Your 6 options when you can’t pay your tax bill

The moral of the story: If you can’t pay your full tax bill, you are not alone–and you have options. In 2021, more than 2.3 million people set up payment plans with the IRS. And many more got other arrangements based on their specific circumstances.

What kind of other arrangements?

The IRS offers several options for people who can’t pay. These range from short time extensions to more complex agreements for people who owe large sums or have financial hardship situations.

Most of the time, people just need a few extra weeks to get the money together, or they set up a monthly payment plan with the IRS.

Here’s a little more about each type of IRS alternative option.

1. You can request a time extension to pay of up to 180 days.

If you just need some extra time to pay and you aren’t experiencing financial hardship, your best option is probably a 180-day extension to pay your entire tax bill. The IRS calls this option a short-term payment plan. The IRS grants these extensions to individual taxpayers.

There are 3 ways to request an extension-to-pay agreement:

• Call IRS Collection and request it by phone.
• Use the online payment agreement application at IRS.gov if you owe less than $100,000.
• Authorize a tax professional to request the agreement for you.

You can only request an extension-to-pay agreement once for each tax year.

2. Request a streamlined installment agreement.

If you owe $50,000 or less and can pay your full tax bill within 72 months, you can request a streamlined installment agreement (installment agreement is the IRS term for a payment plan). It’s called “streamlined” because these agreements require less paperwork and financial disclosure than other types of agreements, and they’re fairly simple to request.

Ways to request a streamlined agreement:

• Call IRS Collection directly and request it by phone.
• Use the online payment agreement application at IRS.gov.
• Authorize a tax professional to request the agreement for you, using a dedicated IRS practitioner phone line.

Important: In a streamlined installment agreement, the IRS won’t file a public Notice of Federal Tax Lien on amounts of $25,000 or less. However, to avoid the lien for amounts between $25,001 and $50,000, the IRS requires you to pay by direct debit.

3. Set up a full-pay non-streamlined installment agreement.

This agreement was introduced in 2020. It allows people who owe up to $250,000 to easily request a payment plan with the IRS. The payment terms are for the length of time that the IRS has to collect the tax debt. This is called the IRS collection statute of limitations, and it’s generally 10 years from the date the IRS charged, or assessed, the tax. Also, this plan usually doesn’t mean that you would have to sell or borrow against your assets to pay the IRS.

There is one catch: If you owe more than $10,000 and set up this agreement, the IRS will probably file a Notice of Federal Tax Lien.

There is only one way to request the full-pay non-streamlined installment agreement: Contact IRS collection directly. These plans can get complicated, and most taxpayers will want to use a tax professional to set up this type of agreement.

Important: if you owe less than $50,000, you likely will want to use the streamlined installment agreement to avoid a tax lien filing. One option you can use if you owe more than $50,000 is to pay down your tax bill to less than $50,000 and use the streamlined agreement option.

4. Try to get another ability-to-pay installment agreement.

If you owe more than $50,000 or can’t pay your tax bill using the extension to pay, streamlined installment agreement, or the full-pay non-streamlined agreement, setting up a payment agreement with the IRS is much more complicated. You will need to make arrangements based on your ability to pay. This means you’ll need to provide documents to the IRS showing your full financial picture.

The IRS will use the information (provided on IRS Form 433) to determine how much you can pay from equity in your assets and through a monthly installment agreement.

First step: The IRS may want you to pay with assets.

Examples of your assets could be cash on hand, funds in an IRA, or value in the stock you own. The IRS can also ask you to take out a loan on your assets, such as a home equity line of credit.

Often, people request atime extension from the IRS to get a loan or use their assets to reduce their tax bill to less than $50,000. Then, they can set up a streamlined agreement for the remaining balance.

Second step: The IRS may want a payment plan based on your ability to pay.

If you still owe after paying with your assets, you’ll have to make monthly payments, based on your income and necessary and allowable living expenses. You will have to complete an IRS Collection Information Statement (Form 433-A or 433-F) to detail your finances and propose a monthly payment amount to the IRS.

If you can pay your entire tax bill within 72 months, you may be able to establish a conditional installment agreement. This agreement allows you to make payments based on your actual monthly income and expenses, as long as you can pay your entire tax bill within 72 months (or the IRS collection statute of limitations, whichever is longer). But if you can’t pay within 72 months, the IRS will look at your expenses closely to determine whether they are necessary or excessive.

