Even If You Have No Money for Taxes, the IRS Will Work With You
You filed your tax return and you owe big. What happens if you have no money for taxes? Fortunately, the IRS is usually willing to work with you to keep you from going completely broke.
File on Time
The first thing to do? File your tax return. Even if you can’t afford to pay your entire tax bill, it’s important to avoid penalties for not filing. You can file an extension, which will give you more time to prepare your return. But – and it’s a big but – an extension to file does not give you more time to pay.
Next, you’ll want to pay as much of what you owe as you can right now. The IRS charges interest on unpaid taxes. The interest rate changes quarterly; currently it’s at 3 percent. If you can find a loan with a lower interest, that might be a money-saving option to pay your tax bill. The IRS accepts credit cards (for an extra fee), but a credit card’s interest rate is probably going to be high.
Payment Plans
The IRS offers payment plans to taxpayers who need extra time to pay their bill. You can set up a short-term plan for no fee that lets you pay off your tax debt over a few months. The normal period is 120 days, but as part of pandemic relief measures, the IRS has extended that period to 180 days this year.
You can set up a longer-term payment plan, and take up to six years to pay. The government charges a fee to set up the plan. The fee is less if you apply online instead of over the phone. Set-up costs are also lower if you opt to pay directly out of your bank account each month.
Let’s Make a Deal
It’s even possible the IRS will forgive your tax debt. At least, a part of it. You can ask the government for an Offer in Compromise. Basically, the IRS looks at your tax debt and your ability to pay it. If they decide paying your full bill would create a serious financial hardship, they will reduce the amount you owe. They expect you to pay off the new amount within a few months. Fair warning: the IRS approves only about 40 percent of the Offers in Compromise applications it gets.
Links
This page on the IRS website explains payment plans in more detail.
The IRS has an online pre-qualification test for Offers in Compromise.
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