Using IRS Form 1127 to Get an Extension to Pay Your Taxes 

Perhaps you just finished preparing your annual income tax return. Or maybe the IRS sent you a notice or letter explaining there’s a tax deficiency you have to pay. Either way, you owe the IRS an amount of money that you can’t pay right now, as doing so would create a financial hardship for you. However, if you had more time, paying your taxes wouldn’t be such a burden.

There’s a special form for this situation: IRS Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Read on to learn more about this form, including who can use it, when you can use it, how to complete it, its limitations, and alternatives to using IRS Form 1127. 

IRS Form 1127 Overview 

You’ll typically use Form 1127 to ask the IRS for an extension of time to pay a tax bill. More specifically, you’ll ask for this extension if there’s a tax amount you have to pay that arises from a tax return you just prepared or the IRS has examined a prior return and concluded there’s a tax deficiency. 

Who Can Use Form 1127? 

Most taxpayers can use IRS Form 1127 to ask for extra time to pay. However, the IRS will only grant the request if the taxpayer can show that paying the required tax amount by the original deadline will create an “undue hardship” for the taxpayer.

So what does “undue hardship” mean? It’s hard to provide an exact definition, as every taxpayer’s situation will be different. That being said, it refers to something that goes beyond an annoyance or inconvenience. Instead, it must be something that creates a substantial financial loss or detriment for the taxpayer if they have to pay their taxes by the given deadline.

For instance, you might have undue hardship if the only way you could pay your taxes was to sell some of your property at a significant loss. In other words, there are no lenders, family members, friends, or other sources that would give or let you borrow money to pay the IRS on time. Or perhaps, the only way you can afford to pay your taxes is to skip paying your mortgage or rent, which also constitutes financial hardship.

One thing to keep in mind about undue hardship is that you don’t necessarily have to show that you’re currently facing financial hardship the exact moment you’re completing the 1127 form. Instead, you could show that if you did pay the required taxes by the deadline, it would then create undue hardship for you.

In addition to showing the financial hardship or loss, you also need to explain to the IRS that you took reasonable steps to plan for your tax bill. For example, let’s say it’s late March and you completed your income tax return for the most recent tax year. You owe the IRS $8,000, but you were expecting to owe this money and have been saving up for the tax payment you plan on making by April 15.

Unfortunately, you’ve just been diagnosed with a medical illness and have to immediately start medical treatments. These treatments are covered by your insurance, but your insurance company won’t pay anything until you hit your deductible of $8,200. Therefore, all of the money you were planning on sending to the IRS will instead go to your medical bills.

Finally, if you’re asking for an extension to pay a tax deficiency, the IRS will refuse to grant it if the deficiency is the result of you purposely trying to evade the tax or you intentionally (or negligently) disregarded tax rules and regulations. 

When to Use IRS Form 1127 

The deadline for submitting the 1127 form depends on the taxes you have to pay. If these are taxes shown on your income tax return, then you need to submit Form 1127 by the return’s filing deadline. If the taxes you have to pay come from a tax assessment, then the deadline for filing Form 1127 is the same as the deadline to pay the tax deficiency.

How to Use Form 1127

The two most important parts of Form 1127 are the undue hardship explanation and providing supporting documentation. With regards to providing supporting documentation, at a minimum, you’ll need to provide a statement showing your assets and liabilities at the end of last month. You’ll also need to list out your sources of income and expenses for the three months leading up to the tax payment deadline.

When you’re ready to file Form 1127, you’ll mail it to the advisory group for the area where you’re a legal resident or have a principal place of business. You can find the correct address in IRS Publication 4235, Collection Advisory Group Office Contact Information.

The one exception is if the tax you owe is a gift tax that’s reportable on Form 709. In that case, you’ll mail Form 1127 to this address:

Department of the Treasury
Internal Revenue Service
Stop 824G 7940 Kentucky Drive
Florence, KY 41042-2915 

Length of the Payment Extension

You can tell the IRS how much time you need, but the amount of time the IRS grants depends on where the tax you have to pay originated. If the tax amount arose from a tax return, then your extension is usually limited to a maximum of six months. If you’re out of the country, it’s possible to get a longer extension.

If the tax relates to a deficiency following a tax assessment, then any extension is limited to no more than 18 months, unless there are exceptional reasons for a longer extension. In these rare situations, an extra 12-month extension is possible. 

What to Do After Filing Form 1127

Because of the subjective nature of how the IRS decides payment extensions, a real person from the IRS will likely need to review your 1127 submission and make a decision. As a result, don’t expect an immediate decision from the IRS.

While you wait for the IRS to grant your extension, it’s a good idea to start finding ways to pay your tax balance. Even if you get the extension, you’ll need to come up with the money and could have less than six months to do so. You can even make a partial payment towards the tax bill, which can help reduce the interest you’ll have to pay.

If the IRS grants your extension request, do everything you can to pay off your taxes as soon as possible. If you fail to pay the entire amount before the extension period ends, the IRS may impose penalties that they originally waived by granting the extension.

Limitations of the IRS Payment Extension 

The biggest limitation of a payment extension is that even if you receive it, interest continues to accrue. Then what’s the point of the extension? Getting it can help you avoid a failure-to-pay penalty.

Another thing to remember is that Form 1127 only provides an extension relating to the payment of taxes. It doesn’t provide an extension to file taxes. For that situation, you’ll file IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. If you’re out of the country, file IRS Form 2350, Application for Extension of Time to File U.S. Income Tax Return.

Alternatives to Form 1127 

If the IRS rejects your extension request or you believe it won’t make a difference to your situation, there are other options available to help you settle your tax debt with the IRS.

One possibility is an installment agreement (sometimes referred to as a payment plan). In essence, these offer more time to pay off your taxes. There are several types, where you could have anywhere from a few months to a few years to pay off your tax balance.

Another option is the offer in compromise or OIC. This allows you to settle your tax debt for less than what you owe. As good as this sounds, the IRS is particular about which OIC requests it accepts.

Finally, there’s currently not collectible (CNC) status. This is where the IRS agrees to temporarily pause its tax collection activities until a later time because it realizes you can’t afford to pay your taxes and forcing you to pay would mean you’re unable to pay for basic living expenses. 

The W Tax Group Can Help You

If you need more time to pay your taxes, IRS Form 1127 is something to consider. But if you’re having trouble showing undue hardship or need even more time to pay off your tax debt, contact the tax pros from the W Tax Group. We offer free consultations and will help you obtain more time to pay your taxes while minimizing how much you have to pay.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg