What should I do if I can’t afford to pay my federal income taxes?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jun 19, 2018

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For various reasons, taxpayers are sometimes unable to pay their federal income taxes. If you find yourself in this situation, there are a number of options available to you. But to find out what these options are, you will need to communicate with the IRS directly. Do not rely on companies that advertise that they can reduce or eliminate the amount of taxes you owe. Although it may seem intimidating to contact the IRS on your own, rest assured that the IRS does try to help taxpayers who truly cannot afford to pay their taxes. If a taxpayer is unemployed, has a serious illness or significant medical bills, or relies solely on Social Security income, the IRS can suspend collection actions.

Be honest with the agent handling your case and explain why you cannot afford to pay. The IRS will work with you to reach a fair solution, either through an installment agreement, an offer in compromise, or an offer to delay collection until you are financially able to repay back taxes.

Options for Taxpayers: Installment Agreements

An installment agreement is the most common option used by taxpayers who are unable to pay their federal income taxes. If you are in the process of filing your tax return and realize that you owe taxes but are not able to pay the entire amount in full, it’s possible to request an installment agreement online. Taxpayers owing less than $50,000 can apply online to pay their taxes in installments. Future tax refunds will be applied to the outstanding taxes from prior years. There is a fee for setting up an installment agreement, which is determined by your income and how you intend to make the monthly payments (direct debit or payroll deductions). Once you enter into an installment agreement with the IRS, keep in mind that you cannot enter into another installment agreement to pay for future taxes until the first one has been paid off.

Under an installment agreement, penalties and interest will continue to accrue on the balance you owe, but you will not have to pay them unless you miss payments or stop making payments under the terms of the agreement. If you cannot make installment payments due to a recent job loss or other serious situation, the IRS may allow you to skip a payment or reduce your monthly payments.

Options for Taxpayers: Uncollectible Status

For some taxpayers, even making monthly payments may be a challenge. The IRS understands that certain taxpayers may be so distressed financially that paying taxes is simply impossible and forcing them to pay would impose an extreme hardship on them. If you fall into this category, the IRS can put your taxes under uncollectible status. While under uncollectible status, all collection activities will be suspended until the taxpayer is financially able to pay the taxes. Taxes in uncollectible status continue to accrue interest and penalties and the IRS may file a notice of federal tax lien.

Options for Taxpayers: Offer in Compromise

Finally, the IRS can also offer certain taxpayers an offer in compromise, or OIC. An OIC is basically a settlement agreement between the IRS and the taxpayer that clears the entire amount of taxes due for a reduced amount. For example, if you owe $200, the IRS could possibly accept an OIC for $50 and consider the entire tax liability of $200 paid in full. If you believe you cannot pay your federal income taxes, contact the IRS immediately. To discuss any IRS bill, call 1-800-829-1040 (individuals). 

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