Important: The new full-pay non-streamlined installment agreement option has removed the need for many ability-to-pay agreements, as long as you can pay before the collection statute expires. Also, like the full-pay non-streamlined agreement, the IRS will file a tax lien in all ability-to-pay agreements if you owe more than $10,000.

How to request an ability to pay agreement:

• Call or write IRS collection.
• Authorize a tax professional to request the agreement for you.

5. Currently not collectible hardship status

Hardship status means that if you can’t pay the IRS, you can request currently not collectible (CNC) status. CNC status means you can’t pay the IRS, based on your financial situation. To figure out whether you can pay, the IRS will set strict limits on the amounts that you pay for necessary living expenses. These limits are called the IRS collection financial standards and are published on IRS.gov. For example, for 2021, a family of four in Washington, DC, will be limited to $3,324 in housing and utilities expenses .

CNC status is usually temporary. The IRS checks your income periodically to determine whether your financial situation has improved, and you can start paying. For CNC status, the IRS will file a tax lien if you owe more than $10,000.

How to request it:

• Call or write to IRS collection.
• Authorize a tax professional to request the agreement for you.

6. Apply for an IRS offer in compromise tax settlement.

If your assets, monthly income, and prospects for future income offer the IRS slim hope that you will be able to ever pay your tax bill, you may want to consider requesting an offer in compromise (OIC) for doubt as to collectibility.

OICs allow you and the IRS to agree to settle your tax debt for less than the full amount you owe. There are two steps to an OIC:

• Determine whether you qualify.
• Determine how much you will need to offer the IRS to settle.

Few taxpayers qualify for OICs. For the few that do, many can’t pay the calculated offer amount to settle their tax bill.

You’ll qualify only if you can’t pay all your taxes with equity in your assets or with monthly installment payments, before the collection statute of limitations expires. If you qualify, you’ll also have to be able to pay the offer amount, which will vary based on your situation and the type of OIC.

Requesting an OIC

To get an OIC, you must apply with IRS Form 656 and give the IRS a full picture of your ability to pay using IRS Form 433-A(OIC), plus detailed documents to prove your financial situation.

IRS personnel who specialize in this program will review your application. Unless you meet the IRS low-income criteria (found in the Form 656 booklet), you will have to pay an application fee ($205) plus a down payment, and possibly continuous payments of the offer amount while you wait for the IRS to consider your application, depending on the type of OIC payment option you select.

Important: First, be wary. This program is not for people who are temporarily distressed. Viable businesses and people with short-term financial hardships are generally not good candidates for the OIC. Second, the rules for an OIC can be complicated, and the process can take several months to complete. Because there are nonrefundable fees involved, it is important to consult a tax professional who understands the OIC program before you apply.

Other important terms to know for IRS agreements

There are a few other important terms of any IRS collection alternative:

• You must file all required tax returns. For individual tax filers, that generally applies to the past 6 years.
• You must include all your tax debts in an agreement. If you owe for multiple years, you will need to include all debts in one agreement with the IRS.
• You must be in payment compliance. That means your withholding and/or estimated tax payments must be up to date, so you won’t owe again in the future. If you owe again, your agreement will default.
• Extension-to-pay agreements and streamlined installment agreements are the only agreements that don’t come with an automatic tax lien if you owe more than $10,000. It is important to get into an agreement before the IRS files a tax lien. Once the IRS files the lien, it is difficult to have it withdrawn without paying your full tax bill.

How to figure out your best payment option

You may be one of many people who need an alternative payment option. First, look to the most common alternatives for people who can’t pay in the short term: an extension or a streamlined installment agreement.

If you can’t meet the terms of one of those options, you’ll need to examine your financial situation and establish an agreement based on your ability to pay.

We’re here to help

At Jackson Hewitt, we have 40 years of expertise to help you manage your tax issues. Whether simple or complex, our team of licensed professionals are trained to work directly with the IRS, while keeping you updated every step of the way. Start for free today and learn about how we can help resolve your tax issues.

About the Author

Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.

View Jim's LinkedIn Profile Jackson Hewitt Editorial Policy