Receiving a tax bill that you can’t afford to pay in full can be stressful, but it’s not an uncommon situation. Each year, many individuals and businesses find themselves owing more to the IRS than they can immediately pay. The good news is that the IRS offers several options for taxpayers who are unable to pay their full tax liability. Understanding these options—and the consequences of inaction—is crucial to maintaining your financial health and avoiding escalating penalties and interest.
1. Don’t Ignore the Tax Bill
The worst mistake you can make is ignoring a tax bill. Failure to address unpaid taxes will not make the problem go away—it will only get worse. The IRS has the authority to impose penalties, charge interest, and eventually seize assets or garnish wages to collect what is owed. It’s important to take immediate steps to resolve the issue, even if you can’t pay the full amount right away.
2. Pay What You Can Now
If you can’t pay your tax bill in full, try to pay as much as you can by the due date. Any payment you make will reduce the amount of interest and penalties that accrue. Even a partial payment can demonstrate good faith and potentially help your case if you apply for a payment plan or penalty relief later.
3. Understand the Consequences of Not Paying
When you don’t pay your taxes in full by the due date, the IRS can take several actions:
- Failure-to-Pay Penalty: Typically 0.5% of the unpaid taxes per month, up to 25% total.
- Interest: Charged on the unpaid balance and compounded daily. The rate is the federal short-term rate plus 3%.
- Tax Liens: The IRS can file a public notice of a federal tax lien against your property, affecting your credit.
- Tax Levies: The IRS can seize bank accounts, wages, or other assets if the balance remains unpaid.
The longer the debt remains unpaid, the more severe the penalties and collection actions can become.
4. Apply for an IRS Payment Plan (Installment Agreement)
One of the most common ways to deal with a tax debt you can’t pay in full is to apply for a payment plan, also known as an installment agreement. This allows you to pay the balance over time in monthly installments.
Types of Payment Plans:
- Short-Term Payment Plan: For balances under $100,000, allows repayment within 180 days without a setup fee.
- Long-Term Payment Plan: For balances under $50,000, paid monthly for up to 72 months. A setup fee applies unless you qualify for a waiver.
You can apply for a payment plan online through the IRS website, by phone, or by submitting Form 9465 (Installment Agreement Request).
5. Consider an Offer in Compromise (OIC)
If you truly can’t afford to pay your tax debt in full or through a payment plan, you may qualify for an Offer in Compromise. An OIC allows you to settle your tax debt for less than the full amount you owe.
The IRS will consider your:
- Income
- Expenses
- Asset equity
- Ability to pay
To apply, you must file Form 656 along with a financial disclosure (Form 433-A (OIC) or 433-B (OIC) for businesses). A non-refundable application fee and initial payment are usually required.
Approval is not guaranteed, and the IRS accepts offers only if they believe it is the most they can collect within a reasonable timeframe.
6. Request Currently Not Collectible (CNC) Status
If you’re experiencing extreme financial hardship and cannot pay any amount, you may be eligible to have your account placed in Currently Not Collectible (CNC) status. While in CNC status, the IRS will not attempt to collect your tax debt through levies or garnishments.
However, penalties and interest will continue to accrue, and the IRS may review your situation periodically. You will need to submit financial information (via Form 433-A or 433-F) to qualify.
7. Seek Penalty Relief
If you have a good reason for not paying your tax bill on time—such as serious illness, natural disaster, or other hardship—you may be eligible for penalty abatement.
Types of Penalty Relief:
- First-Time Penalty Abatement: Available if you have a clean compliance history for the past three years.
- Reasonable Cause Relief: Granted if you can demonstrate that circumstances beyond your control prevented payment.
To request penalty abatement, you can call the IRS or submit a written request along with supporting documentation. In some cases, it may be included in a request for an installment agreement.
8. Use a Credit Option Carefully
Some taxpayers consider using a credit card, personal loan, or home equity line of credit to pay their tax bill. This can be a viable strategy if the interest rate on the loan is lower than the penalties and interest charged by the IRS.
However, this approach carries risks:
- High interest rates and fees on credit cards
- Potential negative impact on credit score
- Increased debt burden
Use this option only after carefully evaluating your financial situation and available alternatives.
9. Avoid Future Tax Debt
Once you’ve addressed your current tax issue, it’s important to avoid repeating the same problem in future years. Consider the following steps:
- Adjust your withholding: Use IRS Form W-4 to increase the amount withheld from your paycheck.
- Make estimated payments: If you’re self-employed or have variable income, make quarterly estimated payments using Form 1040-ES.
- Track income year-round: Use a budgeting app or spreadsheet to keep tabs on taxable income and potential tax liabilities.
- Work with a tax professional: They can help you plan for the future and ensure compliance with IRS rules.
10. When to Contact a Tax Professional
It’s wise to contact a tax professional if:
- You owe more than $10,000 and are unsure of your options
- You need help negotiating an Offer in Compromise
- You’ve received collection letters or notices from the IRS
- You are facing wage garnishment, bank levies, or liens
Tax professionals—including CPAs, enrolled agents, and tax attorneys—can help you navigate IRS bureaucracy, file necessary forms, and protect your rights.
Conclusion
Owing more to the IRS than you can pay in full is undoubtedly stressful, but it’s not the end of the world. The IRS offers several tools to help taxpayers manage their debts, including payment plans, offers in compromise, and hardship relief options. The key is to act quickly, communicate openly with the IRS, and seek professional guidance when necessary. By taking action early, you can avoid unnecessary penalties, protect your financial future, and regain control over your tax situation.
