Getting hit with a huge tax bill that you don’t have the money to pay can be an incredibly stressful and scary situation. Maybe you had unexpected income, a major life change, or simply underpaid your taxes. Whatever the reason, owing the IRS a lot of money and not being able to pay definitely causes anxiety. But don’t panic – you have options. In this article, we’ll go over what to do step-by-step when you’re faced with a massive tax bill you can’t afford to pay right now.
First Steps When You Get a Big Tax Bill
The first thing is don’t ignore it Even if you don’t have the money, it’s critical to file your return by the tax deadline, which is usually April 15 You should file even if you can only pay part of what you owe. The penalties and interest will be much higher if you don’t file at all.
Next, pay anything you can afford, even if it’s a partial payment. The more you pay now, the less interest and penalties you’ll owe on the remaining balance. Every little bit helps.
Finally, ask the IRS for an extension of time to pay if you need more time. You can request an additional 120 days to pay your balance without penalties. This gives you a bit more breathing room while you sort out the full payment.
Understanding IRS Collection Process
Once you’ve filed and paid what you can the IRS will send notices requesting payment on the remaining tax debt. Here’s how the process typically goes
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Notice of tax due The first notice you’ll get if you owe a balance It tells you the amount due and requests full payment.
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Notice of intent to levy: This is a legal warning that the IRS may take enforced collection actions like wage garnishment or seizing assets if you don’t pay the tax debt.
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Final notice of intent to levy: Issued 30 days after the first notice if you haven’t paid in full or appealed. This is the last notice before actual IRS collection action.
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Levy: At this point, the IRS can enforce collection by garnishing your wages, levying bank accounts, or seizing assets. This is something you definitely want to avoid.
Understanding this process allows you to act quickly when you get the first notices and avoid escalation to actual levy.
Options If You Absolutely Can’t Pay Your Tax Bill
If you’ve gone through the notices and simply cannot pay the full amount due, you still have options:
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Payment plans – IRS payment plans allow you to pay your tax debt over 6-72 months. Interest and penalties continue to accrue but it allows you time to pay.
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Offer in compromise – This allows you to settle your tax debt for less than the full amount owed. Strict eligibility requirements must be met to qualify.
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Currently not collectible status – The IRS may temporarily delay collection if you can prove your financial hardship prevents paying basic living expenses. Interest and penalties continue to grow during this time.
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Bankruptcy – Declaring bankruptcy can eliminate tax debt in some cases. Chapter 7 bankruptcy wipes eligible tax debt completely while Chapter 13 bankruptcy allows you to pay over 3-5 years.
These options require contacting the IRS directly, proving financial hardship, and agreeing to pay what you can over time. They at least prevent immediate asset seizure while you work to resolve your tax debt.
Tips to Avoid Huge Tax Bills in the Future
While the above can help you deal with a massive tax bill now, here are some tips to avoid them in the future:
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Accurately estimate your tax liability each year and make sure enough is withheld from your paycheck or make estimated quarterly payments.
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Set aside savings for taxes when you have self-employment, side work or rental income to avoid underpayment.
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Adjust your W-4 withholding when you have major life changes like marriage, divorce, new child, new job, etc.
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Consult a tax professional if you have complex tax situations to ensure you comply with all rules.
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Never ignore IRS notices – resolving issues early prevents escalation to collections status.
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Always file on time, even with a balance due. It limits penalties and interest charges.
Dealing with a huge unexpected tax bill is stressful. But staying calm, understanding your options, and taking action to address it can prevent making the situation worse. Use the payment plans and programs available and take steps to avoid repeat occurrences. With some time and diligence, you can resolve your tax debt without financial disaster.
Frequently Asked Questions About Huge Tax Bills You Can’t Pay
What if I really can’t pay anything right now?
If you truly cannot pay anything, request a temporary collection delay from the IRS. You’ll need to prove extreme financial hardship but this pauses enforced collections to give you time to improve your financial situation. Interest and penalties continue to grow during the delay.
Should I use credit cards or loans to pay the IRS?
This is rarely a good idea. Credit cards charge high interest rates and fees on top of what you’ll owe the IRS. Personal loans also have interest charges. Avoid digging yourself deeper; work with the IRS on a payment plan instead.
What if I don’t file a return with taxes I can’t pay?
Never attempt this. Penalties for not filing at all are much more severe. You must file on time, even if paying the balance due will happen later through IRS payment programs. Filing extends your options.
Can I negotiate a smaller tax bill?
Only if you qualify for an offer in compromise, where the IRS agrees to settle for less than the full amount. You must prove financial hardship and strict rules apply, but it is possible in limited cases. Most other payment plans require paying the tax debt in full, eventually.
Should I raid retirement accounts to pay IRS tax bills?
Absolutely not recommended. You’ll face early withdrawal penalties, lose future tax-deferred investment growth and compromise your retirement security. IRS programs allow you time to pay and prevent levying your retirement accounts.
Get Help If You Receive a Massive Tax Bill
Don’t try to handle a huge tax bill you can’t pay entirely on your own. Reach out to a tax professional or the IRS for assistance. Making payment arrangements gives you options without immediately compromising your finances or assets. Review all your tax notices promptly and take action to resolve tax debts using the payment plans and relief programs available to you.
Apply for an IRS payment plan
You dont have to pay your full tax bill by the due date — as long as you take the proper steps to make alternative plans. You can apply for a payment plan to pay what you owe in installments over time, just like any other debt.
The IRS offers two types of payment plans for individuals:
- Short-term: Split your payments into monthly or more frequent installments over three months or less. Theres no setup fee, and you can set up automatic payments from your bank account, credit card, or debit card — you can also send a check or money order.
- Long-term: Make monthly payments for up to 72 months (six years). The set-up fee is $31 if you set up automatic electronic payments and $130 if you pay manually. The fee can be waived or reduced for low-income folks.
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Even on a payment plan, your balance will continue to accrue interest and the failure-to-pay penalty until you pay your balance in full. You can request to have the penalty fee waived if its your first time receiving the penalty; if you can claim reasonable cause (like a death in the family or natural disaster); or if you received bad advice from the IRS.
Apply for an extension to file later
You can always apply for an extension to file your tax return later. You have to submit this application by April 15, and it gives you until October 15 to file.
This will help you avoid the late-filing penalty, but it doesnt change your payment due date. Your tax debt will still accrue penalties and interest, and youre less likely to get your late-payment penalty waived.