That feeling in the pit of your stomach when you realize you owe the IRS a huge amount that you can’t pay? It’s the worst Maybe you had unusual income last year. Or you forgot some deductions Whatever the cause, staring down a monster tax bill is scary.
But before you panic, know this – you have options. The IRS understands that massive tax debts can happen. They offer payment plans and other relief to taxpayers struggling with unpayable balances. Don’t lose hope. With some planning and effort, you can settle your tax obligations over time.
In this article I’ll go over smart ways to handle a massive IRS bill that you can’t pay off right now. I’ll cover
- Why the tax bill is so high
- IRS payment options
- Setting up an installment agreement
- Reducing the amount with an offer in compromise
- Applying for penalty abatement
- Seeking a temporary delay in collection
- Getting professional help
Follow these steps to take control of your huge tax debt. With flexibility and patience, you can pay Uncle Sam while protecting your finances.
Common Reasons for Sky-High Tax Bills
Why are some tax bills catastrophically high while others are low or lead to refunds? Several situations can result in owing the IRS big time:
- Self-employment or side gig income that had no withholding
- Early retirement account withdrawals
- Stock options and bonuses
- Capital gains from selling property
- Moving to a higher tax bracket
- Losing exemptions or deductions
- Simply underpaying estimated taxes
Typically, high earners and those with complex returns are more prone to massive tax debts. But anyone can miscalculate what they owe and be shocked when the IRS bill arrives.
If you received a five or six figure tax bill, don’t panic. Take a deep breath. The IRS gives you options to pay over time.
IRS Payment Plans for Large Debts
If you owe $50,000 or less to the IRS, you can apply online for an installment agreement to pay monthly over 72 months. For bigger debts up to $100,000, download Form 9465 to request an extended plan up to 120 months.
With installment plans, you’ll still owe interest and penalties. But paying something monthly avoids aggressive collection actions. If your financial situation changes, the terms can be adjusted.
For low-income taxpayers, the IRS may approve a “guaranteed” installment plan without verifying ability to pay. Otherwise, they will ask for a Collection Information Statement showing income, assets and expenses.
An offer in compromise allows settling tax debts below the full amount owed. To qualify, you must lack the means to fully pay now or in the future. Offers require a non-refundable $205 fee and rigorous financial disclosure. Only accept reasonable IRS settlement offers.
Strategies to Reduce Tax Debts
In addition to payment plans, you may lower your tax obligation using these options:
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Request an audit reconsideration if errors caused the debt. Provide documentation proving a lower tax liability.
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Ask for penalty abatement if failures to pay on time were due to circumstances outside your control or reasonable cause.
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Submit an amended return with additional deductions or credits missed on the original filing.
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Claim insolvency if liabilities exceed your assets. The IRS may discharge portions of tax debt.
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Argue for currently not collectible status if paying would cause serious hardship. The IRS postpones collection until your finances improve.
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Consider bankruptcy or an offer in compromise if the debt cannot be paid in several years.
The key is acting fast before IRS collection efforts ramp up. Don’t wait to pursue relief options. You can significantly reduce tax debts by claiming all deductions legitimately available to you.
Enlist Professional Help for Large Tax Debts
Don’t face the IRS alone, especially with an unmanageable tax bill. Enlist help navigating your options from a tax pro, enrolled agent or certified public accountant.
A tax expert can audit your return for free deductions, reconstruct lost records, communicate with the IRS on your behalf and ensure you choose appropriate resolutions. Though their fees add cost, the savings often justify the expense.
Take Control of Your Tax Debt Situation
A high tax bill conjures up scary images of liens, levies, and property seizures. But fear can be worse than reality. Stay calm, be proactive and take advantage of IRS relief programs.
With the right strategy and some professional guidance, you can satisfy even massive tax debts over time. Don’t let a big bill ruin your financial life. Reach out to the IRS and explore your payment, settlement and reduction options. With flexibility and persistence, you can pay off your tax obligation without losing everything.
