TaxWatch: What happens if you can’t pay your taxes? IRS has a payment plan — but read this before you sign up.


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Tax Day is almost upon us. If you need more time to sort through your documents, you can get an extension to file by Oct. 16 — as long as you request that extension by April 18.

But what if you simply don’t have enough money to pay the taxes you owe? As Americans contend with pocketbook issues such as inflation and recent layoffs, more people than ever might be asking that question this year.

Fear not, though — there are things you can do, like paying the Internal Revenue Service in installments, either through a buy now, save later (BNPL) plan or through the IRS’s own installment plan. 

Yes, the IRS has a payment plan, but there are caveats. 

The IRS’s installment agreement includes short-term payment plans up to 180 days, as well as long-term plans known as installment agreements that let you pay your tax bill over a couple of years. 

What is the IRS’s installment agreement?

Taxpayers enter into millions of installment agreements every year, making that the most common collection alternative for those who are unable to pay what they owe in full, according to Erin M. Collins, the national taxpayer advocate, who runs an independent taxpayer-assistance operation within the IRS.

An installment agreement allows an individual or business to pay their tax liabilities over time. They can apply online, by phone, by mail or in person. 

“Interest and some penalty charges continue to be added to the amount you owe until the balance is paid in full,” the IRS says. Read more about penalties and interest.

“You must remain in compliance with filing and payment of all tax returns for a period of five years from the date the offer in compromise is accepted,” the IRS adds.

The short-term plan requires no setup fee, but the combined amount of tax, penalty and interest should be lower than $100,000. 

The longer installment payments charge $31 for a setup fee if you agree to enroll in a monthly automatic withdrawal system, $130 if you pay it every month online, or $225 if you pay by mail, over the phone or in person. 

The IRS can waive or reduce the setup fee for low-income taxpayers whose earnings are at or below 250% of the federal poverty level. 

For most states, the federal poverty line is $24,860 a year for a household of three, according to a federal government website.

For tax year 2022, taxpayers established nearly 2.4 million new installment agreements and paid $13.8 billion toward all installment agreements, according to the IRS

That’s some 10,000 more cases than the previous year, which itself was 29% more than in tax year 2020, the agency’s data show. 

Although there are four types of installment plans, the IRS is more likely to put individual applicants into the streamlined installment agreement, tax experts say. 

That streamlined plan runs 72 or 84 months and requires the person to have a tax liability lower than $25,000. It application doesn’t ask about the taxpayer’s financial situation.

Am I a suitable candidate for an installment agreement?

Borrowing money from the IRS is not for everyone. Penalties and fees can make it a more expensive option, said Nina Olson, executive director and founder of the Center for Taxpayer Rights. 

“If you owe the IRS money, you need to realize that under the law, the IRS calculates interest daily on any debts that are not paid,” Olson told MarketWatch. 

In the case of credit cards and mortgages, interest rates are accrued monthly. Daily compounding obviously means much higher interest payments, she said. 

The streamlined installment agreements also have the highest default rate: People tend to overestimate their ability to pay off tax debts, and they tend to say yes to the IRS, Olson added.

People sometimes feel pressure to sign up, she said: “Taxpayers agreed just because they were afraid they would get a nastygram from the IRS.”  

But not everyone can get a loan from a bank, and others don’t have a credit card with affordable interest rates, Olson said. And so they sign up for these installment agreements.

“If you can find another source to pay the IRS, do that,” Olsen added. “If you can’t, there are a number of payment alternatives.”

And be warned, as Collins wrote on the National Taxpayer Advocate blog: “The resulting required monthly payment bears no relationship to what the taxpayer can actually afford to pay.”

What are other payment options for low-income people?

For lower-income people or those with special needs, or for people who are taking care of a family member, Olson said a streamlined installment agreement may not be the best option.

Instead, she said, there are three other options people can turn to: offer in compromise, currently not collectible or bankruptcy. 

By applying for an “offer in compromise,” people ask the IRS to settle the tax debts for less than the full amount they owe. It requires the applicant to provide financial information such as assets, mortgage, income and expenses. The IRS then will decide what a reasonable collection amount is.

For someone who whose income is below their basic living expenses — a financial standard calculated by the IRS — the agency will report the account in question as “currently not collectible.”

The applicant must contact the IRS and provide financial information, but even a “currently not collectible” designation doesn’t mean the debts go away. The IRS will keep an eye on the person’s financial situation and notify the person if it sees that their situation has improved. 

If someone is filing for bankruptcy with the IRS, they need to find a bankruptcy attorney who also has expertise in tax policy, because the timing of the filing is essential for discharging tax debt, Olson said. 

There is really only one cardinal rule: “Don’t be an ostrich,” Olson said. Not doing anything could put you into the automated collection system, which means that the IRS will automatically garnish your paycheck or your bank account. Taxpayers have less say in that process.

“You need to do something. You may not want to talk to the IRS, but you need to talk to the IRS,” Olson said. “You need to engage with them, because not engaging means it’s just going to get in that automated collection system.”

And then? “Bad things happen,” she said.

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