Paying Back Taxes: A Guide to Paying Off IRS Debt

When Uncle Sam comes knocking at your door, the last thing you want to do is to let him in. Dealing with taxes can be a major headache, especially if you don’t have the time to understand complicated tax jargon and what numbers go on what line on your tax return. Although dealing with the Internal Revenue Service (IRS) can be a nuisance, the last thing you want to do is ignore them and fail to pay your taxes.

If you find yourself in a situation where you owe back taxes to the IRS, don’t fret. Below, we’ll go over what to do if you owe taxes, along with the do’s and don’ts if you have back taxes owed. Continue reading for a complete understanding of back taxes, or use the list below to jump to a section that may contain the answer you’re looking for.

• What to Do If You Owe Taxes to the IRS
  • Make Sure You Owe Taxes to the IRS
  • Reduce Your Penalties
  • Set up a Plan to Pay the IRS Back
• What Not to Do If You Owe Taxes to the IRS
  • Don’t Pay
  • Not Knowing Your Options
• Hire a Tax Professional
• Wrapping Up: What to Do If You Owe Taxes to the IRS

What to Do If You Owe Taxes to the IRS

Getting a notice in the mail from the IRS is always a surprise. Is it a notice informing you you’re due for a larger refund? That’s always welcomed. But what if it’s a letter stating you have a balance due? If this is the case, you need to take action immediately, or else your tax bill can double from accrued interest, fees, and penalties over time.

Wondering how to pay the IRS back? You’re not the only one. In fact, the most recent IRS data found that in 2018, roughly 13 million Americans owed back taxes, which amounted to a whopping $128 billion. The first step to paying back taxes is making sure you owe them in the first place, which we’ll discuss below. From there, we’ll outline the steps to take to determine how to pay back taxes and how to choose the right repayment plan.

Make Sure You Owe Taxes to the IRS

First and foremost, make sure you actually owe money to the IRS. If you’ve held the same job as last year without much change and your tax return looks completely different, you or the IRS could have made a mistake on your return.

If this is the case, review your tax return. Check for things like deductions and credits you may have been eligible for, and that you answered all of the questions correctly. To prevent missing out on tax benefits, give the IRS a call or write to them to remediate the problem.

For errors that can’t be immediately fixed, you can file an amended tax return with IRS Form 1040X. This form can be used if you made a mistake with your filing status, failed to report income, claimed the wrong deduction, and so forth. Form 1040X can only be mailed in, so even if you filed electronically, you would still need to send this form to the IRS through the mail.

If you went through your paperwork and found that you do, in fact, owe the IRS money, it’s time to figure out how to pay them back.

Reduce Your Penalties

After determining you owe back taxes to the IRS, you want to file an extension and do everything you can to minimize expensive penalties and interest. Here’s how you can minimize the amount of money you owe in interest and penalties:

• File an extension: Failing to file an extension can lead to some hefty fees. Even if you don’t have the money upfront, filing your tax return will save you money in the long run. However, an extension only gives you more time to file, not to pay, so you still need to pay your taxes by the tax deadline, which is usually April 15th.

To file for an extension, complete IRS Form 4868, which will give you an additional six months to file your federal income tax return. To qualify for an extension, you must submit Form 4868 by the tax deadline. You can either file it using IRS e-file or send it through mail to your local IRS Center.

• Request a first-time waiver: Maybe time caught you by surprise, or perhaps you came down with an illness that put filing your taxes on the back burner. If you’re a first-time offender, you can request administrative relief in the form of a first-time penalty abatement. To qualify, you must have a clean compliance history (meaning you paid and filed your previous returns on time), and you have paid, or arranged to pay, any taxes that are due.

• Ask for “Currently Not Collectible” status: If you’re facing financial hardship and can’t pay your outstanding tax liabilities, you can request a Currently Not Collectible To qualify for an IRS hardship, you must demonstrate you have a financial hardship through Form 433A and/or Form 433F. This will allow you to make a case to the IRS that after you pay for the cost of your living expenses, you have little to no room to pay off your tax liabilities.

Once qualified, the IRS will temporarily pause any active collections. The Statute of Limitations on tax debt is ten years, so you must continually provide proof that you’re in financial hardship to maintain your Currently Not Collectible status.