Long-term IRS payment plan
Also known as an installment agreement, this payment plan is likewise done directly through the IRS for taxpayers who need more than the 120-day extension to pay off their bill.
To set up a long-term payment plan, you must tell the IRS how much you can realistically pay each month. Then, the IRS either approves or denies your request. To qualify, you need to owe $50,000 or less in combined tax, penalties, and interest.
You’ll also pay interest and penalties on top of your balance, just like the short-term payment plan. However, unlike short-term plans, long-term payment plans have a setup fee, which could be reduced or waived based on your payment method or income.
Yes, you can pay your income taxes with a credit card, but it comes with a cost.
Legally, the IRS cannot accept credit cards for tax payment. So instead, the payment can be done through a third party, which then charges you a processing fee (amounting to a small percentage of your total payment).
Keep your credit card’s interest rate in mind before using it to pay off your taxes. Credit cards have comparatively higher interest rates than other borrowing methods, so make sure you don’t trade in one problem for another in credit card debt.
On a positive note, paying with a credit card — instead of using an IRS payment plan — means avoiding the IRS penalties mentioned above. You’ll be all settled with the IRS; therefore, the only charges will be the third-party processing fee and any interest incurred via your credit card.
Having repayment options is great, especially when dealing with a large, stressful tax bill. That’s why it’s important to pay as much as you can at the tax deadline, then figure out the best way to cover the remainder through the other means outlined here. Remember to be totally honest with yourself about how much time you’ll need to pay off your balance so you can find the right terms for your unique situation.
Short-term IRS payment plan
This repayment plan, offered through the IRS, gives you 120 extra days to pay off your tax bill.
However, this extension comes with a few stipulations you should know about:
- You’ll be charged interest and other penalties while you’re repaying, so it’s best to pay it off ASAP rather than wait the full 120 days.
- You need to owe less than $10,000 in combined tax, penalties, and interest to qualify.
Note: There’s no setup fee for the short-term payment plan — just the interest and penalty charges you’ll pay on top of your balance.
Got a Big Tax Bill? What to Do If You Can’t Afford to Pay Your Taxes.
FAQ
What happens if I owe the IRS and can’t pay?
What happens if you owe the IRS over $100,000?
What do I do if I can’t pay my taxes all at once?
What if I owe a tax bill but can’t pay in full?
Taxpayers struggling to meet their tax obligation may consider these payment options. Taxpayers who owe but cannot pay in full by April 18 don’t have to wait for a tax bill to set up a payment plan. They can apply for a payment plan at IRS.gov/paymentplan. These plans can be either short- or long-term.
What if I can’t pay my taxes?
What if I can’t pay my taxes? Don’t panic – you may qualify for a self-service, online payment plan (including an installment agreement) that allows you to pay off an outstanding balance over time.
What happens if you owe more taxes than you can afford?
If you cannot afford to pay a large tax bill, the IRS has several ways to collect the debt, including garnishing your paycheck, seizing your property, and damaging your credit. To avoid these consequences, here are some ways to reduce your tax bill to a manageable size or at least get more time to pay it.
What if I can’t pay my tax bill all at once?
If you can’t pay your tax bill in full at once,, consider an installment agreement with the IRS. An installment agreement lets you pay what you owe over time.
What should I do if I don’t pay my taxes?
But generally, you have three options: Get on a monthly installment agreement. Request an offer in compromise. File and don’t pay, or make a partial payment. Everyone’s tax situation is different, and there is no one-size-fits-all strategy, so you should consult a tax professional for advice.
What if I’m behind on my taxes?
If you’re behind on your taxes but know you can catch up eventually, this is probably your most appealing option. After you file your tax return, fill out an online payment agreement application on the IRS website. You can also mail in your taxes and include Form 9465, which is used for taxpayers who are interested in a monthly installment plan.