the hole you’re in. The best thing you can do is stop digging. Do your best to deal with the current year first, and then resolve past years debt the best you can.
  • Sign up for an online tax account: If you haven’t signed up for an online account with the IRS, I suggest doing that right away.
  • Review Your Return: Your tax return is probably the last thing you want to look at right now, but with the details fresh in your mind, is actually the best time for a review.