What Should I Do if I Owe Taxes and Can’t Pay?

Most of us get tax refunds when we file our tax return. But sometimes we owe the U.S. Treasury some taxes when we file our tax return. 

Whether it’s expected or unexpected, the good news is if you owe, there are options. The IRS ultimately wants you to be able to pay. 

My advice starts with the simple: pay what you can afford to pay (if any) when you file your tax return. This keeps the overall costs due to penalties and interest at a minimum. 

The IRS does take payment plans. So once you’ve determined or have paid what you can, set up a payment plan for the rest. 

The IRS now prefers you request installment plans online. They do charge fees for installment plans, and requesting them online typically results in the lowest fees. 

Can you pay it all off in 120 or 180 days?

When you can pay all the tax debt (plus penalties and interest) within 180 days, the IRS calls the payment plan a short-term payment plan. Just like most of us, they like to get the money sooner rather than later. 

If you can pay it off in 120 days, you can set up a payment plan online for NO fee. 

If you can pay it off in 180 days, you can set up a payment plan with NO fee by phone, by mail, or online. 

You can apply online for a short-term payment plan if your total taxes, penalties, and interest are less than $100,000.

Long-term payment plan

The IRS offers long-term payment plans they call installment agreements. Applying online and using a direct debit to make your payments have the lowest fees. 

If your income is low,  you may get the direct debit payment plan setup fee waived or you may qualify for just a $43 setup fee for other payment plans. If certain conditions are met, the $43 can be reimbursed.

You can apply online for a long-term payment plan if your total taxes, penalties, and interest are $50,000 or less.

You can read more about payment plans here.  

Form 9465, Installment Request Form

You can file an installment request with your tax return using Form 9465. You can suggest your monthly payment using this form, and after you file it with your tax return, the IRS will let you know if they agree or if they prefer a different plan. This form is also used for mail-in and in-person installment plan requests. 

Penalty relief

In some cases, you may qualify for penalty relief. You may want to consider requesting an abatement or penalty relief if paying the penalty is a financial hardship. There is a First Time Abatement that many people qualify for. This abatement can be requested over the phone. If you received a letter regarding your debt, the best number to call is the toll-free number indicated in the letter. Otherwise, you can call 1-800-829-1040. 

Act fast to decrease penalties

The important thing to remember is that delaying addressing any taxes owed doesn’t make the situation better. The longer you have tax debt, the more the interest and penalties will grow. 

If you don’t file your tax return the penalties are often much larger than if you do, so don’t delay filing your tax filing past the deadline. 

Filing for an automatic extension using Form 4868 extends your filing deadline, but not your paying deadline. It isn’t intended for giving you more time to pay. Again, the longer it takes you to pay, the more penalties and interest you will pay. 

If you have trouble navigating the IRS payment options or penalty relief options, you can certainly consult the IRS or see if it makes sense to consult the Taxpayer Advocate Service. 

If you feel overwhelmed, don’t have the time, or find the whole thing confusing, perhaps you should consider engaging a tax professional familiar with dealing with IRS debt. 

Whatever path you choose to take, just don’t stick your head in the sand. You already took the first step to learn about your repayment options. Now you just need to pick the plan that’s right for you. You’re almost to the finish line of the 2022 tax season!