It’s often suggested to structure your withholding so that you do not owe anything to the IRS or get a large tax refund. However, most family’s tax situations are in constant flux, and it can be hard to determine how much to have withheld from their paycheck.
At some point, you may end up with a substantial tax bill and no money to pay it. What are your options?
Why your tax liability changes year to year
Ideally, we update our W-4 every time our financial situation changes to adjust how much tax gets withheld from our paycheck. But it’s not always possible to predict the impact of certain situations. Some factors that drive our tax liability include:
- Changes in income due to a pay raise or pay reduction, side gigs or job loss
- Tax law updates, such as an increase in the standard deduction or the loss of certain tax credits, which may happen at the end of 2025 when the Tax Cuts and Job Act of 2017 expires
- Paying off a mortgage, which means you can no longer deduct the interest
- Major life events, including marriage and divorce, buying or selling a home or having children
- Investments and capital gains
Some of these situations can place a person in a predicament where they owe thousands of dollars to the IRS. Since approximately half of Americans live paycheck to paycheck, it’s likely they don’t have the money available to pay their tax bill.
The IRS offers a way to settle for less than you owe through an Offer in Compromise (OIC). However, it does have strict criteria. The IRS will assess your ability to pay, income, expenses and equity in your assets and determine whether you meet the requirements of an OIC if any of the following apply:
- There is a doubt as to liability, which means you believe the amount you owe is incorrect or can be disputed.
- If the IRS believes it’s unlikely they will collect the full amount of tax debt due to your financial situation, there is a doubt as to collectibility.
- You may qualify if paying your full tax debt would create a financial hardship and prevent you from covering basic living expenses.
It’s unlikely you would be eligible for an OIC if the IRS determines you can pay the full amount of your tax liability through an installment agreement. Your request for an OIC may also be denied if you fail to provide a full financial disclosure. Therefore, it’s best to work with someone who can ensure you have all the required documentation and help you present your case effectively. If you don’t qualify for an OIC, they can help you with alternative solutions.