Unfortunately, there are times when you may not have the money necessary to pay the IRS the taxes you owe. In such a situation, what can you do?
First and foremost, file your return, even if you do not have the money to pay the IRS. Filing your return on time will help you to avoid penalties for filing your tax return late.
When you submit your return, you should pay as much as you can towards your tax bill. A partial payment will lower interest owed to the IRS for the late payment. Any unpaid balance is subject to interest and a monthly late payment penalty.
The IRS offers several payment options. The first is an installment agreement. An installment agreement is one in which the payment amount is based on your ability to pay and should be an amount that you will be able to continue to pay for as long as the installment agreement lasts.
The installment agreement can be set up in three ways: direct debits made from your bank accounts to the IRS; payroll deductions from your employer to the IRS; or a regular installment agreement, where you are responsible for submitting a monthly check to the IRS.
To apply for an installment agreement, either submit Form 9465, Installment Agreement Request, or write your own request for an installment agreement and attach the request to the front of your tax return. On your request, include the amount you can pay each month and the date in each month that you wish to make your payment. To use direct debit, provide your checking account number and bank routing number. You may also attach a voided check to the request. For a payroll deduction, attach Form 2159, Payroll Deduction Agreement, completed by your employer.
The IRS will usually respond within 30 days, either approving or disapproving your request. If your request is accepted, you will be charged a one-time fee of $43. If your request is denied, the IRS will generally ask you for additional information. Remember, penalties and interest will be added to the balance, even if the installment agreement is approved. For more information on this option, go to the IRS Web site and enter the keywords installment agreement.
Do not let the IRS pressure you into an installment agreement if you do not have enough money each month to enter into such an agreement. Instead, there are two other options that you may wish to consider.
Currently Not Collectible Status
You may request that the IRS place your tax account in a status called currently not collectible. Currently not collectible means that you are unable at this time to pay your tax debts. The IRS can declare you currently not collectible after the it receives evidence that you have no ability to pay at this time. You can request currently not collectible status by submitting Form 433-F, Collection Information Statement, to an IRS Revenue Officer or the IRS Automated Collection System unit.
Once the IRS declares you currently not collectible, it must stop all collection activities, including levies (court orders to take property to pay debt) and garnishments (court order permitting a creditor to take money from wages to settle a debt). The IRS must send an annual statement to you stating the amount of tax still owed. Interest and penalties continue to accrue. This annual statement is not a bill. When you file future tax returns and are owed a refund, the IRS may keep the refund and apply it to your past due tax debt. You must file all future returns to remain in the IRS status of currently not collectible.
While in not collectible status, the 10-year statute of limitations on tax debt collection is still running. If the IRS cannot collect the tax within the 10-year statutory period, then the tax debts will expire.
Offer in Compromise
The last option is an offer in compromise, which is an agreement between a taxpayer and the IRS that resolves the taxpayer’s debt to the IRS. The IRS has the authority to settle, or compromise, a federal tax liability (debt) by accepting less than full payment under certain circumstances. The offer in compromise is only considered after all other collection alternatives have been explored. The minimum offer amount must be greater than, or equal to, your reasonable collection potential, which is the total of your value in real estate and personal assets that can be realized (or reasonably used for a payment), plus future income potential (the amount likely to be earned in the future). The IRS accepts offers for the following reasons:
- Doubt as to the correctness of the amount assessed;
- Doubt that the amount due could ever be paid by the taxpayer; and
- Situations where the IRS suspects that the taxpayer has an economic hardship or other special circumstances which may allow it to accept less than the total balance due.
If you are able to pay the balance due through an installment agreement, an offer in compromise will not be accepted. If the IRS believes that you will be able to repay the tax debt in the future, an offer will not be accepted.
To make an offer in compromise, obtain Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses. There is a $150 application fee, which must be submitted with Form 656, unless your total monthly income falls at or below income levels based upon the Department of Health and Human Services poverty guidelines. If you are claiming the poverty guidelines exception, you need to certify your eligibility using Form 656-A. When making the offer, you must indicate how you want to pay the reduced tax—either in one lump sum, in monthly payments, or by a combination of a lump sum and regular payments. Generally, the IRS will expect more to be paid if a longer amount of time is requested.
The offer in compromise process is long. The IRS needs to examine your entire financial life for at least the last three consecutive months. The IRS will need to see proof of income for the last three months, as well as all expenses. The IRS will look closely and carefully at bank statements, medical history, and work experience. The IRS will demand immediate answers to requests and questions. If you do not respond immediately, the IRS will reject your offer. Before you can submit an offer, all returns for the last 10 years must be filed.
For more information on offers in compromise, go to the IRS Web site and enter the key words offers in compromise.
More Information About Filing Your Return
If you file your return but do not pay the tax due, you will receive notices from the IRS. And if you do not request an installment agreement, ask for currently not collectible status, or make an offer in compromise, it is likely that you will continue to receive notices and bills from the IRS. Do not ignore the notices. If you ignore the notices and do not make arrangements to pay your taxes, the IRS may file a Notice of Federal Tax Lien and will be able to take collection action, which could include a Notice of Levy or offsetting any possible tax refunds you may be entitled to in the future.
Your rights are protected throughout the collection process, and the IRS is willing to work with you to find solutions when you cannot pay your taxes. For more information on this, you can obtain Publication 594, The IRS Collection Process, and Publication 1, Your Rights as a Taxpayer. Also, you can contact the IRS at 1-800-829-1040. Before you call, have your financial information with you, such as pay stubs; information about payments being made on homes, cars, and credit cards; medical information; child care payments; and student loan payments.
The Low Income Tax Clinic at Legal Services of New Jersey (LSNJ) may also help you if you cannot pay your taxes. The Clinic can contact the IRS for you and request an installment agreement or currently not collectible status or prepare an offer in compromise for you. If you have received tax bills, call LSNJ-LAW™, Legal Services of New Jersey’s statewide, toll-free legal hotline, and explain that you need tax assistance. The hotline telephone number is 1-888-LSNJ-LAW (1-888-576-5529) or (732) 572-9100 if you are calling from outside New Jersey.
This article originally appeared in the April 2009 issue of Looking Out for Your Legal Rights®.
This information last reviewed 11/2/11.