Resolving IRS Tax Debt: Why You Should File Your Federal Tax Return Even If You Can’t Pay

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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Many Americans owe taxes to the Internal Revenue Service (IRS), but simply don’t have the money to pay them. While it’s tempting to avoid filing your tax returns to delay the IRS knowing that you have a balance due, that is actually the more costly and problematic method of dealing with the problem.  Even filing for an extension is not a solution when you do not have the money to pay your tax debt.  Filing for an extension is an extension to file; it is not an extension to pay.  Filing your returns on time ensures that you avoid the failure to file penalty, and helps you get your tax debt resolved in a smoother and timelier fashion, also reducing your interest and late payment penalties.

The IRS is far easier to work with than your average bill collector.  They are very cooperative with taxpayers who file their returns on time and who are up front and cooperative with getting their tax debt resolved.  As long as your tax debt is under $25,000 they will set up an affordable installment plan that will allow you to get your debt paid off within a reasonable amount of time.  They also give taxpayers many chances to get an installment plan set up.

One important thing to note is that if you ignore letters and notices from the IRS regarding paying your tax, they will eventually garnish your wages, levy your bank accounts, puts liens on your assets, and put negative information on your credit report.  IRS wage garnishment is a serious issue because they are allowed to garnish most of your wages.  The amount of wages that are exempt from garnishment is the amount of the personal exemption (currently $3650 per person in your household) divided by the number of pay periods you have per year.

Example:  You are a single person making $800 a week.  Therefore your total exemptions are $3650 per year.  You are paid weekly, so $3650 divided by 52 is $70.19 per week.  So, the after-tax amount of your pay that you get to keep is only $70.19.  Even if you get to that point with the IRS, they will still work with you and set up an installment plan, so that you can have a payment that is affordable. 

You should realize, however, that there are rules regarding the installment plans.  You must honor the monthly due dates, or you risk having your plan cancelled.  You also have to make certain that for future years, you have sufficient withholding or estimated payments, to ensure that you will not have a balance due in the future.  The IRS will be somewhat lenient if you have a balance due that you cannot pay promptly two years in a row, but will be less than cooperative if it goes on for a third year.

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