What to do if you do not have the money to pay the IRS
Once your tax bill has been established, you have three options available if you are not able to pay the full tax bill.
(a) Installment Agreements - If you owe less than $10,000 in taxes, you are legally entitled to an installment agreement if you meet certain conditions. Fill out Form 9465 and attach it to any of the notices you have received. To minimize your penalties and interest you should pay as much tax as you can when you send in the installment agreement. Put down the amount that you can pay each month keeping in mind that the bill must be paid off within 3 years (including interest and penalties). Once the IRS receives your Form 9465, they will contact you with information on how to make the payments.
The conditions for an automatically accepted installment agreement are:
If you don't meet the conditions for the automatic installment agreement, you can still file Form 9465 to see whether the IRS will accept an installment agreement with you. The IRS almost always approves installment agreements where the tax due is less than $25,000 and can be paid off within 5 years.
If you can obtain a loan or credit card to pay off your taxes, a lot of times the interest rate for your loan or credit card is lower than the effective interest rate of an installment agreement. Installment agreements have a low interest rate, but they have a set up charge between $22 and $178, and failure-to-pay penalties of up to 1% a month. The effective annual interest rate of installment agreements when you consider the set-up charge, interest, and penalties can be 10%, 15%, 20% or more.
(b) Offer in Compromise - If you do not have the ability to pay your full tax bill even if you are given extra time to pay it, consider making an offer in compromise.
Basically, the IRS looks at your current assets and your potential future income in determining whether the offer in compromise you propose is acceptable. If the IRS determines that all you can manage paying is 10 cents on every dollar of tax liability, the IRS will probably accept an offer in compromise of 10 cents on the dollar. The dollar amount of your offer is not important. What is important is the dollar amount the IRS feels it can obtain through its collection efforts. If you offer less than what the IRS feels it can collect, then your offer will be rejected.
Use Form 656 as well as Form 433-A (and Form 433-B if you are an owner in a business) in preparing your offer. Send these forms to the IRS separate from your tax return. Form 433-A is a financial statement that lists all of your assets, liabilities, monthly income, and expenses.
A qualified tax professional will greatly increase your chances of a successful offer and can help you analyze any potential traps in making an offer in compromise. If you decide to fill out the forms yourself, get a book that gives detailed instructions on how to do offers in compromise. If you are thinking about declaring bankruptcy, you should consult a lawyer before filing an offer in compromise.
(c) Bankruptcy - If done right and if certain rules are met, your federal and state income tax liabilities can be discharged by declaring bankruptcy. Consult a competent attorney who has a good knowledge of the tax laws. The timing of when you file your bankruptcy is crucial. If you file for bankruptcy too soon, your tax liabilities will not be discharged.
(a) Installment Agreements - If you owe less than $10,000 in taxes, you are legally entitled to an installment agreement if you meet certain conditions. Fill out Form 9465 and attach it to any of the notices you have received. To minimize your penalties and interest you should pay as much tax as you can when you send in the installment agreement. Put down the amount that you can pay each month keeping in mind that the bill must be paid off within 3 years (including interest and penalties). Once the IRS receives your Form 9465, they will contact you with information on how to make the payments.
The conditions for an automatically accepted installment agreement are:
- The tax due is less than $10,000,
- You have filed all of your tax returns in the previous five years,
- You have paid all of your income taxes in the past five years,
- You have not had a previous installment agreement in the past five years,
- You agree to pay your liability within 3 years, and
- You agree to meet all your future tax liabilities.
If you don't meet the conditions for the automatic installment agreement, you can still file Form 9465 to see whether the IRS will accept an installment agreement with you. The IRS almost always approves installment agreements where the tax due is less than $25,000 and can be paid off within 5 years.
If you can obtain a loan or credit card to pay off your taxes, a lot of times the interest rate for your loan or credit card is lower than the effective interest rate of an installment agreement. Installment agreements have a low interest rate, but they have a set up charge between $22 and $178, and failure-to-pay penalties of up to 1% a month. The effective annual interest rate of installment agreements when you consider the set-up charge, interest, and penalties can be 10%, 15%, 20% or more.
(b) Offer in Compromise - If you do not have the ability to pay your full tax bill even if you are given extra time to pay it, consider making an offer in compromise.
Basically, the IRS looks at your current assets and your potential future income in determining whether the offer in compromise you propose is acceptable. If the IRS determines that all you can manage paying is 10 cents on every dollar of tax liability, the IRS will probably accept an offer in compromise of 10 cents on the dollar. The dollar amount of your offer is not important. What is important is the dollar amount the IRS feels it can obtain through its collection efforts. If you offer less than what the IRS feels it can collect, then your offer will be rejected.
Use Form 656 as well as Form 433-A (and Form 433-B if you are an owner in a business) in preparing your offer. Send these forms to the IRS separate from your tax return. Form 433-A is a financial statement that lists all of your assets, liabilities, monthly income, and expenses.
A qualified tax professional will greatly increase your chances of a successful offer and can help you analyze any potential traps in making an offer in compromise. If you decide to fill out the forms yourself, get a book that gives detailed instructions on how to do offers in compromise. If you are thinking about declaring bankruptcy, you should consult a lawyer before filing an offer in compromise.
(c) Bankruptcy - If done right and if certain rules are met, your federal and state income tax liabilities can be discharged by declaring bankruptcy. Consult a competent attorney who has a good knowledge of the tax laws. The timing of when you file your bankruptcy is crucial. If you file for bankruptcy too soon, your tax liabilities will not be discharged.
