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Unpaid Taxes? Taxpayers Have Options

Unpaid Taxes? Taxpayers Have Options
by Kristi Shibata

Financial complications and lifestyle changes can all add up to tax debt problems. If you miss the filing deadline or have racked up some unexpected tax debt, the best thing you can do is to pay without delay--interest and penalties do add up quickly. And if you can't pay in full, contact the IRS as soon as possible to work out a plan.

File On Time Even if You Can't Pay
Keep in mind that the charges for non-payment are much lower than the penalties for not filing, which is 5% of your tax liability per month up to a maximum of 25%. Even if you can't pay the amount owed, get the return filed on time or file for an automatic extension before the due date. Then try one of the following options for paying what you owe.

You Have Options for Paying Your Tax Debt
Luckily, the government has created provisions for collecting unpaid taxes that don't involve first-born children or debtor's prison. The IRS allows personal or business tax debt to be paid over time.

Such tax repayment programs include:
  • Extension of Time to Pay
    If you can manage to remit the unpaid taxes within 30 to 120 days, the easiest solution is to request an extension of time to pay. Just go to the IRS Web site and select the Online Payment Agreement (OPA) application and choose "short term extension." You will have to pay interest and penalties on your tax debt, but it's less than the cost of paying in installments--and a lot less than the price of ignoring the problem.

  • Pay with a Credit Card
    You can also use your credit cards to get rid of tax debt--for this privilege, the IRS charges a "convenience fee," the credit card companies charge a fee on their end also, and you will of course pay credit card interest. If you can get a low fixed credit card interest rate this might be a fairly cheap way to resolve an unpaid tax issue.

  • Tap Your Home Equity
    Your home may provide you with the cheapest way to pay off the IRS. A home equity loan is fairly inexpensive to get, and the interest rate is likely to be much less than the IRS or your credit card companies will charge. In addition, the IRS will require that you try this route before accepting an Offer in Compromise from you or allowing you a hardship extension.

  • IRA Installment Payment Plan
    If your tax debt is $25,000 or less, the IRS might approve an installment payment plan. Apply online by selecting the Online Payment Agreement and choosing "Monthly Payment Plan," or file IRS Form 9465. The IRS will charge a setup fee of $52 to $105, interest (the Federal Short Term rate plus 3%, which equals 5.23% as of March 2008), plus penalties (1/2 % of the unpaid balance for every month or part of a month it remains unpaid).

    If you fail to make payments on time or miss payments your plan may be terminated and could cause collection efforts to begin. It is best to set up your plan so the amount you have agreed upon is automatically deducted from your checking account.

  • Offer in Compromise (OIC)
    If you can't get an installment plan approved and your financial situation makes it impossible to pay the full amount due, see if you are eligible to file an Offer in Compromise. Just use the checklist in the IRS Form 656 to see if you qualify. If the IRS agrees that you can't pay it all (after reviewing your income and assets and determining that you have no other payment options) you may be allowed to settle your tax debt for less than the full amount. The purpose of the OIC program is to find a compromise when it is in the best interests of the government and taxpayer to do so.

  • Application for Extension Due to Hardship
    If you can't pay your tax debt with an installation agreement and don't have sufficient income or assets to pay the amount due, you can file IRS Form 1127 and apply for a 6 month extension of time to settle your unpaid tax obligation. It isn't easy to get this extension; you must show that you will have substantial financial loss if you pay your tax debt on the due date. You must show that you don't have enough cash (and by "cash" the IRS means any asset that you can convert to cash as well) to pay the tax. You will have to list your assets at current market value and also prove your inability to borrow the money. A hardship delay is not just tough to get; you still owe interest on the unpaid tax liability until the debt is repaid.


There are many situations that could lead to missing tax deadlines or being unable to pay the taxes on time. While it is best to file on time and pay your balance in full, there are times when you need a little help. Know your options so you can get back on track and out of tax debt.

IRS - Offer in Compromise
IRS - Payment Plans, Installment Agreements
IRS Form 1127
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