What If You Owe the IRS More Than You Can Pay?

It's dangerous to become delinquent on a debt to the IRS, because the IRS has the power to place a lien on all of your property including your wages, bank accounts and even your accounts receivable. Some taxpayers have had their property auctioned by the IRS. Nevertheless, when dealing with a delinquent tax debt, you have a number of options.

Reasonable Cause Waiver

• If you are able to pay your underlying debt but can't pay the interest and penalties, you can petition the IRS to waive them. You will need a compelling reason and documentary evidence to back it up. Lack of money to pay, no matter what the reason, is not considered a valid reason. If you contracted a serious illness right around your tax return was due, if a close relative died on April 14 or if a hurricane demolished your home, the IRS may accept your petition.

Installment Payments

• If your total tax debt, including interest and penalties, totals no more than $25,000, the IRS is likely to allow you to pay your debt by installments as long as you can prove that you have the ability to make payments. This will not prevent interest and penalties from continuing to accumulate during the payment period, but will prevent IRS collection action as long as you remain current on your payments.

Status 53

• Status 53, sometimes referred to as uncollectible status, is an IRS moratorium on collection action for a certain period, typically a year or two, even if you don't pay installments. In order to be eligible, you have to have paid all of your current federal tax obligations but require time to pay back taxes. The IRS is more likely to grant Status 53 if collection action would result in the confiscation of business assets that you need in order to make money to pay the debt.

Offers in Compromise

• An offer in compromise is an offer to settle your tax debt with the IRS by paying less than they say you owe them. The IRS will accept an offer in compromise if it believes that its tax assessment is the result of an error made by an IRS employee, that your financial situation is so desperate that you will never be able to pay your debt or if it would cause you extreme economic hardship to pay the debt.

Collection Hearings

• Once the IRS has notified you of its intent to place a lien on your property, you can demand a collection due process hearing in which you can dispute the debt by filing IRS Form 12153 within 30 days of receiving the notice. If you lose the hearing, you can take the IRS to court if you have grounds to dispute the validity of the underlying tax debt. If you fail to request a hearing within 30 days, you may request an appeals hearing with the IRS but lose your right to take the IRS to court.