What happens if your taxes are due and you don’t have the money to pay them… or if you already have back taxes? Even if tax debt seems impossible to pay, do not despair. The following information may give you some peace of mind.
There are several programs that the IRS and private companies offer to help alleviate the burden of tax debt. Each one has specific requirements:
Installment Agreement: This is a monthly payment plan that you set up with the IRS to pay off your debt. The catch is that the IRS determines what the payment amount will be per month. This monthly amount could still be more than you are able to afford. The IRS will take a close look at your financial situation, determine your disposable income, and set your monthly amount. In order to apply, fill out IRS Form 9465 (Installment Agreement Request).
There is also something called a Partial Payment Installment Agreement, in which the taxpayer makes regular monthly payments to the IRS but the payments do not pay off the tax debt in full like the classic Installment Agreement. After you fulfill the terms of the Partial Payment Installment Agreement, the IRS will forgive the remainder of the IRS Tax Debt. You will need to write a letter stating your request for a Partial Payment Installment Agreement and submit it to the IRS along with IRS Form 9465 and IRS Form 433-A.
Currently Not Collectible: “Currently Not Collectible” status refers to when the IRS temporarily suspends collection activities since you have no money or assets that they can go after. You may qualify if you’re completely broke or if you’re on a fixed income that covers only the most basic living expenses.
The IRS must first receive evidence that a taxpayer has no ability to pay. The taxpayer usually provides this evidence on IRS Form 433-F, Collection Information Statement. A taxpayer can request "Currently Not Collectible" status by submitting Form 433-F to an IRS Revenue Officer or to the IRS Automated Collection System unit.
Keep in mind that the IRS does check up on taxpayers who fall under this status every year. If your financial situation changes, the IRS will renew its collection efforts.
Offer in Compromise: This is an agreement between a taxpayer and the IRS that settles an individual’s tax liabilities for less than the full amount owed. The IRS will not accept the offer if it believes that the liability can be paid in full as a lump sum or through a payment agreement. Offers to settle your tax debt for “pennies on the dollar” are examples of an offer in compromise. This program is the most difficult to obtain: only 2 percent of applicants for an offer in compromise get approved. Taxpayers should wary of promoters’ claims that tax debts can be settled through the offer in compromise program for "pennies on the dollar". If the offer seems to good to be true, it probably is, and it may be a scam.
Penalty Abatement: The IRS will apply penalty and late fees to the amount you owe if you do not pay your taxes in full and on time. A computerized system adds these penalties to your account automatically. In fact, your debt will increase by about 25 percent each year if you owe back taxes. However, if you are experiencing economic hardship due to an emergency situation, sometimes it is possible to have these fees overturned or refunded by submitting a request for penalty abatement. This can reduce your debt by up to 30 percent.
To be eligible for penalty abatement, you must have an acceptable reason for falling behind in your taxes, such as an emergency (natural disaster, sudden illness or injury); a death in the family; or a long period of unemployment. Additionally, you must show the IRS a plan for repaying your debt.
There are three ways to present a case for abatement. A written petition is the most common way. You may also request a verbal interview or present a shortened statement of your case with IRS Form 843.
Innocent Spouse: Normally if you marry someone you also marry his or her tax debt. However, there are exceptions to this situation and you can get out of a debt created by your ex-spouse. The tax debt has to be your ex’s and you cannot have filed jointly for the debt. You cannot have known about the debt. The debt can also be erased if there was abuse. If any of the criteria are met your tax debt can be completely erased.
If you really cannot afford to pay your tax debt, be sure to do your research well in advance and explore what options are available to you. You can start here by reading about what you should do if you can’t afford to pay your taxes.