• Reasonable cause: Sometimes, life can throw you a curveball, and the IRS understands that. Fire, casualty, natural disasters, pandemics, and death are a few examples of reasonable causes the IRS will take into consideration to provide penalty relief. To qualify, you must state what and when it happened, the circumstances that prevented you from paying, and the actions you took to file/pay.
• Statutory exception: If you’re a small business and requested advice from the IRS and they provided incorrect written advice, you may qualify for a statutory exception. To receive penalty relief, send proof of your written request for advice, the erroneous written advice you relied on, and the report of tax adjustments that identified the penalty. Then, file Form 843 to request penalty relief from incorrect advice from the IRS.

After you’ve taken measures to reduce or minimize your penalties, it’s time to take action and set up a plan for paying back taxes.

Set up a Plan to Pay the IRS Back

The IRS is willing to work with you when it comes to paying back taxes. The IRS offers a variety of IRS Repayment Plans, such as short-term and long-term installment agreements, as well as offer in compromise resolutions.

To pay the IRS back with an IRS Installment Agreement plan, you first need to file Form 9465. This form will allow you to formally request a monthly installment plan if you cannot pay back what you owe on your federal tax return. If you owe less than $50,000, you can often fill this form out online or by giving the IRS a call. However, if your tax liabilities are over $50,000, you will have to mail a completed copy to the IRS.

Here’s how each IRS Installment Agreement plan works:

• Short-Term Payment Plan: This plan gives taxpayers who owe less than $100,000 in taxes up to 120 days to pay back the IRS. There is no fee associated with this repayment plan, and you can apply online, by phone, through mail, or in-person. You can pay by automatic withdrawals from your checking account, with a debit or credit card, or by sending a check or money order. However, during this 120-day period, interest will still accrue, so your tax liability will grow over time.
• Long-Term Payment Plan: If you need more than 120 days to pay your back taxes or owe less than $50,000, you can opt for a long-term payment plan. However, a fee is attached to this plan. If you pay through automatic withdrawals, you can face a $31 fee. Any other method, you’ll have to shell out $149. If you’re a low-income taxpayer, you can submit Form 13844 to pay a fee of $43. For both short- and long-term payment plans, you can apply through an online payment agreement.

Along with short-term and long-term payment plans, the IRS rolled out four additional payment plans and readjusted the Offer in Compromise resolution with the IRS Fresh Start Initiative. This initiative was put in place to help people pay off their tax liabilities without crippling them financially. These payment plans go as follows:

• Guaranteed Installment Agreement: Taxpayers who haven’t filed or paid their taxes late in the past five years and owe less than $10,000 can apply for a Guaranteed Installment Agreement. With this plan, you must agree you will pay and file on time in the future and can pay the amount of taxes you owe within three years.
• Streamlined Installment Agreement: Taxpayers who owe $50,000 or less can opt for the Streamlined Installment Agreement. With this plan, you must agree to pay off your tax debts within 72 months, and promise to pay future taxes on time. A benefit of this agreement is that you don’t have to submit a financial statement with the IRS, but may need to provide some financial information during the resolution process.

• Non-Disclosure Installment Agreement: The Non-Disclosure Agreement is beneficial for taxpayers who owe $25,000 or less, and can pay off your taxes in monthly installments without disclosing any extensive financial details. Additionally, you have 72 months to pay off your back taxes, and the IRS won’t place a lien on your assets to secure their payments. 
• Partial-Pay Installment Agreement: Taxpayers who owe less than $25,000 can apply for a Partial-Payment Installment Agreement. This plan, you can adjust your monthly payment by subtracting your living expenses from what you can afford. This plan is appropriate for taxpayers who might be left without basic necessities like food and water if the previous payment plans are too expensive. However, the IRS can enforce a tax lien to secure your payment.
• Offer in Compromise Resolution: For taxpayers who can’t pay back their full amount of back taxes, the IRS may be willing to compromise. An Offer in Compromise is often the last-resort option if an installment agreement can’t be reached, and the IRS deems the amount you owe is unpayable and will cause financial hardship. To apply, submit IRS Form 656-B and pay the $186 fee.

As you can tell, Uncle Sam is more than willing to help you out if you find yourself in mounds of tax debt. However, no matter the plan you choose, you must make your payments on time, every time. If you slip, your installment agreement may be terminated, and you can find yourself in a worse financial situation.

