QUESTION: What happens if I owe the IRS money but after paying my living expenses/bills, I currently can’t afford to pay my tax liability?
ANSWER: Depending on your particular situation, there are several options. If you are going through a financial hardship, the IRS may be willing to suspend collection activity to allow you the opportunity to get back on your feet. This process is explained below.
Economic Hardships
You may have the funds to pay the tax you owe the IRS, but if you used those funds to pay your income taxes you may not be able to afford your necessary living expenses and other bills. If you can show that collection of the taxes would cause you or your family financial hardship, the IRS may classify your account as “currently not collectible” and not pursue collection against you. This will allow you to improve your financial condition so that paying income taxes is not an economic hardship. In order to request this status, you must file IRS Form 433-A (employees and self-employed individuals) and/or 433-B (for businesses). Note the following aspects which apply to the suspension for economic hardship:
- Collectability Reviewed Every Year. “Currently not collectible” accounts are reviewed each year. If your financial situation improves during the year, the IRS may remove the suspension and initiate collection of payments. The IRS then may also enter into a compromise agreement with you to satisfy your full tax liability.
- Penalties and Interest Continue. During the period that collection on your account with the IRS is suspended, penalties and interest continue to accrue on the amount of the tax. Even though you do not have to make payments toward the tax liability during the suspended period, it is costing you money in penalties and interest to keep collection at bay during the period.
Keep in mind, the IRS is the most powerful creditor in the United States. If you owe the IRS taxes, as a creditor they can levy on almost any asset or account that you have. You do NOT want to give the IRS reason to use this power against you, therefore you must report all assets and property to the IRS. Failure to report all assets may even expose you to liability for tax fraud, which is a CRIMINAL OFFENSE you do not want to defend against!
The most important advice I can give, is urge you to stay in contact with the IRS and keep them informed with your situation and your intent to pay your tax liability.