What to Do If You Can’t Afford to Pay the IRS
Owing the IRS money can be an anxiety-inducing experience. Even more so if you can’t afford to pay them. However, finding yourself in this situation is not the end of the world. In fact, thousands of people have found themselves in the same exact predicament and come through the other side just fine. You simply have to know what (and maybe more importantly, what not) to do. In this guide, we’ll walk you through exactly what to do when you can’t afford to pay the IRS what you owe.
Don’t Ignore the IRS
First things first, do not ignore the IRS when they reach out about a balance being owed. This is one of the worst things you can do. Pretending that this problem doesn’t exist will only result in additional penalties, interest, and collection actions. Additionally, IRS notices typically contain important information and response deadlines that you will need to know in order to handle the situation properly. So, do not throw it out and do not ignore it. Instead, read it carefully, taking note of any important deadlines and any actions that you are required to take.
Evaluate Your Financial Situation
Next, it’s time to really dig into your financial situation. Review your income, monthly expenses, assets, and outstanding debts. This will give you an idea of exactly how much you actually can afford to pay. You may be surprised, especially if you cut out luxury expenses. At this stage, you should also collect pertinent financial documents, including:
- Pay stubs or proof of income.
- Bank statements.
- Monthly bills.
- Tax returns and IRS notices.
You will likely need to provide this information to the IRS in order to qualify for other payment options.
Continue Filing Your Tax Returns
Sometimes, when people find themselves in tax debt, they stop filing their taxes altogether. They figure that since they already owe the IRS an amount they can’t pay, then what’s the point? This is a massive mistake. Filing is different from paying. The IRS views these as two separate responsibilities that you have as a taxpayer. Even if you cannot afford to pay your balance in full, filing your tax return on time can help avoid additional penalties for failing to file. With this in mind, it is of the utmost importance that you continue filing future tax returns by the applicable deadlines.
Understand Your Options
People often think of the IRS as an unfeeling entity with no wiggle room. They think that the IRS wants everything they are owed and don’t care about a person’s personal situation. In reality, this just isn’t true. In actuality, the IRS understands that every situation is different, and that sometimes paying the full balance just isn’t in the cards. If you can’t afford to pay the full balance, your options include:
- Installment agreements, which are like a payment plan. You work with the IRS to determine how much you can afford to pay in monthly installments.
- Offer in Compromise, which lets you settle tax debt for less than you owe if you face financial hardship.
- Currently Not Collectible, which is when the IRS recognizes that you are facing financial hardship and temporarily halts collection actions until your situation improves.
As you can see, there are a number of options available to you. The IRS is willing to work with you to help you pay your debt without ruining your financial situation.
Avoid Making the Situation Worse
Not making the situation worse may seem obvious, but you’d be surprised by the number of people that do exactly that. The most common ways people worsen their situation include:
- Ignoring IRS notices.
- Borrowing money you cannot realistically repay in order to pay your tax debt.
- Emptying retirement accounts to pay tax debt without understanding the consequences.
- Missing future filing deadlines.
If you are able to avoid doing any of the above, then you will be in good shape and there is no reason that you can’t eventually pay off your tax debt.
Seek Professional Guidance
It’s no secret that taxes, especially when there is debt involved, can be complicated. Your best bet is usually to get help from an expert in tax relief. They will be able to review your financial situation, explain available resolution options, and communicate with the IRS on your behalf.
Additionally, they will help determine whether or not hardship-based programs, such as Currently Not Collectible status, may be appropriate in your specific situation.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
