This is a guest post from Manuel, an accountant and writer who mainly writes on various back taxes related topics. On his company’s website you can find more information and details for various tax resolution filings or you can get help from a tax professional.
If you have been assessed with a tax bill or you know you are going to owe taxes and you cannot pay, you have options. When you cannot pay your taxes owed it isn’t a big deal to the IRS. The IRS actually has created several mechanisms for taxpayers that cannot pay their taxes in full.
The various IRS mechanisms were created so that most taxpayers can reach compliance. These mechanisms were also created in such a way that not just anyone can qualify for certain tax resolutions or payment plans. These mechanisms are structured depending upon a taxpayer’s financial situation.
The first thing you need to do before figuring out what payment or resolution method you should use is take a hard look at your current and anticipated future financial situation. Below, financial situations will be characterized as being either OK or Poor. There is no good financial situation because if your finances were good you would be able to pay the IRS in full.
- OK Financial Situation: You have an OK financial situation if you cannot pay your taxes currently but you still have a stable income and still have some disposable income left after paying for living necessities. You can also be considered in an OK financial situation if you cannot pay currently but you expect to have access to funds in the near future.
- Poor Financial Situation: You are considered to be in a poor financial situation if you cannot pay taxes currently and you don’t have any spare money after paying for the basic necessities to live. You can also be considered in a poor financial situation if have capital now but you need to pay for basic necessities because you don’t know when you will get funds again.
Depending upon your financial situation you should pick the best payment or resolution option. Below are the different resolution and payment options based upon financial situations.
Ok Financial Situation Tax Payments & Resolutions
- IRS Installment Agreement: This is the most common method for individuals to pay their taxes if they can’t afford to pay in full. With an Installment Agreement the taxpayer can pay their taxes back in manageable monthly payments as long as the monthly payment made will pay off all taxes owed plus interest in a period of 3-5 years. If you owe less than $25,000 it is normally pretty straight forward to setup an Installment Agreement. If you owe more than $25,000 it will be a little more difficult to obtain since you will be required to provide more financial information, but you may still qualify. In order to use this form of payment the easiest thing to do is to call the number that is on your tax bill and the IRS will let you know exactly what needs to be done.
- Partial Payment Installment Agreement: This one falls between an OK financial situation and Poor financial situation. In order to be considered for a partial payment installment agreement you must have some money left over after basic necessity expenses are met, but not enough to pay the required amount with a normal installment agreement. With this method the taxpayer often ends up paying less taxes than the total amount owed because of the decreased payment amount they are making. Qualifying for this type of payment plan is similar to applying for an Installment Agreement but you must include detailed financial statements to prove you are unable to pay the full amount required.
- Borrow from friends and family: This method should only be used if you are in an OK financial situation and you do expect to have the funds in the near future to pay them back. The best time to use this method is if you know there is a payment coming in the near future that will be able to cover the entire amount owed and you don’t want to go through the hassle of settling up an installment agreement because you know you will be able to pay off the installment agreement quickly. Other than that, it is best to keep family and friends out of the situation.
Poor Financial Situation Tax Payments & Resolutions
- Offer in Compromise: An Offer In Compromise allows taxpayers to settle their taxes for less than the total amount owed. This is a resolution method that is highly sought after by many taxpayers but the IRS makes sure they only grant it to those people that truly deserve it (acceptance rates are around 10%). The basic qualifications for this resolution are that there must be doubt as to liability or to collectability of the taxes owed. Doubt as to liability means there is doubt that the actual amount you were assessed is correct. Doubt as to collectability means that there is doubt that the IRS will ever collect the full amount of taxes owed, even if the IRS used forced collection mechanisms.
- IRS Uncollectible Status: IRS uncollectible status is when the IRS determines that it would be unfair to collect from you in the time being because if they did it would be unfair and leave you without enough funds to pay basic necessities. When you are declared uncollectible the IRS will put a temporary hold on collecting taxes from you. The IRS will then check back every so often for an update on your financial situation to see if it meets the requirements for them to collect.
- Declaring Bankruptcy: If you are considering bankruptcy solely because you owe taxes, this is not a good idea. You can most likely get a better settlement with the IRS without the severe credit degradation and costs that bankruptcy carries. With Chapter 7 bankruptcy you can typically discharge all income tax debts if you meet stringent rules or requirements. With Chapter 7 you will be required to liquidate non-exempt assets and those assets will be used to satisfy taxes owed, any remaining taxes will be discharged. With Chapter 13, taxes are not discharged but rather repaid through a payment plan that lasts 3-5 years.
One important thing to remember is that if you cannot pay the IRS in full you MUST work with the IRS or you will be facing additional penalties and interest. Also one misconception that normally gets people in more trouble is that if they can’t pay their taxes then they shouldn’t file. This is not true! The penalties for not filing taxes are much harsher than not paying taxes. If you are unable to pay taxes, find the resolution method that fits your situation the best and work with the IRS.