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Handling a Tax Problem When You Can't Pay Your Tax Bill

written by: Patricia Tokar, CPA•edited by: Laurie Patsalides•updated: 10/5/2012

When the bottom line on your tax return shows a balance due, you have many options. You will need to make some careful decisions, though, in order to have some control over what happens if you owe the IRS and can't pay your tax bill.

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    Does Your Tax Return Show an Amount Due?

    Not enough money to pay your tax bill? When you have a balance due to the IRS, it is imperative for you to immediately begin to take steps to arrange for payment. Most of the beginning steps of the IRS collection processes are computer automated. The computer will continue marching through each phase of the collection process unless you take action to have the process placed on hold.

    If your tax return shows a balance due, the IRS will charge you a penalty of 4.5% of the balance due for every month or partial month that the return is filed late, up to a total late filing penalty of 25% of the balance due. If you owe the IRS and can’t pay your tax bill, you’ll save a substantial amount of penalties by filing the return on time, or by filing for an extension of time to file.

    If the IRS finds discrepancies on your tax return, the first notice that you will receive is usually a Notice of Math Errors. Don’t be fooled by the name - the notice covers a large variety of tax preparation errors, such as choosing the wrong filing status or an incorrect social security number. Quite often the Notice of Math Errors is not correct, so the first step for dealing with any balance you owe the IRS is to be certain of the amount of tax that you actually owe. If you are not confident of the calculations, take the return and any notices you have received to a tax professional for review.

    Once the amount that you owe the IRS has been established, you have several choices for dealing with your tax problems.

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    Ignore It and Do Nothing

    If you receive a Notice of Balance Due from the IRS and your choice of action is to ignore it and do nothing, then you will receive a progression of notices from the IRS. Eventually you will receive a Notice and Demand for Payment. Penalties of at least .5% per month in addition to interest on the balance due will be accumulating. If you continue to ignore this notice, then soon you will likely receive a Notice of Federal Tax Lien as well as a Notice of Federal Tax Levy. The Federal Tax Lien will allow the IRS to place a general lien on any and all property that you own and will legally allow the IRS to receive payment when you sell any titled property, such as a house or car. The Federal Tax Levy will allow the IRS to contact all banks where you may have an account and to seize the funds, up to the amount of your tax debt, in your bank accounts. The levy will also allow the IRS to garnish your wages.

    If the balance due is still not satisfied, then the IRS will seize any future tax refunds until the tax bill is paid. During this time, you may also receive phone calls from the IRS, and if the debt is large enough, they may even send a revenue agent to personally try to work out a payment plan.

    You should note that the Federal Tax Lien is a public notice and will therefore affect your credit rating.

    You do have some other (better) choices to resolve your tax problem and to help control what happens if you owe the IRS and can’t pay.

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    Request an Installment Agreement

    One of the easiest options is to File a Form 9465, Installment Agreement Request. This is simply a request to make monthly payments on your balance due to the IRS. You can make this request by filling out and mailing in the form, by filling out the form online, or by calling the IRS. (If you call, use the phone number stated on your tax bill or notice or use the general information number 1-800-829-1040.) If your balance due is less than $10,000, you are current in your tax return filings, and you will pay off the balance within 3 years, then the installment agreement is usually automatically accepted. You should expect to pay a fee of $52.00 - $105.00 for the agreement, depending on the installment payment method you choose.

    The installment agreement will usually put a freeze on any pending tax levies. The IRS will still take any future tax refunds and apply it against your debt. Penalties and interest will continue to run during this time.

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    Request an Extension of Time to Pay

    You may make this request informally by calling the IRS and asking that a hold be placed on the collection of your account. This is usually granted if you will be able to pay your tax bill within 120 days. There is no fee for this type of agreement, so if you are reasonably certain that within 3 months you can pay all or most of your taxes, this is the method to choose. If you do this, be sure that you write down the agent’s name and number and be sure that the agent gives you a specific date that they have placed in the file for expiration of your extension. You can usually request an extension of time of up to 120 days. Penalty and interest will continue to run during this time.

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    Request Your Account Be Placed on Delay or Even Marked as Uncollectable

    If you are completely unable to pay due to illness or unemployment or very low income, then the IRS may place an uncollectable marker on your account. This can be accomplished by calling the IRS and discussing your financial situation with them. Likely, they will interview you to get details on your assets and your monthly cash flows. Ask if they will send you the status in writing so that there is no misunderstanding. As usual, penalty and interest will continue to run, the IRS may still place a general tax lien, and may also seize any future tax refunds.

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    Make an Offer in Compromise

    If you can pay some, but not all of the tax bill, then consider completing an Offer in Compromise (Form 656). Briefly, this is an offer to pay part of the bill and have the rest written off. There is a non refundable fee of $150 to apply for an offer in compromise. (Low income taxpayers can apply for a reduced fee). Any money that you send as an offer will be applied to your tax debt whether they accept the compromise or not. Since the terms of an offer in compromise can be quite complex, and you will pay a nonrefundable fee to submit the offer, it is recommended that you at least consult with a CPA, enrolled agent, or tax attorney before you attempt to file an Offer in Compromise on your own.

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    Call your Taxpayer Advocate

    If you have tried to work out a problem with a balance due and you feel that the IRS is not responding or does not understand your circumstances, then you have an option to contact the Taxpayer Advocate Service. You may do this by sending in a filled out Form 911, Application for Taxpayer Assistance Order or by calling 1-877-777-4778.

    The Taxpayer Advocate, under certain circumstances, can act as your ally to help you and act on your behalf in making certain requests and in resolving your tax or collection issue.

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    As you can see, you have many choices of to resolve a tax problem when you owe the IRS and can’t pay your tax bill. By taking action and contacting the IRS, you may be able to prevent further collection action on your tax debt.

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    Legal Stuff

    This article is based on author's experience and not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.

    CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties.