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What is IRS Form 1127?
You can use Form 1127 to request an extension of time to pay the tax due with your return or additional tax due after an audit. If you file Form 1127 and the IRS grants your request, you can get up to six extra months to pay your tax bill without incurring late payment penalties.
You can use Form 1127 to request more time to pay income taxes, self-employment taxes, gift taxes, and other less common types of taxes.
Typically, the IRS won’t give you more than six additional months to pay your tax bill unless you are out of the country. They may allow you up to 18 extra months if you owe additional tax because of an audit.
How does the IRS determine “undue hardship”?
To qualify for an extension of time to pay your tax bill, you must prove “undue hardship.” This means paying your taxes would be more than an inconvenience. You must show that you would sustain a substantial financial loss if you were forced to pay taxes by the deadline.
Some examples of undue hardship include:
- You would have to sell property for substantially less than its fair market value to come up with the funds
- You had the money to pay your tax bill, but due to a serious illness or injury, job loss, or other unforeseen circumstances, you had to use the money to cover living expenses, out-of-pocket health care expenses, necessary transportation, or housing costs
You don’t necessarily have to prove that you’re facing a financial hardship right now, but that paying the taxes you owe would cause an undue hardship.
Not having the money available won’t necessarily qualify you for an undue hardship extension. You also need to show that you made a reasonable effort to plan for your tax liability.
The IRS will consider all of your facts and circumstances and review the documentation you provide to decide whether to grant your request.
How to fill out Form 1127
As far as tax forms go, Form 1127 is a relatively simple one—there’s just one page to complete and two pages of instructions.
Let’s go through the form step by step.
Step 1: Determine whether you’re eligible for an extension
The instructions included with Form 1127 include a Determination Chart to help you decide whether it’s the right form for your needs.
Don’t use Form 1127 to:
- Request an extension of time to file your return. Instead, use Form 4868 for personal income tax returns or Form 7004 for business tax returns.
- Request an IRS installment plan. Use Form 9465 or request a tax payment plan online at IRS.gov/payments.
Step 2: Fill out your personal information
In the first section of Form 1127, fill in the name shown on your income tax return, your tax identification number (typically a Social Security number or employer identification number), and address.
Step 3: Fill out Part I - Request for Extension
In the next section of Form 1127, enter the date your taxes are due, the extended deadline you’re requesting, and the amount.
You’ll also need to check a box to indicate whether the tax is due with a return or as the result of an IRS audit, the appropriate tax form, and the calendar year or fiscal year to which the tax applies.
Step 4: Fill out Part II - Reason for Extension
In Part II, provide a detailed reason for requesting an extension. Be sure to go into details here—a general statement that paying your taxes would cause undue hardship just won’t cut it.
If you need more space than the five lines printed on the form, you can attach a separate sheet.
Step 5: Fill out Part III and attach supporting documentation
You must include two attachments with Form 1127 for the IRS to consider your extension request. Those are:
- A statement of assets and liabilities. This statement should show the book and market values of all assets as of the prior month-end.
- An itemized list of income and expenses. This statement should provide a detailed list of all income sources and expenses for the three months prior to the due date of the tax.
Don’t forget to check both boxes in Part III to confirm those documents are attached. Otherwise, the IRS won’t accept the form.
You may also need to attach other statements, receipts, and other support documenting your undue hardship. For example, if you had the money to pay your taxes but had to use it to cover an unexpected medical emergency, you should attach copies of your medical bills.
Step 6: Sign and mail the form
Finally, sign and date Form 1127. If you’re married, your spouse will need to sign and date as well. If your accountant, tax preparer, or another authorized representative completes Form 1127 on your behalf, they need to sign, too.
Mail your signed Form 1127 and all schedules and supporting documents to the Internal Revenue Service, Attn: Advisory Group Manager. You can find the address of the advisory office for your state on page 2 of IRS Publication 4235.
If you’re filing Form 1127 to get more time to pay the balance due on a return, make sure Form 1127 is postmarked on or before the tax return due date, not including any filing extensions. If you’re filing the form due to an IRS audit, you need to submit Form 1120 before the due date on your IRS bill.
What happens next?
The IRS may take a while to process your request since every payment extension request needs to be manually reviewed by an IRS representative.
While you wait to see whether your request is approved, start working on collecting or saving up the money by the deadline. You might even want to make a partial payment of the tax due. If the IRS grants your request, you’ll avoid penalties, but interest still accrues. So making partial payments during the waiting period can minimize interest payments and reduce your penalties if they deny your request.
Be sure to make plans to pay by the extended deadline. Otherwise, the IRS may apply late payment penalties retroactively. They can also start collection action by levying your wages or bank accounts or placing a federal tax lien on your property.
If the IRS rejects your request, you’re not entirely out of options for minimizing your tax debts, penalties, and interest. You can:
- Request an installment agreement. While you’re on a payment plan, the IRS charges late payment penalties and interest. However, they reduce your late payment penalty to 0.25 of the outstanding balance (down from 0.5% without a payment plan).
- Request an offer in compromise (OIC). With an OIC, you offer the IRS a lower amount than you owe. The agency may accept your offer if they believe that collecting the entire amount due is unlikely because you’re struggling financially.
- Apply for Currently Not Collectible (CNC) status. If making any payment toward your tax deficiency would cause serious financial hardship, the IRS may agree to place your account in CNC status. This means the IRS postpones charging penalties or trying to collect the tax while you try to stabilize your finances. The IRS reviews the financial situation of CNC filers annually to determine whether they can afford to make payments.
Applying for an IRS installment agreement is an isolating, challenging process, so it’s best to get expert help if at all possible. This way, you can ensure you’re setting up the option that is both the most realistic, and the best, choice for your situation. An expert tax resolution team will also help you navigate the payment system and handle any changes you need to make or issues that emerge.
This is the case as well for the OIC and CNC processes, which are highly complicated. If you find yourself in a situation where either of these processes may be appropriate, it’s important to work with a professional, like Bench’s catch up bookkeeping team and our tax resolution partners.
The bottom line
Facing a tax bill you can’t afford to pay is never fun, but millions of people deal with the situation every day. The IRS is used to working with taxpayers who make mistakes, fall behind on their taxes, or face financial troubles.
The most important step in getting caught up on your tax obligations is usually the first one: recognizing you have a tax bill you can’t pay and taking action to head off additional interest and penalties.
If you need help getting your books in order or estimating your tax liability so you can start setting money aside and avoid falling behind, book a free, no-commitment consultation.
