What to Do If You Can’t Pay Your Taxes

Failing to file a tax return can not only result in the accumulation of interest on top of the amount you already owe in taxes, but can also carry with it additional financial penalties, and in some cases, criminal prosecution. 

 
Even if you don’t file a tax return, the IRS still may have information that can be used to determine the amount of tax you owe. Employers are required to file a form W-2 for every employee, reporting the amount of compensation that was paid to you, and those who hire independent contractors are required to file a form 1099 showing how much they paid to you. Using this information, the IRS can generate a “substitute” tax return for you and calculate the tax you owe based on that return. Since the IRS will only have limited financial information, this return will likely not include any deduction or exemptions that you might otherwise be entitled to, resulting in the IRS imposing a higher tax than would have been owed had you filed your own return.

Once a tax return has been generated for you, the IRS will send you a notice of tax deficiency, and you will be given 90 days to respond to the notice by either filing your past due return or a notice of petition with the tax court. If you do not file within that time, the IRS can begin collection proceedings to obtain the tax owed, including garnishing your wages and bank accounts and filing a federal tax lien against any property you own. 

What should you do instead of ignoring your tax problems or failing to file a tax return if you are unable to pay your taxes? You have several options. These include:

- Requesting a temporary delay of collection
- Arranging an installment payment plan
- Obtaining an Offer in Compromise
- Making an Innocent Spouse claim

If you are unable to pay what you owe due to a temporary issue, such as an illness or other unforeseen circumstance, you can request an additional 60-120 days to pay your account in full. To qualify for temporary delay of collection, the IRS may ask you to complete a form to provide proof of your financial status and reason for the delay. Your account will then be marked currently not collectible for the approved period.

While this does not reduce or eliminate your tax liability, it will give you time to get back on your feet and pay your taxes in full, avoiding any collections procedure; however, the IRS may still file a Notice of Federal Tax Lien during that time, and you will still incur interest and penalties.

Although failure to pay your taxes in full by the tax deadline may carry interest and late payment penalties, these penalties will be far less than penalties imposed for failure to file or failure to pay completely. The IRS recommends that you pay as much as you can by the deadline to reduce future interest and penalties as much as possible. For the remainder, the IRS does have a payment plan option, which allows you to pay your outstanding taxes in installments over a period of time.

The IRS has both short term (120 days or less) and long-term payment plans (longer than 120 days). Long term payment plans carry some minimal additional fees, which depend on your method of payment. Paying by automatic withdrawal carries fewer fees than paying by other methods. Penalties and interest continue to accrue until your balance is paid in full.

The IRS will usually not try to enforce collections of the amount due by filing tax liens, etc. if:

- You have requested a payment plan and the IRS is considering it
- You already have a payment plan in effect
- It is less than 30 days after a request is rejected or terminated, or
- The IRS is evaluating an appeal of a rejected or terminated agreement

In Part 2 of this post, we’ll discuss the other options available if you cannot pay your taxes.

A qualified tax attorney may be able to help you to negotiate your installment payment plan with the IRS, reduce your tax liability, or reduce or eliminate penalties and interest. To quickly and easily connect with a tax lawyer near you, briefly post a summary of your tax-related issue on our site.