What to Do if You Can’t Pay the IRS

As the April 17th deadline for filing 2017 income tax returns draws near, practitioners may encounter some clients who don't have cash to pay the balance due on their returns. Clients can avoid penalties but not interest if they can get an extension of time to pay from IRS. But such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). This Practice Alert examines ways in which financially distressed clients may be able to defer paying their income taxes, including installment agreements—fees for which are now waived or refunded for certain low-income taxpayers under a recent law change—and offers in compromise with IRS.

Paying in full within 120 days. A taxpayer can pay the full amount owed within 120 days, without having to pay any fee, but interest and any applicable penalties continue to accrue until the tax is paid in full. Taxpayers can use an online payment application (irs.gov/individuals/online-payment-agreement-application) or call IRS at 800-829-1040 (individuals) or 800-829-4933 (businesses).

Installment agreements. Taxpayers unable to pay the full amount owed within 120 days may be able to enter into an installment agreement with IRS to pay the tax. Apply using Form 9465, Installment Agreement Request, and Form 433-F, Collection Information Statement. (irs.gov/individuals/payment-plans-installment-agreements)

There are different rules for taxpayers who owe $10,000 or less, and for taxpayers who owe $50,000 or less.

Taxpayers are eligible for a guaranteed installment agreement—in other words, IRS is required to enter into the agreement—if the aggregate amount of the liability (determined without regard to interest, penalties, additions to the tax, and additional amounts) is not more than $10,000 and:

  • During the past five tax years, the taxpayer (and spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement for payment of income tax;
  • The taxpayer agrees to pay the full amount owed within three years and to comply with all Code provisions while the agreement is in effect; and
  • The taxpayer is financially unable to pay the liability in full when due and submits information that IRS may require to make this determination (i.e., a financial statement). (Code Sec. 6159(c)(2); Reg. § 301.6159-1(c)(1))

Fees Involved With Installment Agreements

The following fees currently apply to installment agreements, except for low-income taxpayers:

  • $225 for regular installment agreements, where a taxpayer contacts IRS in person, by phone, or by mail and sets up an agreement to make manual payments over a period of time either by any electronic method other than direct debit, such as direct pay or debit/credit card, or by check or money order. (Reg. § 300.1(b))
  • $107 for direct debit installment agreements, where a taxpayer contacts IRS by phone or mail and sets up an agreement to make automatic payments over a period of time through a direct debit from a bank account. (Reg. § 300.1(b)(1))
  • $149 for online payment agreements, where a taxpayer sets up an installment agreement Online Payment Agreement application on irs.gov and agrees to make manual payments over a period of time by any electronic method other than direct debit, such as direct pay or debit/credit card, or by check or money order. (Reg. § 300.1(b)(2))
  • $31 for direct debit online payment agreements, where a taxpayer sets up an installment agreement Online Payment Agreement application on irs.gov and agrees to make automatic payments over a period of time through a direct debit from a bank account. (Reg. § 300.1(b)(2))

The first three fees above are reduced to $43 for certain qualifying low-income taxpayers, and under a recent law change made by the Bipartisan Budget Act of 2018 (P.L. 115-123, 2/9/2018), no user fee is imposed where the low-income taxpayer enters into an installment agreement under which the taxpayer agrees to make electronic debit installment payments through a debit account. For low-income taxpayers who are unable to agree to make such electronic payment, the user fee applies, but will be reimbursed upon completion of the installment agreement. (Code Sec. 6159(f))

Offer in Compromise

An Offer in Compromise is an agreement between a taxpayer and IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, won't qualify for an OIC in most cases. IRS says that to qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. (irs.gov/taxtopics/tc204.html)