7 Tips for When You Own the IRS More Money than You Can Afford

Two weeks ago Mr. Patterson and I sent off our tax documents to our accountant. Now we are playing the waiting game. We’re waiting to hear back on if we owe money to Uncle Sam or if he owes us money. We think we’re getting a refund this year, but we’re not sure. So we wait. We wait to know if we are going to dance with excitement if we hear we’re getting a check or if we huff in disappointment and surprise at having to write him a check.


Tax time is like this for a lot of Americans. You get all the forms, organize your paperwork, and start filling in each line on the documents till you get to the last one where you figure out if you are getting a refund or writing a check to cover the money that you owe. Either that or you wait for the email from your accountant like us.

This waiting game has me on pins and needles. I’m biting my fingernails down bit by bit. I just want to know. All this built up anxiety has me thinking the worst. Do we owe money and is it a lot?  When you’re stressed your mind plays games with you and makes you think the worst.

The rational part of my brain says don’t worry, even if we owe money we have enough money in savings to cover the debt. But the irrational part of my brain started to fixate on owing an amount we couldn’t afford and what we would have to do if that happens. Thus this letter was born. If you find that you owe more to the government than you currently can afford then these are your only options.

The first thing that I found out surprised me, but it makes total sense. If you can’t afford to pay your tax bill, you probably think what’s the point of even filing? Why rush to tell the IRS I owe them money when I can’t afford to pay them, right? The problem with that line of thinking is that if you don’t file a return the IRS will bring the heavy hammer down on you and make you pay more money in penalties and fees.

The penalty for filing late is a stiff 5 percent per month up to a maximum of 25 percent of the amount of tax due on the tardy return. But if you at least file your return, even if you don’t have enough money to pay your taxes in full, the penalty for paying late is much less severe – half a percent per month, up to a maximum of 25 percent of the amount due on the return. Despite their fearsome reputation, the IRS can be an understanding lot. They only get nasty and unforgiving when taxpayers try to avoid making payments.

Even if you can’t pay off the entire debt you owe to Uncle Sam, doesn’t mean you shouldn’t at least send them something. The IRS sees partial payment as a sign of good faith and will most likely go easier on you. The IRS accepts all forms of payment including credit cards. As a personal finance expert I wouldn’t normally recommend this option to you. While paying off your debt to the government this manner will relieve you of paying penalties and fees to the IRS, it will not stop you from owing possibly thousands of dollars in interest on any balance you carry month to month. The interest rate on credit cards is generally much higher than what the government will charge you. But if you use a credit card with an introductory zero percent interest rate, then using a credit card can be a great option.

If you own your home and have any equity in it you could get a home equity line of credit to pay off your tax debt. You could also try to get a loan from a bank or credit union. Current interest rates are historically low and repayment terms can be flexible.

But if those options aren’t available to you the IRS does offer you some choices. Your first and probably best option if you owe $50,000 or less is to apply for a payment installation agreement. This agreement requires you to make monthly payments to the IRS until your debt is paid off. There are some strings attached though. You must have filed all of your prior year’s tax returns and pay a user fee of $105 ($52 if the payments are automatically deducted from a bank account). You’ll also pay the IRS interest on the unpaid balance, which is currently sitting at 4 percent.

If for some reason you cannot pay your taxes, the IRS may temporarily delay collection until your financial condition improves. This determination is strictly up to the IRS to determine. This determination will stop any collection activities against you, but will not wipe out your debt. Penalties and interest will still accrue during this time, and they could put a lien on any property you own. The IRS has a 10 year statute of limitations to collect on a tax debt. If at any time during those years you are able to pay off even a portion of the debt, the IRS will come after you. However, the status will give you some breathing room while you get your affairs in order.

When you hear TV commercials offering to settle your IRS tax debt for pennies on the dollar most likely they are referring to the Offer-in-Compromise debt relief strategy. The IRS only does this when they believe they will not be able to recover the full amount owed. They settle on an amount that the tax payer can reasonably afford to pay off and the remaining balance is wiped clean.

The IRS has strict qualifications for accepting less money than what they are owed. A taxpayer must be in extreme financial distress.  Before they will accept a lesser amount the IRS will sell any assets you have including your house, car and furniture. Only when your outstanding tax liability outweighs your collection potential will this offer be accepted.

Please be wary of any company that promises you they can settle your debt for pennies on the dollar. Undoubtedly you’ve seen one or two commercials where companies make these promises. Not all of these offers are scams but a lot of them are. It is nearly impossible to convince the IRS to take less than what you owe. Any company or individual who promises they can reduce your tax debt is probably blowing smoke up your ass and attempting to bilk you out of more of your hard earned cash.

Whatever option you choose, don’t ignore your tax obligations. The IRS are a determined bunch who will go to great lengths to get what money they feel is theirs. Your tax bill will not just go away if you don’t file a return. In fact not filing will make your tax debt situation worse.  Before you panic and start thinking of moving out of the country or disappearing into the wilderness file your return and contact the government to get the ball rolling. Believe me, you’ll thank me later.

Keeping Money in Your Pocket,

Nancy Patterson


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