Can't Pay Your Taxes? Here Are Your Options

by Lyle Daly | Updated July 17, 2021 - First published on April 15, 2019

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Owing taxes you can't pay is stressful, but there are options available to avoid trouble with the IRS.

Tax time is here and, for some of us, that will mean making a payment to the IRS. While it's doubtful that anyone enjoys paying taxes, it's even worse if you don't have the money to cover what you owe.

A tax bill is something that only becomes more of a problem the longer you wait to deal with it. If your taxes are going to cost you more than you have in your bank accounts, here's what your options are and what you should do first.

Don't wait to file your taxes

Regardless of whether you can pay your taxes in full or not, make sure you file by the deadline. If you don't, the IRS can charge you a penalty for filing late, so you'll only be adding to what you owe.

By the time you're ready to file your taxes, you should know how much you can afford to pay at that moment and how you plan to pay off the rest. For the amount you can't pay, there are two ways you can go:

  • Work with the IRS
  • Borrow money to pay your taxes in full

Your options with the IRS

For those who can't pay their taxes, the IRS offers several options, which are listed below. Payment plans are the most common option, and you can set one up through the IRS's Online Payment Agreement application or by calling the IRS at 800-829-1040.

Set up a short-term payment plan -- If you just need a few more months to pay your taxes, the IRS will give you another 120 days. Your taxes will incur interest and penalties until they're paid in full.

The good thing about this option is that there's no fee. You can set it up online or over the phone.

Set up an installment agreement -- The IRS allows taxpayers to make monthly payments towards their taxes through installment agreements. Once again, your taxes will incur interest and penalties until they're paid in full.

Installment agreements are an option if you will owe $50,000 or less on your taxes, including interest and penalties. There is a setup fee for arranging an installment agreement, and the amount of the fee depends on:

  • How you apply -- It costs less to apply online than it does to apply by phone, mail, or in-person.
  • How you make payments -- It costs less if you agree to payments that are debited directly from your account every month.
  • Your income -- Low-income applicants can qualify for a lower fee and potentially even have the fee reimbursed.

Make an offer of compromise -- With a tax bill that you can't realistically pay back, you can make an offer of compromise to the IRS. An offer of compromise is a smaller amount that you pay in one lump sum to settle your tax debt.

Although this probably seems like a great way to chop down your tax bill, it's really only a last resort option. You'll need to pay an application fee, unless you qualify for a low-income exemption. The IRS will take a thorough look at your financial situation. It will only allow an offer of compromise if you couldn't pay off your taxes with a payment plan and if you also couldn't pay your taxes with the equity in everything you own.

Put your account in a Currently Not Collectible status -- When it would be impossible to pay your living expenses and your taxes, the IRS can put your account in a Currently Not Collectible Status.

While your account is in this status, you won't need to pay your tax bill. However, this status is temporary, and your taxes will incur interest and penalties during this time.

How to pay your taxes with a credit card

Another option is to pay your taxes on time with a credit card, specifically a card with a 0% intro APR. You'll avoid interest and penalty fees through the IRS, and you'll have the length of the card's intro period to pay off your debt with no interest. If you have a good credit score and can qualify for the best 0% APR credit cards, you could get that intro APR for 12 months or longer.

There's a transaction fee of just under 2% to pay your taxes with a credit card. On a positive note, some of those cards also have sign-up bonuses, so you could even earn some money back on your tax bill.

What's important is that you can pay off your taxes in full within the card's intro period. Otherwise, the intro period will end and you'll be stuck paying the card's standard APR on whatever's left.

How to pay your taxes with a personal loan

If you don't want to set up a payment plan with the IRS, you can also opt for a personal loan. The top personal loan providers offer low interest rates, loan amounts ranging from $1,000 to $100,000, and terms of varying lengths, allowing you to get a loan that fits what you need.

Once you get a loan, you can pay the IRS through an ACH transfer. That means you avoid the transaction fee of paying by credit card.

The downside with paying your taxes this way is that even though personal loans can have low interest rates, those rates still tend to be higher than what you'd pay through a payment plan with the IRS.

Avoiding future issues

It's never easy when you can't pay your taxes, but you aren't the first person to be in this situation, and there are several ways to get yourself out of it.

Once you've figured out how you're going to pay the IRS, you should also go over why this happened in the first place, whether it's due to a problem with your withholdings, not saving enough for self-employment taxes, or for another reason.

Then you can plan for what adjustments you'll make so that you don't end up in the same situation next year.

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