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02.25.21

What should a taxpayer do if unable to pay the IRS timely?

BY , Income Tax Department

While any unpaid tax balance is subject to interest that compounds daily and a monthly late payment penalty until the tax liability is fully paid, the Internal Revenue Service (IRS) does have a payment option available to taxpayers.

Please note that entering into an agreement with the IRS does not stop the interest and penalty accumulation.

Full payment agreements for up to 120 days

The IRS can grant you up to 120 days to pay in full. The IRS does not charge a user fee for this arrangement. An individual can apply by filling out the Online Payment Agreement or by calling (800)-829-1040.

Installment agreements

An installment agreement allows you to make a series of monthly payments over time. Payments can be made through direct debit from your bank account; payroll deduction from your employer; payment by electronic federal tax payment system (EFTPS); through IRS “Direct Pay” program; or payment by credit card, check, money order, or cash at a retail partner.

To request an installment agreement, use the Online Payment Agreement application or complete an Installment Agreement Request, Form 9465, and mail it to the IRS. The IRS charges a user fee when you enter into a standard installment agreement or a payroll deduction agreement.

Be advised that before your installment agreement can be considered, you must be current on all filing and payment requirements. Taxpayers in an open bankruptcy proceeding are not eligible.

Offer in compromise

An offer in compromise is an agreement between you and the IRS that resolves your tax liability by payment of an agreed upon reduced amount.

Before the IRS considers an offer, you must have filed all tax returns, made all required estimated payments for the current year, and made all required federal tax deposits for the current quarter if you are a business owner with employees.

As in the case of the installment payment agreement, taxpayers in an open bankruptcy proceeding are not eligible.

Temporarily delay collection

If the IRS determines that you cannot pay your tax debt due to financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible. Changing the debt status as currently not collectible, however, does not mean the debt goes away. As mentioned before, interest and penalties still continue to accrue even if the debt is delayed for collection.

Before the IRS approves your request to delay collection, you need to complete a Collection Information Statement (Form 433-FForm 433-A, or Form 433-B). By filling out these statements, you are providing the IRS with your assets information as well as your monthly income and expenses.

The IRS may temporarily suspend certain collection actions, such as issuing a levy until your financial condition improves but can still file a Notice of Federal Tax Lien while your account is suspended. The IRS may also file a Notice of Federal Tax Lien in the public records, which means that your creditors are notified that the IRS has a claim against all your property. By doing so, your credit rating may be affected. Once a lien arises, the IRS cannot release the lien until the tax, the penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.

Other payment options

In addition to the IRS payment options mentioned above, you might also consider financing the full tax payment of your tax liability through loans, such as a home equity loan or a credit card. The interest and penalties set by the Internal Revenue Code may be higher than any applicable fees charged by the bank or credit card company.

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Author

Christopher F. Caldwell, EA

Professional Specialist

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