For many, taxes are annoying. This is especially true when it comes to filing tax returns. Then some oppose taxes on moral grounds.
Another reason to hate taxes is the difficulty in paying them. This can sometimes arise when an unexpected tax bill arrives in the mail.
So, what happens if you can’t afford to pay your taxes? This is a common problem, so the IRS has several options available. Most of these require paying your entire tax debt over time, plus any applicable penalties and interest. In rare cases, the IRS will “forgive” some or most of the tax debt. But before you get your hopes up, let’s look at how these tax resolution possibilities work.
Offer in Compromise (OIC)
This is one of the most talked-about tax relief options, and for good reason. It allows eligible taxpayers to settle their tax debts for less than the full amount. The IRS agrees to consider a tax debt as “fully paid” through the use of an OIC in three scenarios:
- Doubt as to Liability: There’s a legitimate question as to whether you owe the tax debt in question or, if you do owe it, there’s uncertainty as to the total amount you owe.
- Doubt as to Collectibility: You don’t have the financial resources to pay the full tax debt.
- Effective Tax Administration: You can afford to pay the full tax debt, but doing so would create an unreasonable economic hardship or be inequitable.
Getting the IRS to accept your OIC request is difficult. Statistics vary each year, but acceptance rates typically range between 34% and 50%. The application process can be extensive, requiring significant effort to compile and complete the necessary paperwork. And it can take up to two years for the IRS to review your request and make a decision.
Currently Not Collectible (CNC) Status
If you’re financially unable to make even partial payments to the IRS to pay off your tax debt over time, the IRS will place your tax account in “currently not collectible” status. While in CNC status, the IRS won’t take any tax collection efforts until your financial situation gets better. As nice as this sounds, there are several caveats to know about.
First, this doesn’t make the tax debt go away, and because the balance remains, any applicable penalties and interest continue to accrue. Second, it’s not easy to receive CNC status, as it often only applies to taxpayers who are in severe financial trouble. Third, the IRS may file a tax lien against your property while you have CNC status. Fourth, this temporary delay is just that—temporary. This means the IRS will periodically review your financial situation to reassess your ability to pay your unpaid taxes.
Payment Plans and Installment Agreements
This is probably the most popular option for taxpayers who can’t pay their entire tax bill all at once. With a payment plan (also called a short-term payment plan), you have an extra 180 days to fully pay your tax bill. Payment plans are only available if you owe less than $100,000 in taxes, penalties, and interest.
With an installment agreement (also called a long-term payment plan), you can take up to 72 months to pay off your tax debt. To be eligible for an installment agreement, your outstanding balance must be less than $50,000 in taxes, penalties, and interest.
In special situations, you might be eligible for a Partial Payment Installment Agreement (PPIA). This is an installment agreement where you agree to make monthly payments until the statute of limitations for the IRS to collect your tax debt expires (usually referred to as the CSED, or Collection Statute Expiration Date). At this point, any remaining balance you have with the IRS is wiped away or “forgiven.”
Penalty Relief
One of the easier ways to lower your tax bill so that you can settle it for less than the full amount is with penalty abatement. This is where the IRS agrees to remove some of the tax balance attributable to penalties in situations where you tried to do the right things with your taxes but were unable to do so for reasons beyond your control. Penalty relief is available for a wide variety of penalties, such as:
- Failure to File
- Failure to Pay
- Accuracy-Related
- Dishonored Check
- Underpayment of Estimated Tax
There are several types of penalty relief available:
- First Time Penalty Abate
- Administrative Waiver
- Reasonable Cause
- Statutory Exception
The penalty relief request process depends on which penalty you’re trying to reduce and your reasons for making the request. In some cases, a simple phone call to the IRS asking for penalty relief will suffice. In other cases, a more formal written request is needed.
Have a Tax Debt You Can’t Afford to Pay?
If you’re having trouble paying a tax bill from the IRS (or the California FTB), there are tax relief options available. They may not be perfect, but they can help. To learn more, contact a tax professional.
