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Tax Debt Relief: What to Do if You Can’t Pay Your Taxes

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If you owe back taxes, a payment plan or debt forgiveness through the IRS could provide needed tax debt relief. Failure to file or pay your taxes on time can come with serious consequences, such as accruing interest and property liens, so it’s important to gain IRS debt relief as soon as possible.

In this article, we’ll cover:

What is tax debt relief?

Tax debt relief is an umbrella term for programs that help you pay back your tax debt, such as IRS debt repayment plans and services from third-party tax relief companies. Tax debt relief programs help you avoid the fees that you’ll owe if you don’t pay by the deadline.

There are two major costs associated with not paying your taxes on time: interest and penalties. And if you decide to create a repayment plan through the IRS, you could owe additional fees. You can see details on those fees, such as failure-to-pay penalties, on the IRS website.

It’s important to note: Even when you enter a payment plan with the IRS, you will still have to pay accruing interest on your taxes.

IRS debt relief: Payment plans, offers in compromise and more

Short-term and long-term installment agreements

An IRS payment plan allows you to pay back your tax debt over a set amount of time in manageable monthly payments. Short-term payment plans give you the chance to pay back your tax debt within 120 days, while long-term payment plans last more than 120 days.

Entering a payment plan helps you avoid wage garnishments, levies and other collection actions. And while interest and penalties will accrue until the balance is paid, your failure-to-pay penalty will be cut in half, from 0.5% monthly to 0.25% monthly.

Fee breakdown: IRS short-term vs. long-term payment plans
Option Fees
Short-term payment plan
  • No setup fee when done online, by phone, by mail or in person
Long-term payment plan lasting more than 120 days with autopay
  • $31 fee for online setup
  • $107 fee for setup by phone, by mail or in person
  • Setup fees may be waived for low-income filers
Long-term payment plan without autopay
  • $149 fee for online setup
  • $225 fee for setup by phone, by mail or in person
  • Setup fees may be lowered to $43 for low-income filers

Note: Additional fees may apply if paying by card

Who qualifies for a payment plan?

Anyone qualifies for a payment plan, but choosing the plan that works for your finances depends on your situation.

First, determine whether you should sign up in person, by mail, by phone or online. Online setup for long-term payment plans can be cheaper than other methods, or even free. But not all filers will be able to take advantage of online payment plan setup. For example:

  • Long-term payment plan: Individual filers who wish to sign up online must owe $50,000 or less
  • Short-term payment plan: Individual filers who wish to sign up online must owe less than $100,000

Individuals who fall outside of these limits must sign up for their payment plan by phone, by mail or in person.

If you’d like to sign up for a payment plan by phone, call 800-829-1040, but keep in mind it can be difficult to get in touch with the IRS by phone around tax season. Those who want face-to-face help can use this tool to find the nearest IRS office. If you’d prefer to communicate with the IRS by mail, the mailing address will depend on the state in which you live.

Offer in compromise

Another form of federal tax debt relief is the offer in compromise (OIC), which allows you to settle your tax debt for less than the full amount owed. If the IRS agrees to your offer, then you’re in luck, since the majority of OICs are rejected. If your offer is rejected, you may file an appeal within 30 days.

The IRS grants an offer in compromise based on the following factors:

  • Your ability to pay
  • Your income
  • Your expenses
  • Your asset equity

See if you might be eligible for an offer in compromise by using this IRS tool.

How to submit an offer in compromise

Some may hesitate to submit an OIC, as the application requires a $186 fee and 20% of the total offer amount, though certain low-income individuals may have these costs waived. If they’re not waived, your nonrefundable application fee and initial payment will be applied to your tax liability.

Your application should include:

  • Form 656 (offer in compromise)
  • Form 433-A (collection information statement)
  • Application fee, unless you meet low-income certification
  • Initial offer payment, unless you meet low-income certification

While your offer is being evaluated, other collection activities are suspended, and a federal tax lien may be filed.

If this all sounds like a bit much to handle alone, that’s where tax debt relief companies could get involved. However, you are able to complete this process on your own.

Currently not collectible

Currently not collectible doesn’t mean that your tax debt goes away — rather, the government determines that you can’t pay your debts at this time.

