Can't Pay Taxes Owed to the IRS? Here's What to do:

What to do if You Can't Pay Your Taxes

By: Pam Grundy

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What do you do if you owe the IRS money and you can’t pay your taxes? Do you go to jail? Do they attach your wages? Do they take your house? How bad can it get?

If you have no money to pay your taxes, or if your tax payments are overdue, it’s completely natural to be frightened, but the worst thing you can possibly do is nothing. To get tax debt help, first you need to understand your situation. Take some simple steps to get a handle the problem, communicate with the IRS using an intermediary if necessary, and get started clearing your debt. It’s never as bad as you think it will be. The IRS wants to work with you, but you have to keep in touch.

The following tips are meant to help you sort through your own situation, and clear it up with the least amount of hassle and expense. Whatever you do, don’t delay. Every day you ignore the problem, the IRS adds more penalties, fees, and interest to what they say you owe. So take a deep breath, and get started:

You Have to File

If you suspect you owe the IRS money, you may decide not to file. More accurately, you may just avoid filing back taxes out of fear or because avoiding these kinds of problems feels easier than confronting them. You can’t go to jail for filing a return, discovering you have tax debt and owe the IRS money, and then not paying it. However, you can go to jail for not filing at all! So if you haven’t filed in awhile because you fear you owe money or you’re just afraid period, the first step is to get to an accountant, tax preparer or attorney to help you file right now.

Determine How Much in Back Taxes You Owe

Maybe you just owe for this year and you know exactly how much that is. Good. If, however, you have been avoiding filing at all, the first step is to determine your total amount in back taxes. Once you have that figure, you can choose from a number of IRS options for getting that debt paid.

If You Can Pay but Not by April 15th

If you are able to pay the amount you owe but the payment will be late, send what you can with your return, and the rest as soon as you have it. Your incomplete payment will generate a form letter from the IRS advising you of the penalties for late payment, and asking you to please pay what you owe. The penalty for non-payment is 5% of the amount not paid in the month it is due, up to 25% of what you owe. If you are past due 60 days or more, the minimum penalty is $100 or the balance of the tax due on your return, whichever is smaller.
So, if you can pay but are getting hit with penalties, suck it up and pay them, then resolve not to get in that situation again.

If You Can’t Pay Taxes and Owe Less Than $25,000

The IRS is not going to show up on your doorstep and take you away, as long as you communicate with them. After all, they do want your payment, and they won’t get it if they haul you away. However, you usually can’t wriggle out of the payment on the grounds of poverty, and if you hide assets, that is tax fraud, and you technically can go to jail for that.
If you own less than $25,000 and can pay it off within five years, ask the IRS for a streamlined payment agreement. You will have to fill out form 9465 (you can download the form and get additional info on setting up a payment plan at the IRS website, Topic 202), and chances are good the IRS will approve your request. You will be charged a fee of $102 (added to your tax debt) to set up the payment plan, and you will be charged interest based on the short term federal rate (determined at the beginning of each quarter) plus three percent. Any future refunds will be applied to your debt until it is paid off.

If You Owe Less Than $25,000 and Installments Are Too High

If you can’t even afford the five year streamlined payment agreement because you just don’t make enough money, you can ask for an “offer in compromise,” which simply means the IRS agrees to accept less than what you owe, based on your personal economic situation. To apply for this program, you must also file form 656, which you can download at the IRS website and file at a charge of $150 to the IRS.

The IRS cautions that this option is only for people in extreme circumstances, not for people who are just financially pinched. If you make an “offer in compromise” and the IRS agrees to it and you then default, you will owe the entire tax debt amount you did before you asked for the compromise, plus penalties and interest, in full, immediately.

If You Owe the IRS Over $25,000

If you owe this kind of money to the IRS, you will probably want to get some legal advice. Filing income taxes yourself can be tricky even when you have an ordinary middle class income, and negotiating with the IRS on your own when you are in this deep can be even trickier. Facing the IRS calculations for huge debt alone is not advised, and this is why lawyers exist. Get a good one who is well versed in tax law, and try not to hyperventilate. Remember, the IRS wants to settle your tax debt. The worst thing you can do is try to hide from them or avoid communicating. There’s nothing that says you can’t get some professional help with that.

If You Decide Not To Pay Taxes, Ever

Look, the IRS isn’t kidding, and they know where you live. The can and will attach your bank accounts (freeze them and take the money), garnish your wages (have your employer send what you earn directly to them), and/or attach a lien to your house (add the amount you owe onto your mortgage and even seize and sell your home to get the money you owe them). It’s much better to just talk to them and make a plan, getting legal help if necessary.

If You Can’t Afford An Attorney

The IRS really does want to work with you:

If you can’t afford an attorney, the IRS runs a Tax Payer Advocate service, for people who have ongoing tax disputes but whose difficult financial circumstances make legal representation unaffordable.
You can call the IRS Taxpayer Advocate Intake line to see if you are eligible at 1-877-777-4778.
You can also contact the Legal Aid Society nearest you.
The U.S. government maintains a website that lists all the free and low-cost legal services available to U.S. citizens nationwide at Isc.gov. To locate low-cost or free legal help, select your state from their drop down menu and look for the organizations nearest you.

The IRS Can Help

If you can’t pay your owed taxes, the most important thing you must do is contact the IRS and work towards a solution. The IRS website contains a wealth of information, all available downloadable forms and booklets, a list of tax preparers and tax professionals nationwide, links to free e-filing services, a list of IRS offices across the U.S., and a list of dozens of ways you can communicate with the IRS or get started sorting things out. You can call the IRS directly, Monday through Friday, at 1-800-829-1040, between 7 AM and 10 PM. You will talk to a real person who will actually attempt to get you started sorting things out. It’s really not that bad.

If you prefer, you can even walk into any IRS office and throw yourself at their mercy. They will file your taxes for you (or set up an appointment), even if your taxes are past due, and they will advise you on what to do next if you can’t pay.
If you owe more than $25,000 in back taxes(most people won’t), you might be better off throwing yourself at the mercy of an attorney, but in any case, what you absolutely must not do is avoid the problem. In the vast majority of cases, people who can’t pay their taxes discover that sorting it out it with the IRS is a lot less painful than they imagined.

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