6 Options for Income Tax Debt You Can't Pay

When you owe income tax but can't afford to pay it, use one of these 6 options to get relief as quickly as possible.

Laura Adams, MBA
2-minute read

The Tax Cuts and Jobs Act of 2017 made sweeping changes, including reductions to tax rates for most individual tax brackets and limits on many tax breaks. Problem is, employers may not calculate federal withholding changes properly or have updated W-4 forms from workers. This can leave many taxpayers owing more than they expected.

Sometimes, the amount owed is relatively small and painless to pay. But when you have a large tax debt, it can seem impossible to pay without a special arrangement in place.

Use one of the following six options to deal with an income tax debt that you can't pay:

Option #1: Offer in Compromise

With an offer in compromise (OIC) your tax debt is reduced based on your income, necessary expenses, assets, and equity in assets. To qualify, you can't have any delinquent taxes, estimated tax payments, or be in bankruptcy.    

Option #2: Partial Payment Plan

If the IRS won’t budge on the tax amount you owe, they may give you an installment agreement, which allows you to make partial payments on a set schedule. This arrangement lets you gradually eliminate your tax debt. 

Option #3: File an Amended Tax Return 

If your tax debt results from an overstatement of your financial liability on a tax return from the past three years, you can correct it by filing an amended return.

Also, filing tax returns for years that you didn't file could reduce your tax liability. You might discover that you owe zero or should receive a refund.

Option #4: Non-Collectible Status

If you have a financial hardship and your expenses exceed your income, you may qualify for non-collectible status. This doesn’t reduce the amount you owe but gives you more time to pay.  So, it's a good option when you know that you'll have the ability to pay your debt in foreseeable future. 

Option #5: Penalty Abatement

Penalty abatement can revoke your tax debt when the IRS makes mistakes (such as errors on your return or providing incorrect advice in print) that caused your tax liability.  

Option #6: Filing Bankruptcy

Filing bankruptcy should be a last resort due to the damage it causes to your credit. However, when you have a large tax debt or other debts that bankruptcy would dissolve, it may make sense.

The best approach for dealing with a tax debt depends on your financial situation. Always get professional financial advice before moving ahead. Many tax attorneys offer a free consultation to understand if they can help you with one of the tax debt strategies above. Instead of owing the IRS, you could receive a tax refund—or at least be in a far better financial position on Tax Day next year.   

Man with tax debt image courtesy of Shutterstock.

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.