Owing more tax than you can pay at once is stressful, but it is common and the IRS has established options. The worst response is to ignore the bill, since penalties and interest keep growing and the IRS can take collection action. The best response is to file on time, pay what you can and set up an arrangement. This guide explains the available options, what they cost and how to apply.
First, File Your Return
Even if you cannot pay, file your tax return or request an extension by the deadline. The penalty for not filing is far larger than the penalty for not paying. An extension to file does not extend the time to pay, so estimate what you owe and pay as much as you can. Filing also starts the clock on collection timelines and keeps you eligible for payment arrangements.
How Penalties and Interest Work
If you do not pay on time, the IRS charges:
- Failure-to-pay penalty, generally 0.5 percent of the unpaid tax per month, up to 25 percent. It is lower while you are in an approved installment agreement.
- Failure-to-file penalty, typically 5 percent per month of unpaid tax, up to 25 percent, which is why filing matters.
- Interest, which accrues on unpaid tax and penalties. The rate is set quarterly and is based on the federal short-term rate plus 3 percentage points.
Paying sooner reduces these charges. Details and current rates are at irs.gov.
Option 1: Pay in Full With a Short-Term Extension
If you can pay within 180 days, you may request additional time to pay. There is generally no setup fee, but penalties and interest still accrue until the balance is paid. This works for people expecting a bonus, refund or other lump sum soon.
Option 2: Installment Agreement (Long-Term Payment Plan)
If you need more time, you can set up a monthly payment plan. Individuals who owe up to a certain amount, currently $50,000 in combined tax, penalties and interest for many filers, may qualify for a streamlined online process. Larger balances can require more financial information.
Key Features
- Monthly payments over up to 72 months for many plans, and the agreement must typically pay the balance before the collection statute expires.
- Setup fees, which are lower when you apply online and choose direct debit.
- Continuing interest and penalties, though at a reduced penalty rate.
- Requirements to file all returns and make estimated payments on time while the plan is active.
How to Apply
- Gather information. You will need your Social Security number, filing status, address and bank details.
- Use the IRS Online Payment Agreement tool on the IRS website, or file Form 9465 by mail, or call the number on your notice.
- Choose a monthly amount you can pay reliably.
- Select direct debit if possible. It lowers fees and reduces the risk of missed payments.
- Confirm the agreement and keep the confirmation.
Option 3: Offer in Compromise
An offer in compromise lets certain taxpayers settle their tax debt for less than the full amount. The IRS considers your ability to pay, income, expenses and asset equity. Approval is not easy, and there are application fees and payment rules. The IRS offers a Pre-Qualifier tool to check your eligibility. Be careful with companies that promise to settle your debt for pennies on the dollar. Many charge high fees for services you can do yourself.
Option 4: Currently Not Collectible Status
If paying would prevent you from meeting basic living expenses, the IRS may temporarily delay collection by placing your account in currently-not-collectible status. Interest and penalties still accrue, and the IRS may review your situation periodically.
Option 5: Other Ways to Cover the Bill
- Use savings. Interest and penalties can exceed what savings earn. See how to choose a high-yield savings account to understand opportunity cost.
- Use a low-rate loan. Compare an installment agreement with a personal loan. A credit card is usually worse, because card interest is typically higher than IRS interest, though paying the IRS by card has fees.
- Adjust withholding to prevent a repeat next year.
What Happens If You Ignore the Bill
The IRS sends a series of notices. If you do not respond, it can file a Notice of Federal Tax Lien, levy your bank accounts, garnish wages and withhold future refunds. Responding early gives you more options. If you receive a Notice of Intent to Levy, act right away, since you may have the right to a Collection Due Process hearing.
Tips to Avoid This Problem Next Year
- Adjust your W-4 withholding with the IRS estimator.
- Make estimated payments if you have side or self-employment income. See tax deductions for the self-employed.
- Set aside tax money each pay period in a separate account.
- Use deductions and credits you qualify for. Our guide on reducing your taxable income has ideas.
- Keep an emergency fund so that a tax surprise does not become debt. See how to build an emergency fund.
Common Mistakes
- Not filing on time.
- Ignoring IRS letters.
- Choosing a payment amount that is too high and missing payments.
- Hiring a tax relief firm without checking its credentials and fees.
- Forgetting current-year taxes while paying old ones, which can default the plan.
Preparing for the Call or Application
Before contacting the IRS, gather your latest tax return, notices, recent bank statements, income records and a list of monthly expenses. If you apply online, you will verify your identity with information from a prior return and a mobile phone or financial account. Having these ready makes the process faster and helps you choose a monthly payment you can truly afford. If you call, expect long wait times and note the date, time and name of the representative.
Staying in Good Standing
An installment agreement can default if you miss a payment, fail to file future returns or accrue a new balance without paying it. If you foresee trouble making a payment, contact the IRS before the due date to discuss options. Keeping the plan current protects you from levies and liens and eventually clears the debt.
Frequently Asked Questions
Can I get the penalties removed?
You may qualify for penalty relief for reasonable cause or first-time abatement if you have a clean compliance history. Ask the IRS.
Does a payment plan hurt my credit?
The IRS does not report installment agreements to credit bureaus, but a filed tax lien can affect credit in some situations.
Can I change my payment amount?
Yes. You can usually revise your agreement online or by contacting the IRS.
Do states offer payment plans?
Most states do, and they have their own rules and fees.
Bottom Line
If you cannot pay your tax bill, file on time, pay what you can and set up an IRS payment plan. Acting early limits penalties and keeps you in control of the process.
Related guides
- The Child Tax Credit Explained: Who Qualifies and How Much
- How to Reduce Your Taxable Income Legally: 9 Strategies
- When to Claim Social Security: 62, Full Retirement Age or 70?
- General Liability Insurance Explained for Small Businesses
This article is for general education only and is not financial, tax, legal or insurance advice. Rates, limits and rules change, so confirm current details with the provider or a licensed professional before you decide.