The IRS generally attempts to collect unpaid taxes first through voluntary payment arrangements. If this fails, the IRS may then turn to enforced collection methods such as liens, levies, and seizures. Thus, it is important that you take the appropriate steps if you cannot fully pay your tax liability.
If you are not disputing the amount of the liability, but simply are unable to pay your bill in full, you have several options to consider, as described below. You should first attempt to get a personal or business loan or borrow from sources such as family, credit cards, 401(k) plans, life insurance, and/or home equity. You may also consider taking a distribution from an IRA, but this generally comes with a federal and state combined tax hit of upwards of 50% of the proposed distribution.
Short-Term Payment Extension. For 2019 returns, the IRS announced in Notice 2020-18 that all taxpayers can defer payment until July 15, 2020, without penalty or interest.
Six-Month Payment Extension. If you can establish that timely payment would result in “undue hardship,” you may be able to obtain a longer-term extension of time to pay of up to six months. The extension may exceed six months if you are abroad.
Suspending Collection Due to Economic and Other Hardships. If you can show that collection of the tax debt would cause a financial or other hardship for you or your family, such as preventing you from meeting necessary living expenses, the IRS may temporarily delay collection until your financial condition improves (i.e., classify the account as “currently not collectible”). After approximately one year, the IRS will review your case to determine if the hardship still exists. (Note, however, that penalties and interest continue to accrue during such period). The IRS may also enter into a compromise agreement with you.
Installment Agreements. If you cannot fully pay within 120 days, you may be able to pay in monthly installments. You will be charged interest and may be charged a late payment penalty on any tax not paid by its due date. There are several types of installment agreements.
Guaranteed Agreements. The IRS must accept an installment agreement if you: (1) owe $10,000 or less; (2) have filed and paid all tax returns during the five years prior to the year of liability; (3) can fully pay the tax liability within three years; (4) file and pay all tax returns during the agreement; and (5) have not had an installment agreement within the last five years preceding the year of liability. Importantly, you can qualify for this “guaranteed” agreement so long as the tax liability alone does not exceed $10,000 (i.e., your actual tax bill may exceed $10,000 including penalties and interest). Also, the IRS’s policy is to grant such agreements even if you could otherwise fully pay. Further, the IRS generally does not file a lien to secure the agreement. You can apply online through the IRS’s website or authorize me to prepare the application for you.
“Streamlined” Agreements. You can apply for a “streamlined” installment agreement online through the IRS’s website without having to contact the IRS or provide extensive financial disclosure if your unpaid liability (including tax, assessed penalties, and interest) is $50,000 or less and you can fully pay the liability within 72 months. If your unpaid liability exceeds $50,000, you can pay the balance down to $50,000 to become eligible. Further, the IRS generally does not file a lien to secure the agreement. You can also authorize me to prepare the application for you.
Regular Agreements. Lastly, you can apply for the more traditional type of installment agreement, but you will need to provide extensive financial disclosure and the IRS will conduct a fairly detailed financial analysis to determine the amount and duration of any payment plan. In short, the amount you will be asked to pay will be largely based on the IRS national and local financial guidelines, which may significantly alter your current lifestyle. The IRS may file a tax lien to secure the agreement.
Offer in Compromise. You also have the right to submit an “offer in compromise” (OIC). The IRS may compromise your tax liability, i.e., accept less than full payment, on one of several grounds: (1) doubt as to liability for the amount owed; (2) doubt as to ability to make full payment of the amount owed; or (3) if there is no doubt as to liability or collectability, promoting effective tax administration in exceptional circumstances or to avoid economic hardship.
The doubt as to the liability for the amount owed must be supported by evidence, and the amount acceptable to the IRS depends upon the degree of doubt found in the particular case. In the case of inability to pay, the amount offered must exceed the total value of your equity in all your assets and must provide adequate consideration to present and future earning capacity. If an offer is accepted, the IRS also may require you to agree to pay a percentage of future earnings as part of the offer and to relinquish certain present or potential tax benefits.
Bankruptcy. You may also consider bankruptcy. The filing of a bankruptcy petition serves to place a “stay” on further IRS collection actions. The IRS may then file a claim for the unpaid taxes with the bankruptcy court. The court can determine whether and when these taxes are to be paid. In addition, certain taxes that cannot be paid from the bankruptcy estate may be discharged.
Discharge generally is limited to taxes incurred more than three years before the bankruptcy petition is filed. Before filing for bankruptcy, however, you should first consider all of the consequences that such filing may have on your overall financial situation.