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What to Do If You Can't Pay Your Tax Bill

By Kailey Hagen - Mar 8, 2020 at 12:24PM

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Step one: Don't panic. Step two: Follow these other steps.

Most people can look forward to refunds once they've filed their tax returns for the year, but some people get handed a bill instead. This isn't a huge problem if you've been preparing for it, but if it comes as a surprise, or it's larger than you expected, you might not have the cash on hand to pay it. 

There's no need to panic, though. The IRS gives you a few options if you're not able to pay your bill right away. Follow the steps below to find a solution that works for you.

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Image source: Getty Images.

File your tax return

Completing your tax return is the only way to find out how much you owe, so that's the first step. You should still submit your tax return by the April 15 tax deadline, unless you decide to file an extension, in which case, you have until October 15. 

You don't want to skip this step even if you can't pay your bill right now, because the IRS will charge you a failure-to-file penalty. This is 5% of your outstanding tax bill for every month that your return is late, up to a maximum of 25%, and it can make it even more difficult to pay back what you owe.

Pay what you can

Write the government a check for as much money as you can spare right away, even if it's not for the full amount. This demonstrates to the IRS that you're making an effort to pay what you owe. It also reduces your outstanding balance so it will grow more slowly. 

Your balance will begin accruing interest daily past the April 15 deadline until you've paid the balance in full. The exact interest rate varies quarterly. Any penalties you incurred can also accrue interest, which makes it especially important to avoid the failure-to-file penalty and the failure-to-pay penalty, which costs you 0.5% of your tax bill per month, up to a maximum of 25%.

Try to pay the rest within 120 days

The IRS offers short-term repayment plans that give you 120 days to pay your tax bill. Your balance will still accrue interest if you do this, but you'll avoid the failure-to-pay penalty. There is no fee required to sign up for a short-term repayment plan, though you could owe a small fee if you use a credit card to pay. 

Individuals who owe less than $100,000 in combined tax, penalties, and interest can apply for a short-term repayment plan online. If you owe more than this, contact the IRS. Remember, you must apply for a repayment plan if you want to avoid penalties. Otherwise, the government will just think you're ignoring your bill.

Apply for a long-term repayment plan if you need more time

When you need more than 120 days, you can apply for a long-term repayment plan instead. This enables you to make monthly payments to the IRS until your outstanding bill and any penalties and interest are paid in full. You can apply for one of these using the link above.

You can either have the government withdraw the money directly from your bank account every month, or pay another way, like with a credit card or a check. You might have to pay a one-time setup fee when agreeing to a long-term repayment plan. This is $31 if you choose a direct debit or $149 if you choose to pay another way.

Low-income individuals -- those whose adjusted gross income (AGI) is 250% or less of the federal poverty level -- do not have to pay a fee if they choose a direct debit and will owe at most $43 if they choose to pay another way. Those with outstanding tax bills of $25,000 or more must choose the direct debit option.

Try making the government an offer if you doubt your ability to pay

If you doubt you'll be able to pay your full tax bill with an installment plan, you can try making an Offer in Compromise (OIC). This is where you tell the government how much you're able to pay. If it agrees, you pay that amount, and then you're off the hook for the rest of it. The IRS looks at your income, household expenses, assets, and your ability to pay when deciding whether to agree to your offer. OICs are not available to those who are in open bankruptcy proceedings. You can check if you qualify for an OIC using this tool.

You have to be reasonable in what you ask for if you expect the government to agree to your offer. You can't owe $20,000 in outstanding taxes and try to convince the government that you shouldn't owe anything. There is a $186 non-refundable application fee when you submit an OIC, though this is waived for some low-income filers.

If the government agrees to a lump-sum offer, you must pay 20% of the agreed-upon amount right away and the remaining 80% within five or fewer subsequent payments. Alternately, you can ask for a monthly payment plan over as long as 24 months. If your offer is rejected, you can file an appeal within 30 days.

Request a temporary collection delay

When nothing else works, you can request that the IRS temporarily delay collections if paying your tax bill would leave you unable to afford your basic living expenses. That doesn't mean your debt goes away. You'll still have to pay it, and it'll be accruing interest (and possibly penalties) the whole time, but it can give you a little breathing room if you need it. You must provide the government with information on your income, assets, and expenses to help it make a decision about whether to delay collections.

If you have any questions, or you're not sure which strategy is best for you, contact the IRS to discuss your options. Those who owe state taxes should also contact the department of revenue for their state to learn about how they can avoid penalties and what their options are for paying their bill.

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