What To Do If You Owe Back Taxes to the IRS [2024]

Owing taxes can be stressful, especially if you cannot pay on time or owe taxes from prior years. While tax fraud and evasion penalties are high, receiving prison time for tax crimes is less common than people think. The most common repercussion for taxpayers who owe back taxes is an additional interest rate and penalty on top of the original amount due. If you owe back taxes to the IRS, don’t panic. This article will discuss the options available for paying your tax debts to the IRS and how to gain financial stability.

File an extension

If you know ahead of time that you are unable to pay your tax bill, take a minute to file a short-term extension. The IRS will provide up to 120 days for taxpayers to pay their outstanding balance. Filing an extension is free, and the request takes only a few minutes. Most taxpayers will hear back about their approval status within a day or two. Failing to file your return or an extension on time avoids the failure to file penalty, ranging from 5% to 25% of the unpaid tax, depending on the circumstances of your delayed tax filing. 

With installment agreements, there is a penalty of 0.5% per month on the unpaid balance. Setting up a payment agreement is one of the most convenient options for taxpayers who need a short time to pay their tax bills. The IRS will charge interest at the short-term federal rate plus 3%. It’s important to note that the interest rate may change each quarter. With this type of short-term loan, there’s no installment payment application fee, but there are interest and late-payment penalties. 

Establish payment installments

The IRS allows taxpayers to set up payment plans, called installment agreements. The specifics of your arrangement depend on your unique situation, including the total amount owed and your timeline for repayment. If it takes longer than 120 days to pay off the balance, you should not set up an installment agreement. 

There is a fee to set up an online payment agreement. The application fee is $149, or $31 if payments are set up electronically. The fee is reduced to $ 43 for low-income taxpayers. To apply for a low-income application fee, submit Form 13844. 

Taxpayers with less than $50K due should file Form 433-A. If you owe more than $50K, you will submit Form 433-F. 

Offer in compromise

The IRS offers another option for taxpayers to pay their back taxes through Offer in Compromise, which allows you to settle your tax debt for less than the total amount due. This is a great option for folks who cannot pay their full tax liability or that doing so creates a financial hardship. Follow these step-by-step instructions on Form 656-B to start your application. 

The other option is to file an extension based on hardship. There is no cost to apply for a hardship extension. You can file for a hardship extension through Form 1127 if you can prove that paying the tax debt would cause significant financial hardship, based on IRS financial standards. No penalties exist, but interest is calculated at the short-term federal rate plus 3%.

Borrow from 401(k)

A loan from your 401(k) plan can be an immediate and inexpensive source ofto cash to pay your back taxes. The loan is considered a taxable distribution if you don’t make consistent payments, leave your company without repaying the loan, or the plan terminates. Some plans charge an early distribution penalty of 10%.  Check with your plan administrator to see if you qualify for a loan from your 401(k). Most plans limit the amount you can take out to 50%, with a $50K maximum, and you must repay within five years. Depending on your plan, there may be a minimal fee or interest. 

Personal Loan 

If it is reasonable, you could ask a trusted family member or friend to loan you the money. While this can be an inexpensive option, fees, and costs will vary widely depending on who you borrow from, so use your best judgment. 

Credit or Debit Card 

If you owe a significant tax debt, one of your last options is to pay with a credit or debit card. Fees and interest rates will depend on your service provider, but it can be a convenient and fast way to pay off your debt. You may even earn rewards, like miles, points, or cash back, if you pay with a valid credit card. However, high credit card balances can negatively impact your credit, and paying with a credit card is not always a manageable option. 

How To Find a Tax Attorney

At Expertise.com, we vet our attorneys so you can rest easy knowing you are hiring the best legal counsel. To start your search for a legal representative in your area, you can use Expertise.com’s legal directory of qualified tax attorneys. Another option is to ask other legal professionals that you trust for recommendations for a tax attorney. You can ask an attorney you’ve worked with on prior matters for a referral. If this is not an option, check your local bar association for specialists in your area.