To put it lightly, being unable to pay the taxes you owe to the Internal Revenue Service is not a good thing. However, if you find yourself in this position, it’s not the end of the world. There are a number of options available to you, and here are seven of them.
- Partial Payment In order to prove to the IRS that you are operating in good faith, making a partial payment is better than paying nothing at all. The penalty and interest you owe later will also be reduced. Make your check, money order, or cashier’s check payable to U.S. Treasury and write your name, address, daytime phone number, social security number, tax form number, and tax year on the memo line. Once you have mailed it to the correct address, immediately plan your course of action using one of the options listed below.
- Additional Time Although IRS audits are portrayed as cold-hearted and uncaring in their pursuit of your tax money, they do have a more understanding side. Depending on your particular circumstances, the IRS could grant your request for additional time – from 60 to 120 days – to pay what you owe in full. Since this option doesn’t count as a long-term installment plan, any penalties and/or interest will be lower. To ask for additional time, you can fill out the Online Payment Agreement application or apply over the phone.
- Installment Agreement Setting up an installment agreement with the IRS is a viable solution if you are able to pay off your taxes through your paycheck rather than paying a lump sum. The IRS may grant you up to 72 months, or possibly more under special circumstances, depending on the type of agreement for which you qualify. If you owe $50,000 or less in combined tax, penalties, and interest, you can apply for an installment agreement online, but for tax debt over $50,000, you must apply via mail. In either case, file your tax returns before applying, and keep in mind that the IRS will charge interest and may seize any refunds due while you are in repayment. They may also file a federal tax lien until you have paid in full.
- Loan From Family Member To avoid paying interest to the IRS, you could try to arrange a loan from a family member, preferably one who is retired and living off the interest of their bank accounts. Since banks aren’t offering much in the way of interest rates these days, this solution could be ideal for all parties involved. Not only will you be able to pay what you owe to the IRS, but your generous relative could get a higher interest rate from you than they would get from the bank. Just make sure they’re not too generous; if you don’t pay interest to your family member, the IRS will classify the money as a gift instead of a loan.
- Credit Card Payment If you know you can pay off your bill eventually, you can wipe out your tax debt with your credit card. However, interest and other fees can accumulate rapidly, so consider the other financing options on this list if you don’t feel you will be able to pay off your balance. The IRS accepts all major credit cards and won’t charge a fee, but the processing companies do. It is recommended that you pay as much as possible upfront because you are limited to two credit card payments for individual income tax payments.
- 6. Home Equity Loan Convert your usable assets into usable resources and use your Home Equity Line of Credit, known as HELOC, to get the IRS off of your back. The interest rates should be lower than using your credit card or arranging an installment agreement, but it will be your home on the line, so remember to submit your payments on time and create a realistic schedule to pay off your balance completely.
- Offer In Compromise An offer in compromise, or OIC, will enable you to settle your tax debt for less than the full amount owed. The IRS considers your circumstances, such as income, expenses, asset equity, and ability to pay, and they will only grant an OIC if they realize that they will be unable to collect the amount you owe within a reasonable period of time. You will not be eligible if you are currently undergoing bankruptcy proceedings, and you must be up-to-date with all of the filing and payment requirements. Most offers are rejected, so the OIC should not be your first choice.