What to Do If You Owe the IRS But Can’t Pay

What to Do If You Owe the IRS But Can’t Pay

Owing money to the IRS can be a stressful situation, but you are not alone. Every year, millions of taxpayers find themselves unable to pay their tax bills in full. The good news is that the IRS offers several options to help individuals and businesses resolve tax debt without facing severe consequences. By understanding your options and taking action promptly, you can avoid penalties, interest, and potential collection actions such as tax liens or levies.

Consequences of Unpaid Taxes

Ignoring a tax bill from the IRS can result in serious financial and legal consequences, including:

• Penalties and Interest – The IRS imposes penalties for both failure to file and failure to pay. The failure-to-pay penalty is 0.5% of the unpaid taxes per month, up to a maximum of 25%. Additionally, interest accrues daily on the outstanding balance, making it more expensive over time.
• Tax Liens – If you owe a significant amount, the IRS may file a federal tax lien against your assets, affecting your credit and ability to secure loans.
• Wage Garnishment and Levies – If taxes remain unpaid, the IRS can take aggressive collection actions, such as garnishing your wages, seizing funds from your bank account, or placing a levy on your property.

IRS Tax Debt Relief Options

If you owe back taxes and cannot afford to pay the full amount, the IRS provides several programs to help you manage and resolve your debt. Here are some common solutions:

1. Installment Agreements (Payment Plans)

For those who cannot pay their tax debt in full, the IRS allows taxpayers to set up a payment plan. A short-term installment agreement must be paid off within 180 days, while long-term installment agreements can stretch payments over several years.

• Eligibility: You must owe less than $50,000 to qualify for an individual installment agreement.
• Application Process: You can apply online through the IRS website or submit Form 9465 (Installment Agreement Request).

2. Offer in Compromise (OIC)

An Offer in Compromise (OIC) allows eligible taxpayers to settle their tax debt for less than what they owe. The IRS considers a taxpayer’s income, expenses, assets, and ability to pay when determining eligibility.

• Who Qualifies? The IRS will approve an OIC only if they believe they are unlikely to collect the full amount from you within a reasonable period.
• How to Apply: You must submit Form 656 and pay an application fee, along with detailed financial documentation.

3. Currently Not Collectible (CNC) Status

If you are experiencing significant financial hardship, you may qualify for Currently Not Collectible (CNC) status. This temporarily suspends IRS collection activities, including wage garnishments and levies. However, interest and penalties will continue to accrue.

• Qualification: You must prove that paying your tax bill would prevent you from meeting basic living expenses.
• Review Process: The IRS will periodically review your financial situation to determine if you still qualify.

4. Penalty Abatement

If you have a reasonable cause for failing to pay your taxes on time, such as a medical emergency or a natural disaster, you may request penalty abatement. The IRS offers First-Time Penalty Abatement for taxpayers with a history of compliance.

Steps to Take If You Can’t Pay Your Taxes

1. File Your Tax Return on Time – Even if you cannot pay your balance in full, filing your return will help you avoid additional penalties.
2. Assess Your Financial Situation – Determine how much you can realistically afford to pay and explore your IRS tax relief options.
3. Contact the IRS – The IRS is often willing to work with taxpayers who communicate proactively about their inability to pay.
4. Seek Professional Help – A tax attorney or tax resolution firm, such as Segal, Cohen & Landis, can negotiate with the IRS on your behalf and help you find the best solution.

How to Prevent Future Tax Debt Issues

• Adjust Withholding or Estimated Tax Payments – If you frequently owe taxes, consider adjusting your withholding or making estimated tax payments throughout the year.
• Stay Organized – Keep detailed financial records to ensure accurate tax filings and avoid future tax liabilities.
• Plan for Tax Payments – Set aside money regularly to cover expected tax obligations, especially if you are self-employed.
• Work With a Tax Professional – Consulting with an experienced tax attorney can help you stay compliant and minimize your tax burden.

Get Professional Tax Help

If you owe the IRS and cannot afford to pay, seeking legal guidance from a tax resolution expert can help protect your assets and financial future. Segal, Cohen & Landis (SCL Tax Law) specializes in IRS back tax relief, Offer in Compromise, and penalty abatement services to help taxpayers navigate complex tax issues. Contact SCL Tax Law today to explore your options and get the IRS off your back.