What If You Can't Pay IRS Taxes?

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A question that comes up quite frequently is, what should you do if you can’t pay your taxes or if you can’t pay your taxes on time? It’s a great question, it’s actually a common question, and whatever you do, don’t panic.

In this article, I’ll share some ideas on what to do along with minimizing potential penalties and interest.

If you can’t pay your taxes or pay your taxes on time here are some things you should do.

1. File your tax return on time.

First and foremost, make sure to file your tax return on time, which is generally April 15. If you think you'll owe money, you might be tempted to delay filing until you have the funds, but this can result in a late payment penalty of up to 25% of the amount due.

If you can't file by April 15, you can apply for a six-month extension by filling out and submitting Form 4868. Just keep in mind, this only extends the deadline to file your tax return, not to pay any taxes owed. 

You'll still need to pay at least 90% of your tax liability by April 15 and the rest by October 15 to avoid any late-payment penalties.

2. Pay as much as you can with your tax return.

So, if you can't pay the full amount of your tax bill, it's still a good idea to pay as much as you can when you file your return. This can help reduce the late-payment penalty and minimize interest charges. The same goes if you owe money due to an audit or an IRS notice. Pay as much as you can, as soon as possible. Every dollar you pay will help lower the late payment penalty and reduce interest charges.

3. Ask the IRS for more time to pay.

If you're having trouble paying your taxes in full, the IRS may give you a little extra time - usually 60 to 120 days. Keep in mind that you'll still accrue interest and penalties on the unpaid amount during this time. 

If you need to set up a payment plan, you can either call the IRS at 800-829-1040 or use their online payment agreement application at irs.gov., which I’ll discuss more in a bit.

4. Request an extension of time to pay by filing Form 9465, Installment Agreement Request.

If you can't pay your entire tax bill at once, you can use Form 9465, as shown here, to request a payment plan with the IRS. You can either attach this form to your tax return or file it separately. 

On this form, you can specify the amount you want to pay each month and the due date for those payments. You can also make an initial payment when you file the form. If the IRS approves your request, you'll have up to 72 months to pay off your debt. Keep in mind that you'll accrue interest during this time, but you might be able to get the penalties waived.

If you owe between $25,000 and $50,000, you'll need to agree to payments by direct debit and provide your bank information. If you owe $10,000 or less, your request will automatically be approved as long as you agree to pay the balance in full within three years, and don't have any other IRS installment agreements in place, and have filed and paid your taxes on time for the past five years.

If you owe more than $50,000, it gets more complicated. You'll need to attach Form 433-F, Collection Information Statement, to Form 9465 to determine the monthly payment amount.

However, if you think you can pay the entire balance within 120 days or if you want to set up an ONLINE payment agreement, and you don't need to file Form 9465. Which I will explain next with…

5. Request an extension of time to pay using the IRS Online Payment Agreement application at irs.gov/payments. 

So, if you don't want to file Form 9465, you can also set up an installment agreement online with the IRS. The terms of this online payment agreement are similar to those for Form 9465. You're eligible to apply online if you owe no more than $50,000 in combined taxes, interest, and penalties and have filed all required tax returns. 

To keep your installment agreement in good standing, be sure to make your payments on time and stay current with your tax filings. This will help ensure that everything goes smoothly and you can pay off your tax debt without any problems.

What if you default on your IRS installment agreement?

If you default on your IRS installment agreement or payment plan, you may have to pay a reinstatement fee. If you receive a notice that your installment agreement is being terminated, it's important to contact the IRS right away. 

In general, the IRS won't take enforced collection actions against you; while you're considering a payment plan, while a plan is in effect, for 30 days after a request is rejected or terminated, or while they're evaluating an appeal of a rejected or terminated agreement.

Thanks for reading, and see you in the next blog post! 

About The Author

Noel Lorenzana is an Illinois-licensed, Registered Certified Public Accountant with over 20 plus years of experience.

Through his online educational content, YouTube videos, easy-to-understand courses and 1-on-1 consulting, he gives you the tools to become tax savvy for yourself. 

Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.