What happens when you can't pay what you owe the IRS

irs bill

Finding out that you owe the IRS serious money is enough to ruin your year.

But what if you can't come up with the money, at least not all at once?

The good news: There are options other than pawning everything you own or having the IRS go after your wages and bank account.

Your first step should be to file all your returns of the past few years if you haven't done so already. Otherwise steep failure-to-file penalties will accrue quickly, compounding your financial woes.

Second, you must weigh lots of variables to figure out the best payment plan for you -- and then hope the IRS agrees. Those variables include how much you owe, your capacity to pay, the time required under different plans to do so and how much financial information you must reveal to seal the deal.

Whatever deal you strike, follow the terms down to the letter. Because if you miss a payment you're considered in default and then "the gloves come off," said former IRS collections officer David Levine, now an enrolled agent in Reno, Nevada.

Related: When the IRS can keep your refund

Getting help: If you owe less than $10,000, you may be able to resolve the situation on your own, without paying high fees to a lawyer or accountant, according to former IRS attorneys Deborah and Garrett Gregory, who wrote the "Guide to IRS Collections for Liabilities under $10,000."

But if the IRS maze confuses you, find a qualified pro to help.

In any case, if you've always done your own taxes, you might want a tax professional to look them over to make sure you really owe as much as the IRS says before working out a payment plan, Levine suggested.

If you owe more than $10,000, it's advisable to have a tax attorney, enrolled agent or CPA with experience setting up payment plans represent you.

"The more that is owed to the IRS, the more complicated it becomes to negotiate with the government," the Gregorys noted.

Payment options include:

Personal loan: If available to you and you're sure it won't ruin your relationship, a personal loan from a family member or friend will let you pay what you owe in full, save you money in penalties and get the IRS off your back right away.

Related: Don't want to file your taxes? Get ready to pay ... a lot

Assuming you can pay the loan back, Levine recommends this option.

But make sure you formalize the loan by writing down the repayment terms, including interest, and having it notarized, he said.

For many people, of course, a personal loan is not an option. So consider the following:

Short-term extension: If you think you can pay off your debt within 120 days, the IRS may let you do so, and that will curb how much you'll owe in interest and penalties. Plus there's no fee to set up this payment plan as there are with most other options.

Related: You've never seen IRS penalties like these

Installment agreement: If it will take you time to pay your debt, an installment agreement may be your best bet. You can apply online or on paper.

To be considered for one, you generally must owe less than $50,000, be current on your tax return filings and can pay what you owe within 72 months or within the remaining portion of the 10-year collection statute, whichever is less, Garrett Gregory noted.

You may be able to get an installment agreement if you owe more than $50,000 too, but the bar for acceptance is much higher. In addition to everything those who owe less than $50,000 must do to apply, you also must produce a financial statement and all documents supporting income and expenses, he said.

Undue hardship extension: If you can document that paying your tax debt immediately would cause you undue hardship -- e.g., forcing a fire sale of your home -- the IRS may grant you up to 18 months to pay.

To apply for the extension you must include a statement of assets and liabilities, as well as itemize the income and expenses you had three months prior to the tax due date.

Offer in Compromise (OIC): If you can make the case with supporting documents that you will never be able to pay your tax debt in full, the IRS may agree to accept a lesser amount.

Keep in mind, though, the IRS only accepts a minority of OICs and undue hardship extensions, said Mike Slack, a tax researcher at H&R Block's Tax Institute.

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