What to Know if a Client Can’t Pay Their Tax Bill

No one wants to learn that they owe more taxes than they can afford to pay, but as a tax professional, you can help your clients resolve their tax debt before it becomes an even bigger problem. You may work with clients who have filed on time and can pay their debt relatively quickly with a payment plan. In other cases, you may work with clients who have avoided filing, accrued considerable penalties and interest, and need your help to resolve the mess. 

No matter the situation, here’s what you need to know to help your clients pay off their taxes and avoid future issues with the IRS.

Paying before the deadline

If your client has filed early in the year, they may still be able to pay off their tax debt in full before the April 15 deadline, even if they can’t pay the full amount all at once.  To pay gradually, they can send payments through the IRS website directly from their bank account. If they can pay the full amount before the deadline, there’s no need for them to contact the IRS. This is the ideal solution because they won’t face additional cost in penalties and interest. 

Applying for an installment plan

When paying in full before the deadline isn’t possible, requesting a payment plan is your client’s next best option. You can help them request an installment plan by attaching Form 9465 to their tax return.This form allows your client to propose their own monthly payment amount, helping them find a solution that works for their financial situation. They can also apply for a payment plan on their own online or over the phone.  No matter how they apply, if the owed amount is less than $25,000 and will be paid in full within five years, there’s a very good chance their request for an installment agreement will be approved.

Short-term plans (those that last 120 days or less) do not require a setup fee but do incur late penalties and interest. Long-term payment plans (those that last more than 120 days) incur penalty and interest and require an additional setup fee. Let your client know that this fee is significantly reduced if they choose to set up payment through direct debit from their bank account.

Applying for an “offer in compromise”

An “offer in compromise” is an agreement that allows a taxpayer to settle their owed taxes for less than the full amount. This option should only be considered if a client is sure they cannot pay the full amount even with a payment plan. Getting approved for an offer in compromise is usually much tougher than getting approved for an installment plan. To apply, they’ll need to submit Form 656 and Form 443-A.

For more information about Form 656, read this IRS booklet.

A word on wage levies

If a taxpayer fails to make payments or set up a payment plan, the IRS may eventually seize a portion of the taxpayer’s income through a wage levy. This process is involuntary and will continue until the tax debt has been paid off or the taxpayer reaches out to arrange another payment option. 

Be sure to let your client know that this is a possibility if they do not create a plan with the IRS to pay off their tax debt. Because this method is used as a last resort, more penalties and interest will accrue before the IRS begins levying wages, so your client will end up paying even more than they had to.

A word on temporary delays

You  can also let your client know that they can request a temporary delay on collections. Clients will need to provide proof of their financial situation, and if the IRS agrees that they cannot immediately pay their tax debt, they will grant a temporary delay of the collection process. During this time, the IRS will not contact your client to collect the debt. However, this option is not preferable as it does not provide a real solution to the problem. Temporary delays do not pause the accrual of penalties and interest, nor do they reduce the amount your client owes. If your client can afford to pay even a small amount each month, requesting an installment plan is almost always the better option.

How you can help your clients

When a client can’t afford to pay their taxes, there’s usually an issue with their savings plan or withholdings throughout the year. Depending on your expertise, you can help them correct their withholdings and create a tax savings plan to avoid the same issue next year. Most tax professionals charge additional fees for these services.

Encourage your clients to file on time

One reason your clients may have trouble paying their taxes is due to the consequences of not filing their taxes on time. The failure to file penalty is 5% for each month they do not file, up to 25% of the unpaid taxes. Many times, taxpayers that have collection issues with the IRS failed to timely file their returns. However, ignoring the problem inflates their tax bill.

Assist your clients who have this issue by encouraging them to file on time even if they can’t afford to pay. The IRS offers payment plans that could work for your client. And filing your taxes without paying your tax bill is still more beneficial than not filing at all.

Encourage your clients to make estimated payments

If you have self-employed clients, encourage them to make estimated tax payments throughout the year instead of waiting to pay their all their taxes during tax season. This will help to divide their tax burden between multiple payments.

As a tax preparer, help your clients by making estimates for the coming year. TaxSlayer Pro will help you calculate these in the software, and then you can print vouchers to give to your client. These will act as a reminder for them to make estimated payments.

Encourage your clients to withhold taxes from any taxable transactions

If your clients receive distributions from retirement plans or other benefits but aren’t withholding taxes, they may be faced with a significant tax bill. Remind your clients that these distributions are still taxable, and they need to withhold taxes upfront to prevent a large tax bill during tax season.

How you could be affected

Clients may seek your services if they need additional representation before the IRS to resolve their tax debt. How much you are able to help depends on your credentials and representation rights before the IRS. (Attorney, EAs, and CPAs have unlimited representation rights before the IRS, and Annual Filing Season Program participants can represent clients whose returns they have prepared.)

If your client planned to pay your tax preparation fee through their tax refund, they’ll need to choose an alternate method of payment before you conclude your meeting. If your client has additional questions about filing, paying, or dealing with the IRS, you can brush up on exactly what happens after you file their taxes in this article.

This article is up to date for tax year 2021 (returns filed in 2022).