What To Do If You Can’t Pay Your Tax Bill

It can be very stressful and overwhelming to get a big tax bill that you can’t pay. Maybe you earned more than expected and owe a lot to the IRS. Or, unplanned costs came up out of the blue and made it impossible for you to save for taxes.

Whatever the reason, not being able to pay your owed taxes can have serious repercussions like penalties, interest charges, and even wage garnishment. The good news is there are options to help if you can’t pay your tax bill This guide will walk through strategies to deal with owing if you can’t cut that check to the IRS

First Steps If You Can’t Pay Your Taxes

If you get your tax bill and realize you can’t pay it, don’t worry. Here are some things you can do right away:

• Don’t panic – The IRS won’t show up the next day demanding payment You have some time to address this.

• Review your return – Are you sure your tax liability is accurate? Double check for errors just in case

• Ask for an extension. This gives you an extra six months to file your tax return without having to pay a late fee.

• Communicate with the IRS – Immediately call and explain the situation so they classify your balance as “can’t pay” instead of “won’t pay”.

This buys you a bit more time to get a plan in place. The IRS will work with taxpayers who show they are acting in good faith to resolve their tax debt.

Payment Plan Options With The IRS

The IRS offers payment plans to give people more time to pay what they owe over an extended timeframe. This can make your tax bill more affordable by spreading payments out.

Some common IRS payment plans include:

• Short-term extension – Pay in 120 days with no setup fees. For balances under $100K.

• Installment agreement – Pay monthly over 6 years. Small setup fee may apply.

• Long-term extension – Pay over several years for low income taxpayers.

To qualify, you need to have filed all required returns, owe less than $50,000, and prove financial hardship. Interest and penalties continue accruing during these plans.

You can apply online or call the IRS directly to discuss payment plan options and see if you’re eligible. Having an established plan on record is better than being delinquent on your taxes.

Available IRS Hardship Programs

For taxpayers undergoing significant financial difficulties, the IRS offers some hardship relief programs:

• Currently Not Collectible – The IRS temporarily suspends collection activity on your account. No installment plan, but penalties/interest continue growing.

• Offer in Compromise – IRS settles tax debt for less than the full amount owed in certain circumstances. Must meet strict eligibility criteria.

• Penalty Abatement – IRS waives failure-to-pay penalties based on reasonable cause criteria. Interest still applies.

These provide ways to reduce tax debt or pause aggressive IRS collection actions while you work to regain financial stability. To pursue hardship programs, you’ll need to provide detailed documentation.

Should You Take Out A Loan?

With the threat of IRS collections looming, your instinct may be to take out a loan to pay off your tax liability. However, borrowing should be an absolute last resort.

Tax debt loans often have absurdly high interest rates and fees, trapping borrowers in an expensive cycle of debt. Financial experts recommend exhausting ALL other options before resorting to a loan.

If you must take a loan, avoid so-called “tax relief” companies promising to negotiate with the IRS. Their fees are exorbitant for something you can do yourself for free. Carefully vet any potential lender and know the full costs before borrowing.

Strategize With Your Tax Professional

Don’t try to handle this solo – consult your CPA, Enrolled Agent, or knowledgeable tax pro for guidance navigating this. A tax professional can:

• Help determine the accuracy of your tax liability
• Suggest applicable exemptions or deductions you may have overlooked
• Advise on the pros/cons of different IRS programs and payment plans
• Assist communicating with the IRS and providing required documentation
• Set up a customized payment solution that works for your financial situation

Leaning on a tax pro provides both financial and emotional benefits when dealing with unpayable tax debt.

Cut Expenses Where Possible

If you owe taxes, it’s time to trim excess spending to free up cash flow for payments:

• Create a budget – Track where your money is going each month and identify areas to cut back.

• Reduce non-essential costs – Dining out, entertainment, vacations, etc. Stick to needs not wants.

• Call service providers – Seek rate reductions on cell phone plans, cable packages, insurance policies, etc.

• Shop with cash – Leave the credit cards home and stick to a set spending limit to avoid overspending.

• Delay major purchases – Hold off on buying anything non-essential like appliances, electronics, or other big ticket items.

• Find roommates – Lower housing costs by adding a roommate to your apartment or home.

Every dollar you can trim from your monthly spending gets you closer to paying the IRS. It takes discipline but is worth it.

Increase Your Income

In addition to cutting expenses, boosting your income can provide more money to put toward tax debt.

• Ask for overtime – Volunteer for any extra shifts or overtime opportunities at work.

• Freelance in your off hours – Use skills like writing, design, programming, or consulting to make extra cash.

• Monetize hobbies – Sell handmade crafts, clothes, baked goods or other items using sites like Etsy and eBay.

• Drive for rideshare – Sign up for Uber, Lyft or other rideshare platforms during peak hours for surge earnings.

• Rent out extra space – Generate rental income by listing a room or property on Airbnb, VRBO and other rental sites.

• Sell unused items – Tools, electronics, furniture, designer items, etc. Use Facebook Marketplace, Craigslist or consignment stores to unload belongings for cash.

If your full-time job makes taking on side work difficult due to schedule inflexibility, aim to be strategic by doing intermittent gigs whenever you have downtime.

Adjust Withholdings For The Future

While the above strategies help you tackle existing owed taxes, adjusting your withholdings can help avoid another unpayable tax bill in the future:

• Review deductions – Claiming too many deductions results in too little withheld. Only claim valid exemptions.

• Update W-4 – Increase allowances on your W-4 to have more taxes withheld from each paycheck.

• Make estimated payments – If self-employed, pay estimated quarterly taxes on income to avoid a huge end-of-year bill.

• Consult a tax pro – Getting expert advice can help calculate ideal withholdings given your occupation, income sources, deductions and tax situation.

Planning ahead and withholding enough throughout the year prevents finding yourself in this position again down the road.

If All Else Fails, Contact A Tax Attorney

If you’ve exhausted all options with the IRS and still cannot find a solution to pay off your tax debt, it may be time to get legal help. A tax attorney can provide assistance with:

• Negotiating an Offer in Compromise settlement
• Fighting inappropriate penalties and interest
• Halting enforced IRS collection actions
• Resolving issues from previous years’ unfiled returns
• Understanding complex legal options and IRS rules

While an added expense, a tax attorney may be able to resolve tax debts that are beyond your capabilities and get you the best possible outcome. Just be sure to vet credentials carefully.

Don’t Delay – Take Action Now

The absolute worst thing you can do if you owe unpaid taxes is nothing. Ignoring tax debt allows it to grow and gives the IRS power to come after your wages, bank accounts and assets.

Don’t stick your head in the sand. Follow the strategies above, develop a plan of action, and start resolving your tax debt today. Through a combination of payment plans, professional guidance, cost-cutting and perseverance, you can pay off what you owe and move forward.

It will take time, effort and discipline – but taking initiative puts you back in control so you can eliminate tax debt and regain peace of mind.