Can’t Pay Your Tax Bill? Here’s What to Do
Taxpayers can work out a payment plan with the IRS on their own or with professional help, but should not ignore the problem
With tax forms arriving in mailboxes, many older Americans are sweating this year's April 18 tax deadline because they lack the funds to pay their bills in full.
If you owe the almighty IRS and can't pay, you have options. Whatever you do, don't do zilch. You can run, but you can't hide.
"The worst thing to do with the IRS is to do nothing at all," says Nina E. Olson, executive director of the Center for Taxpayer Rights, a nonprofit organization in Washington. "You really do need to take some steps if you have debt and can't afford to pay."
"The worst thing to do with the IRS is to do nothing at all."
Over time, Olson explains, late-payment penalties and interest on the debt will accrue and, possibly, add up to more than the original tax debt.
In the year ended Sept. 30, 2021, more than 10.2 million returns showed a delinquency, according to the IRS. The average amount owed was about $13,000; the agency does not break down the total delinquency of $133.4 billion by taxpayers' ages.
First Step: Ask for Help
If you are among the millions who do owe the government and you're starting to panic, know that a first step can be to call the agency's 1040 toll-free line: 800-829-1040. Prepare for a long wait.
The good news is that your honesty will pay off because acknowledging the lack of funds might spare you from more aggressive collection actions. In extreme cases, the IRS can legally seize property to satisfy tax debts. Tax scofflaws might even be subject to a hefty fine or even jail time.
For those who wish to avoid the phone wait and are adept at navigating websites, the IRS also offers information and options online at irs.gov.
Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax, the tax-filing software owned by Intuit Inc., advises taxpayers "to prepare their taxes as soon as possible to give themselves more time to figure out how they will pay what is owed."
"If taxpayers still owe after taking [all available] credits and deductions . . . , they should pay as much as they can by the tax deadline and then request an installment agreement," she adds.
Such plans allow taxpayers to make periodic payments rather than a lump sum. You can apply online or by mail using Form 9465.
Raphael Tulino, a spokesman for the IRS, offers an example:
"Let's say you owe $2,500. You think: 'I can pay $600.' You pay $600 and set the short- or long-term payment plan. The penalties and interest are much less there than if you don't file at all."
Taxes on the Installment Plan
An extended installment plan allows you to take as long as six years to pay what you owe (including penalties and interest, of course), whereas a short-term agreement allows payment over the course of 180 days, Greene-Lewis says.
"Taxpayers ... should pay as much as they can by the tax deadline and then request an installment agreement."
A taxpayer who cannot pay anything should ask to be considered "currently not collectible," Olson says. The designation does not let you totally off the hook, but it does alert the IRS that you do not have the ability to cover your basic living expenses and pay the tax bill at the same time.
Older taxpayers should be sure to take any deductions for which they are eligible. Greene-Lewis notes that Social Security benefits are not taxable alone. But other income, such as withdrawals from retirement plans and consulting or side gigs could make a portion of income taxable.
An Additional Deduction
Single people who are 65 or older or blind qualify for an additional $1,750 standard deduction. Medical expenses above 7.5% of adjusted gross income can also be deducted if you itemize.
For low-income persons with tax disputes, free or low-cost help is available from Low Income Taxpayer Clinics. These clinics can represent taxpayers before the IRS or in court. For a taxpayer to qualify for such assistance, income must be below a certain level, and the amount in dispute with the IRS (in this case, the delinquent amount) must typically be less than $50,000.
Although they receive some funding from the IRS, the clinics as well as their employees and volunteers operate independently of the agency.
The most popular program for those who can't pay their tax bills in full is an installment plan and what is known as "offer in compromise," which allows you to settle your tax debt for less than the full amount owed.
"The IRS says: We'll cut you a break if you become a compliant taxpayer and stay a compliant taxpayer."
The IRS uses a formula to assess a taxpayer's income and expenses. It also looks at a taxpayer's assets. Many taxpayers who follow this course of action make monthly payments for 24 months. The IRS says it typically approves an offer in compromise "when the amount you offer represents the most we can expect to collect within a reasonable period of time."
"The other part of the agreement is that you stay in compliance for five years and don't get behind on debt again," Olson says. "The IRS says: We'll cut you a break if you become a compliant taxpayer and stay a compliant taxpayer."
Other Options, Good and Bad
Olson advises delinquent taxpayers to seek advice from a trusted CPA, lawyer or "enrolled agent" who is authorized to represent taxpayers before the IRS. She cautions against seeking help from companies she calls "offer mills."
"They take your money and don't work for you," she says.
Other options do exist. One is to pay by credit card, knowing that you will be subject to fees and higher credit card interest rates. Another possibility: Request a loan from a relative or friend.
If you are fortunate enough to have equity in your home, consider using it as collateral for a home equity loan or a home equity line of credit. But be aware that such loans take time to set up, and the April tax deadline looms.
Worst Option of All?
Tapping a retirement account might be tempting, but this is possibly the worst option. You will jeopardize your retirement lifestyle, and the distributions are typically taxed at the rate of your highest bracket. That would pile even more taxes onto the heap. In addition, if you are under 59½, the withdrawal is also subject to a 10% penalty for early withdrawal.
Finally, don't confuse the ability to apply for an extension of the time allowed to file your tax return with gaining more time to pay your tax bill. Penalties and interest (at a current level of 7%) on the amount due will continue to apply as of the original due date.
The IRS has a vested interest in ensuring that you pay up.
"The IRS wants to be a help and not a hinder," Tulino says. "If you have an obligation, we want to work with you."