What happens if you owe more taxes than you can pay at once?

It’s easy to get overwhelmed, but fortunately the IRS gives you options. The best plan for you depends on how much you owe, how quickly you can pay it off, and whether your tax debt is for an individual or a business.

First things first

You’ll need to file any returns for the past few years that you haven’t already filed. You don’t want to get stuck with a failure-to-file penalty.

Double check how much you’ll be paying. If you file taxes yourself, it may be worthwhile to have a tax professional look over your return and make sure you owe what the IRS says you do. Don’t forget to count any penalties and interest into your total debt.

If you owe more than $10,000 it’s a good idea to get a tax attorney or CPA to advocate for you. The more you owe, the more complex the red tape becomes.

Gather any financial documents proving your income and expenses. These could include bank statements, credit card statements, pay stubs, and documentation of any assets and liabilities.

Next you’ll want to line up information for the three months prior to the tax due date. How much personal info you’ll need to submit depends on your payment plan.

Let’s take a look at those payment plans now.

Short-term payment agreement or payment extension

You’ll use this payment plan if your IRS debt is $10,000 or less and you can pay your debt in 120 days (about four months).

Also called a “guaranteed installment agreement,” this plan allows you to make manageable monthly payments. There’s no minimum monthly payment, though you’ll want to pay as much and as soon as possible to avoid rising interest rates.

Fees

None, if you can pay in 120 days

Forms

Form 4868, Application for Automatic Extension of Time to File

Online Payment Agreement Application

You’ll use this payment plan if your IRS debt is less than $50,000 and you need more than 120 days to pay the debt in full.

You can make your payments through auto-debits from a checking account, a payroll deduction, a credit card, or an Online Payment Agreement Application.

How much you pay a month is up to you. The IRS encourages you to pick an amount as high as possible to reduce accumulating interest, but an amount still manageable with your income.

A streamlined installment plan gives you 72 months (about six years) to pay. To calculate your minimum monthly payment, the IRS divides your balance by the 72-month period. If you don’t negotiate another payment plan, this amount is the default minimum. The IRS usually won’t require additional financial information to approve this plan.

There’s a 10-year collection statute on IRS debts, so any plan you pick will aim to get your debt paid off in 10 years, if not sooner.

If your debt is over $25,000 but less than $50,000, you’ll need to document your income and expenses to the IRS before you’re put on a payment plan.

Fees

$120 for a standard agreement or payroll deduction agreement

$52 for a Direct Debit agreement

$42 with a fee reduction. If your income is below 250 percent of the Federal Poverty Guidelines, you may qualify for a reduced fee. Use Form 13844 below.

Forms

Online Payment Agreement Application

Form 13844, Application for Reduced User Fee for Installment Agreements

Form 9465, Installment Agreement Request

You’ll use this IRS payment plan if your total debt is above $50,000 and you need longer than 120 days to pay in full.

High-debt installment plans like this are more complicated to set up with the IRS. You won’t be able to apply for the online installment agreement.

You’ll need to provide financial information on:

  • Any accounts and lines of credit
  • Assets you own (including real estate)
  • Monthly income and living expenses

Individuals with debt higher than $50,000 aren’t always eligible for installment plans, but if you need time, it doesn’t hurt to apply and explain your situation. Provide any documents you think will make your case.

Fees

$120 for a standard agreement or payroll deduction agreement

$52 for a Direct Debit agreement

$42 with a fee reduction

Forms

Form 9465, Installment Agreement Request

Form 433-F, Collection Information Statement

Small business agreement

You’ll use this IRS payment plan if you run a small business and owe back taxes for that business and if your total debt is $25,000 or less.

For a small business payment plan, the forms are slightly different, though you can still use the Online Payment Agreement Application. In addition, you’ll file an In-Business Trust Fund Express Installment Agreement (IBTF-IA) online. You won’t need to provide a financial statement. The typical time frame to pay the outstanding debt is 24 months (two years).

If you owe between $10,000 and $25,000 for your small business, you’ll set up a Direct Debit installment agreement.

Fees

$52 for a Direct Debit agreement

Forms

Online Payment Agreement Application

In-Business Trust Fund Express Installment Agreement (IBTF-IA)

Undue hardship extension

You’ll use this IRS payment plan if you’re unable to pay using any of the payment plans above.

You can prove payment would cause “undue hardship” or significant financial loss (such as having to sell a property).

Apply as soon as you know you owe taxes. You’ll need to provide:

  • Statements of any assets and liabilities (such as retirement accounts, student loans, or auto loans)
  • An itemized list of income and expenses for the three months prior to your tax due date
  • If your application’s approved, the IRS will waive any late payment penalty fees. Extensions can last anywhere from six to 18 months.

Fees

None to file, although you may accumulate late penalty fees if the application’s not approved.

Forms

Form 1127, Application for Extension of Time of Payment of Tax due to Undue Hardship

You’ll use this IRS payment plan if you’ve looked into all the options above and none of them work.

With an Offer in Compromise, you make an agreement with the IRS to pay less than the full amount owed. How much you’ll pay depends on your resources and the amount you owe.

As with other plans, you’ll need to give information on:

  • Any accounts and lines of credit
  • Any assets you own or liabilities you have
  • Monthly income and living expenses

The IRS recommends you pursue an Offer in Compromise as a last-ditch option. You’ll be granted an offer if the IRS determines payment in full would cause economic hardship, or if your assets and income are less than the full amount of your tax liability.

Fees

$186 to apply for an Offer in Compromise

Forms

Form 656, Offer in Compromise (includes a booklet with more information)

You can call the IRS for help with any of these forms and situations. Remember to record the information you learn in your phone call (including the date and time you made the call) in case you need to refer to it later.

Summary

It’s easy to get overwhelmed with anything involving the IRS, but luckily there’s an IRS payment plan for most any situation involving unpaid taxes. Whether you have a small business, need a few years to pay off your debt, or can pay it off quickly, there’s a plan for you.

Read more

  • Special Tax Situations
  • Reduce Your Tax Bill By Up To $1,000