What Not to Do If You Owe Taxes to the IRS

Swimming in unsurmountable tax debt can make anyone panic. However, the longer you push it off, the deeper you’ll sink. If you owe back taxes to the IRS, paying back as much as you can, as soon as you can, is the best action to take. Here’s what not to do if you owe taxes to the IRS:

Don’t Pay

Whether you believe in taxes or not, you still need to pay them. After all, how else do you think roads are maintained, schools stay opened, and the elderly are taken care of? If you don’t pay your taxes, the IRS will hunt you down and demand their fair share. Along the way, they’ll charge you penalties and fees that will rack up your tax bill. You can face the following liens, levies, and penalties for failing to pay back taxes:

• Failure to pay penalty: If you don’t pay your taxes by the return due date, you can expect a failure to pay penalty to show up in your mailbox. This penalty is 0.5 percent of the tax not paid each month or part of a month, 0.25 percent during an approved installment agreement, and 1 percent if that tax isn’t paid within ten days of a notice of intent to levy. The failure to pay penalty can reach up to 25 percent of the amount of tax that you owe until you pay it in full.
• Failure to file penalty: The failure to file penalty is much costlier than the failure to pay penalty, so if you don’t have the money up front to pay, it’s still worth filing your tax return. The failure to file penalty is 5 percent of your unpaid balance per month, or part of a month, for up to five months. The maximum can reach as high as 25 percent of the taxes you owe. Filing more than 60 days late will result in a penalty that is lesser of the two amounts—100 percent of the tax required to be shown on your return, or $435 if the return was due on or after January 1, 2020.
• Interest: Starting the day after the tax deadline, your tax debt will begin accruing interest. It’s a federal law that interest must be collected, and it cannot be forgiven, so the sooner you pay your back taxes, the less money you’ll owe in the long run. The interest rate is determined quarterly and is the federal short-term interest rate plus 3 percent.
• Tax Lien: Failing to pay taxes to the IRS can result in some pretty serious consequences—one being a tax lien. If a tax lien is placed on your property or assets, it means the IRS is claiming it as their own. A lien will be removed 30 days after you pay your tax debt in full.

• Tax Levy: Failing to pay back taxes and getting rid of your tax lien can lead to a tax levy. A tax levy is where the government seizes your property and assets, such as homes, vehicles, and money in your bank accounts, to satisfy a tax debt.
• Garnish Wages: The IRS can also garnish your wages if you have back taxes to pay. This means the government will contact your employer and have part of your wages sent to the IRS each pay period until the amount of tax debt you owe is paid, you make other arrangements to pay your taxes, or the levy is released.

Not Knowing Your Options

Not knowing your options when it comes to paying off IRS debt can put you in serious financial trouble. Failing to pay back taxes can lead to a multitude of negative consequences, such as liens and levies, garnished wages, penalties, and interest. An installment agreement will keep you in good financial standing and can help you pay off your back taxes sooner to avoid accrued interest.

Hire a Tax Professional

Facing the IRS alone can be a daunting task, especially if you have limited experience dealing with taxes and the federal government. Seeking out back taxes help is one of the best things you can do to get out of your current financial situation and set your future up for success.

At Community Tax, we offer tax resolution services to help get you back on track. Our tax professionals are ready and willing to work with you and the IRS to find an installment plan that works for you. Our process starts with a free tax analysis to discuss the best potential resolutions to your tax liability. From there, we investigate your case and finish by devising a resolution that fixes your tax issues and keeps you tax debt-free in the future.

Wrapping Up: What to Do If You Owe Taxes to the IRS

No one wants to be indebted to the IRS. While seeing a portion of your wages taken out of your paycheck for taxes can be frustrating, they’re used for the common good, including yourself. Neglecting to pay these taxes can lead to costly repercussions, such as fees, penalties, interest, liens, and levies.

If you owe back taxes to the IRS, it’s best to pay them as soon as possible. However, if paying back taxes is impossible or will cause financial hardship, you can apply for an installment agreement to pay back your liabilities over time. At Community Tax, we’re here to help you get back on your feet. Speak with one of our tax representatives to see how you can take control of your tax situation.

Note: Due to the Coronavirus pandemic that is spreading across the globe, the IRS has changed the tax filing deadline from April 15th, 2020, to July 15th, 2020, without penalties and interest, regardless of the amount owed. Refer to the IRS’s COVID-19 webpage for updated information.