Owing money you can't afford to pay can be stressful. But owing money to the IRS? That can feel downright scary. After all, the IRS has powers that many other creditors don't have. It can take money from your bank account or paycheck, take your property, and even revoke your passport.
But don't panic. Even if you haven't paid taxes in years, it's possible to get caught up and back in the IRS's good graces. Here's how.
Step 1: Gather your tax documents
If you have all of your tax documents and receipts in a folder or drawer somewhere, this step should be easy. But what happens if you're missing 1099s, W-2s, or other tax forms?
It happens, and you have options. These days, many tax documents are available online. So if you're missing a W-2, mortgage interest statement, or information on interest income, try logging into your account online to see if you can download it. If that doesn't work, talk to your employer's HR department or call your bank or lender. They may be able to send you a new one, no problem.
If all else fails, you may be able to get the information you need by creating an account at IRS.gov. You can order a Wage and Income Transcript that includes information from your W-s and 1099s. You can also request a Tax Account Transcript that shows any estimated payments and withholding applied to your account.
These transcripts can be a good start toward recreating your tax documentation.
Further reading: Want Your Tax Refund Sooner? IRS Announces 2024 Tax Season Start Date and Deadline for Federal Tax Returns
Step 2: File your tax returns as soon as possible
Many people who owe taxes they can't afford to pay put off filing or avoid filing altogether. Unfortunately, this isn't a great strategy.
If you haven't filed taxes in years, the IRS can prepare a Substitute for Return (SFR) on your behalf and bill you for the tax it says is due. Before you get excited contemplating the idea of the IRS handling your tax filing for you, know that when the IRS files an SFR, it files a tax return based on all of the income they know you received. Remember, they get copies of all of your W-2s and 1099s. The problem is, the IRS doesn't know about your deductions. It doesn't know if you have dependents or deductible business expenses, so those things are just left off entirely.
It's almost a guarantee that you'll owe more with an SFR than you would if you file on your own (or get help from a pro on Taxfyle). So gather your paperwork and get started. It’s not uncommon to feel lost or overwhelmed in this situation. Even if you don’t know where to start, a Taxfyle Pro can help you get organized, collect your paperwork, and take care of everything you need to get back in good standing with the IRS. The sooner you file, the better chance you have of avoiding, or at least reducing, IRS penalties.
Step 3: Ask the IRS to waive penalties
Many people don't realize they can ask the IRS to waive their penalties – all you have to do is ask.
If you haven't filed taxes in a while, there are two main penalties you might be dealing with:
- Failure to pay penalty when you don't pay your tax bill by the deadline (usually April 15)
- Failure to file penalty when you don't file your tax return by the deadline (usually April 15 or October 15 if you requested an extension)
*These dates are subject to change if tax season is extended.
There are two common reasons the IRS might consider waiving your penalties:
- Reasonable cause: If you couldn't file on time due to extenuating circumstances, the IRS might agree to waive penalties. Examples of reasonable cause include a fire or natural disaster, illness, or an immediate family member's death.
- First-time penalty abatement: If you're normally on top of your tax filing responsibilities but just forgot to file, the IRS might do a one-time favor of removing your penalties.
To ask the IRS to waive penalties, call them at 1-800-829-1040 (or the phone number on your IRS collection notice, if you have one). Or, you can ask your Taxfyle Pro to call the IRS on your behalf.
The IRS doesn't waive interest, so you can't avoid all consequences of missing your tax deadline. But getting penalties waived can seriously lower your tax debt.
Further reading: Avoiding IRS Penalty for Underpayment of Quarterly Estimated Tax Payments and Underpayment of Estimated Tax
Step 4: Pay what you can, then set up a payment plan
Once you've filed your tax return and know exactly how much you owe, it's time to deal with those back taxes. It's a good idea to pay as much as you can when you file. That's because the IRS charges interest and penalties on late payments, and those penalties continue to accrue until you pay the balance in full.
If you can't afford to pay your tax bill in full, the IRS will typically give you more time to pay. There are a few ways to get this set up.
- Short-term payment plan: If you can afford to pay what you owe within four months (120 days), this is the easiest way to go because the IRS doesn't charge a set-up fee. Call the IRS at 1-800-829-1040 or request a payment plan online.
- Long-term payment plan: If you need more than 120 days, the IRS offers several installment agreement options. As long as you owe $50,000 or less, you can request an installment agreement via the phone number or link above. You tell the IRS how much you can afford to pay each month, and the IRS either approves or denies your request. There are set-up fees involved in long-term payment plans, but you can minimize the fee by applying online and making payments via direct debit from your checking account.
If you're dealing with a financial hardship and there's no way you can afford payments, you might be able to qualify for an Offer-in-Compromise (OIC) or Currently Not Collectible (CNC) status. An OIC settles your tax debt for less than you owe. CNC status means the IRS acknowledges you can't afford to pay your back taxes and agrees not to come after you. However, these are tough to qualify for, and you really need a professional's help to apply.
Owing money to the IRS can be stressful, but it doesn't have to be. If you work with a tax pro, like those available through Taxfyle, they can help you track down your tax documents, file back tax returns, request penalty waivers and set up an installment plan. Just sign into Taxfyle and fill out the questionnaire to get started.