If your account is in currently-not-collectible status, the IRS generally won’t try to collect from you by placing a lien on your assets. While you’re not paying your tax debt, it accrues interest and penalties all the same. Plus, any future tax returns will be put toward your tax debt until it’s paid off.

To find out if you qualify for currently-not-collectible status, call the IRS at 800-829-1040.

Can tax relief companies help?

Tax debt relief companies are essentially the middlemen between you and the IRS. They may promise to lower or even eliminate your tax bill, but proceed with caution. That’s because they typically charge a fee for a service that you could do yourself.

At the end of the day, tax debt relief companies often utilize the same IRS hardship programs that you can apply for yourself. Plus, there are plenty of scammers who operate under the guise of tax relief companies that could be out for your money and personal information.

However, there are reputable tax relief companies that can help with your tax situation. If you don’t have the time, energy or know-how to commit to submitting an offer in compromise, do your own research to find an organization you can trust.

Beware scammers: 3 tax scam red flags

Falling victim to a scam puts your personal data at risk. The Federal Trade Commission offers the following red flags:

“Behavior warranting a complaint to the IRS includes companies or individuals that:

  • promise that you will get relief from tax liabilities;
  • misrepresent how long it will take to process a debt relief request application; or
  • omit relevant asset information on financial statements submitted to the IRS.”

Paying your tax debt with a personal loan

In most cases, you shouldn’t take out a personal loan to pay off tax debt. But for borrowers with good credit and a lot of tax debt, this could be a good option for avoiding the fees coupled with unpaid taxes.

The IRS updates interest rates on a quarterly basis. As of the first quarter of 2020, that rate is 5% for underpayments. That’s a pretty low rate, and it’s almost always lower than the APR you’d owe when getting a personal loan. The average personal loan APR for borrowers with credit scores of 720 and above was 7.63% in 2019’s fourth quarter. (Though, APRs can hit triple digits for subprime borrowers with less-than-perfect credit.)

However, when you add in the accruing failure-to-pay penalty plus a payment plan setup fee, a personal loan might be a more cost-conscious option. See the pros and cons of this payment option below.

Pros and cons of paying tax debt with a personal loan
Pros Cons
If you have good to excellent credit, you may be able to secure a better APR than what you’ll pay through the IRS between interest and penalties. For many borrowers, the rate of a personal loan will be much higher than what you’ll pay through the IRS.
You’ll pay off the debt in equal monthly installments. You may be subject to fees, including loan origination (typically 1% to 8%) and late penalty fees and prepayment penalties.
Taking out and paying off a personal loan could raise your credit score. You won’t have leverage to negotiate your tax debt if you pay it with a personal loan.

Paying your tax debt with a credit card

You could put your tax debt on a credit card without paying any interest if you utilize a card with a 0% introductory APR period. This is the only option through which you should charge a credit card to pay your taxes.

You’ll still have to pay a processing fee between 1.87% and 1.99% with a minimum fee of $2.50. Compare that to the interest rates of a personal loan or an IRS payment plan, and it could be a great deal for you. But not everyone will be able to utilize this option, as those with lower credit scores may not qualify for a credit card with a no-interest introductory period. Weigh your options for this payment method using the table below.

Pros and cons of paying tax debt with a credit card
Pros Cons
You’ll potentially pay no interest at all, if you utilize a card with a promotional 0% introductory APR period and pay off your balance within that period. You’ll have to go through a third party, which will charge a processing fee.
You won’t have to pay IRS penalties or interest. Promotional APR periods are temporary, so you’ll typically have to pay off your debt within 12 to 21 months or else owe interest (deferred interest is even worse if you owe it back to the start of the promo period).
You won’t have to set up a payment plan or have a set monthly payment like you would with a personal loan, so you can pay the taxes on your timeline. If you don’t pay it off in time, you’ll end up paying much higher interest rates than you would get through the IRS.
If the credit card offers cash back or points, you could get rewarded for paying your taxes. You’ll increase your credit card utilization ratio, albeit temporarily, which could negatively impact your credit score.

If you’re one of the millions of taxpayers who owes money to the IRS come tax season, you have options for repayment. Weigh the pros and cons of federal installment agreements, hardship programs, personal loans and credit cards to see the option that best fits your financial situation.

 

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