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Back Taxes and Tax Debt

5 steps to take if you owe taxes and can’t pay

Mark Steber

Chief Tax Information Officer

Updated on: June 15, 2022

It's a terrible feeling. You've completed your annual income tax return and find that you owe the IRS—and not just a little, but more than you can afford to pay.

It's tempting to avoid the problem by not filing your return, or not paying the tax bill, but that has consequences. What can you do to resolve this situation?

1. File on time and pay what you can by the filing deadline.

The best thing to do is pay as much of your bill as you can upfront, to reduce the amount the IRS will charge you over time. The IRS charges, or assesses, a monthly penalty for failing to file a tax return when you owe taxes, as well as a failure-to-pay penalty, and interest on the taxes you owe. The failure-to-file penalty is 5% per month—up to 25% of the taxes you owe. There is also a failure-to-pay penalty on your tax balance. This penalty is 0.5% per month, up to 25% of the taxes you owe. This means that if you file or pay late, penalties can add up to a significant amount on top of the taxes you owe. The combined penalty for the failure-to-file and failure-to-pay penalties won’t be more than 5% per month.

2. Look into an IRS tax payment plan if you can’t pay your taxes.

If you know you’ll eventually be able to pay your debt, but just need a little more time, you can request an extension to pay, for up to 180 days. You also may be eligible to set up an installment agreement. You can do this on the IRS website, by phone, by mail, or in person using Form 9465. You can also set up a payment plan when you file your tax return by the deadline, to reduce the failure-to-pay penalty by half. The penalty would go from 0.5% of the taxes you owe per month to 0.25% per month. If you are experiencing financial hardship, you will want to consider other hardship options (see No. 4 below).

3. Pay with a debit card instead of a credit card

Once you have a plan in place to pay some, or all, of your taxes, you’ll need to consider how you’ll pay. To avoid processing fees, pay by check or from your bank account using the IRS direct-pay method. The IRS charges processing fees if you pay with a debit or credit card. Debit card fees range from $2 to $3.95 per transaction, while credit card fees are around 2% of the payment.

Tip: To save money on a long-term payment plan, apply online and set up automatic withdrawals from your checking account, also known as a Direct Debit Installment Agreement.

4. If you’re struggling financially, see whether you qualify for a hardship agreement or a tax debt settlement.

If you’re experiencing an unforeseen drop in income, or have high expenses related to catastrophic issues such as natural disasters or illness, you may qualify for a hardship agreement. There are three types of hardship agreements: currently not collectible (CNC) status, a partial-pay installment agreement, or an offer in compromise (OIC). These IRS agreements allow you to pay based on your financial situation. If you qualify for an OIC, you may be able to settle your bill for less than what you originally owed. There are specific requirements for each one, but if you think you might qualify, it’s worth looking into.

If paying your tax bill would mean that you couldn’t afford basic living expenses, you may want to request that the IRS classify your account as currently not collectible. This does not erase any of your tax debt, but it delays IRS collection efforts.

Beware: CNC status doesn’t stop penalties and interest. Those will continue to add up until you pay your bill, or you reach your collection statute expiration date.

5. Get some help.

Tax professionals can look at your specific situation, consider the various options available, and help you figure out the best way to handle your back taxes. With Jackson Hewitt, clients can receive a free consultation, and if you are not happy with the options provided during the discovery phase, you can get your money back, guaranteed.

Take control of your tax problems, now.

Avoid owing the IRS when filing your taxes by adjusting what your employer withholds from your paycheck. Ideally, your withholding should be as close as possible to the actual tax amount you will owe. Having a little more money withheld every pay period is usually more manageable than trying to pay a lump sum all at once.

To make changes to your withholding, contact your human resources department and ask to update your Form W-4. You can work through the forms using the instructions, or go to irs.gov and use the Withholding Calculator. You can also withhold an additional set amount every paycheck. Consider dividing what you owed this year by the number of pay periods, and have that additional amount taken out on top of what you are already withholding.

If you are self-employed, retired, or have other income that is not from employment, you will need to consider making estimated tax payments to the IRS. Making estimated payments during the year will reduce your bill when you file. Making the correct estimated tax payments also helps you avoid penalties and future tax bills.

For more tips on tackling tax debt, read on.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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