What if You Can't Pay the Taxes You Owe?

Don't panic—you have many options

Worried couple discussing how they are going to pay their owed taxes.
Photo:

Pamela Moore / Getty Images

Since most Americans get a tax refund, it can be a big shock to find out you actually owe taxes when you file your return. If you haven't anticipated owing a balance, you might not have anything saved up to pay those taxes.

Don't worry, though. The IRS is willing to work with you, and offers many options. The IRS may offer you a payment plan, reduce your tax liability, or allow you additional time to pay your taxes.

But don't wait to take action, because the consequences of not paying can be expensive and damaging.

Key Takeaways

  • File your tax return as early as you can to give yourself more time to pay.
  • If you owe the IRS money that you can’t pay, reach out right away to come up with a solution.
  • The IRS offers many types of payment installment plans.
  • In some cases, the IRS may even settle for less than you owe in taxes.

IRS Penalties for Failure To Pay Taxes

The IRS doesn't mess around when it comes to making sure your taxes are paid up, one way or another. First, the IRS will charge you interest on any unpaid tax balance.

The interest rate for any unpaid taxes for the calendar quarter beginning October 1, 2022, was 6% per year, compounded daily.

On top of that interest charge, the IRS can impose two different penalties:

  • A late-filing penalty, if you don't file your taxes by the deadline
  • A late-payment penalty, if you don't pay your taxes on time

The penalty for filing late starts out at 5% of your unpaid tax balance per month, up to a maximum of 25% of your unpaid tax bill. If you wait more than 60 days after the due date to file, you'll face a minimum penalty of either $435 or 100% of the tax required, whichever amount is smaller.

Note

If you can, file your taxes as early as possible. Even if you file in January, you have until at least April 15 to pay taxes or get a plan set up, which gives you extra time to come up with the money.

The penalty for paying late is lower than for filing late. You’ll be charged 0.5% per month, up to a maximum of 25% of your unpaid tax bill.

If you wait too long and end up getting a Notice of Intent to Levy in the mail—which means the IRS is getting ready to take possession of assets such as your wages or bank account—you'll have 10 days to pay before the penalty rate increases to 1% per month.

On the other hand, if you file on time and get a payment plan set up before April 15, the penalty rate gets cut in half to 0.25% per month.

IRS Installment Agreements

The IRS makes it easy to set up a payment plan; depending on how much you owe, you may be able to do it online (in other cases, you may need to call the IRS). There are two types of payment plan options.

Note

You will still have to pay penalties and interest if you set up a payment plan, so choose the shortest option you can afford. You also still have to file your tax returns before and during any extended payment agreement. 

Short-Term Payment Plan

Choose the short-term payment plan if you think you can come up with the remaining balance within the next 180 days. There's no fee, and you make payments as you're able.

Long-Term Payment Plans

Choose a long-term payment plan if you think it will take longer than three months to pay off what you owe. With this plan, you agree to make monthly payments, which you can even set up on autopay if you choose. Automatic payments are recommended so you don't miss a payment.

There is a fee to set up a long-term installment plan, ranging from $31 to $225. You’ll pay a lower fee if you apply for the plan online and if you choose to make automatic payments. If you earn a low income, you may qualify for a reduced or waived setup fee.

The length of time you have to pay your taxes on a long-term plan depends on the amount you owe.

  • Guaranteed Installment Plan: If you owe less than $10,000 to the IRS and sign up for a long-term payment plan, there is no minimum payment required as long as you agree to pay what you owe within 36 months.
  • Streamlined Installment Agreement: If you owe $10,000 or more to the IRS, you can set up a long-term, streamlined installment agreement (SLIA), which will give you a maximum of 72 months to pay your balance. This may come with a minimum payment amount.
  • Non-streamlined Installment Agreement: If you set up the full-pay non-streamlined installment agreement (NSIA), you will have until the collection statute of limitations expires to pay your taxes. That means you would typically have up to 120 months to pay your tax bill, unless the statute is extended. You and someone from the IRS will determine your monthly payment amount, or how you would pay with assets.

Just remember that the longer you take to pay what you owe, the more you’ll pay in interest.

Making an Offer in Compromise

In some cases, you might never be able to reasonably expect to pay off your tax bill, even with a long-term installment plan. If that's the case, you can propose an amount to settle with the IRS through a formal process it has set up called "offer in compromise."

The IRS even offers a pre-qualification tool so you can see if this might be an option for you.

Cost of an Offer in Compromise

Keep in mind you can't just propose settling your bill for $5 with the IRS. It doesn’t generally accept lowball offers. Instead, it'll calculate how much it could potentially collect from you if it seized your assets and even your future income to a point, and it won't accept an offer below this amount.

If you have a lot of assets and a high income, this could still be quite a substantial number. But if your income is modest and you don't have a lot of assets, it will probably be less.

The cost to apply for an offer in compromise is $205, which can be waived if you have a low income. You can choose to make a lump-sum payment or pay off the agreed-upon amount in monthly installments for up to 24 months.

Paying Partial Taxes

If you don't owe a huge bill and only need a very short amount of time to pay, such as until your next paycheck, it’s a good idea to make whatever payment you can make now.

This is called a partial payment, and it's a good-faith sign to the IRS that you're not ignoring it. You'll still accrue the same interest charges and penalties, but if you truly only need a small amount of time to pay, they won't be that much.

Note

If paying even a small amount would cause undue hardship, contact the IRS and ask for a temporary delay of collection. You'll need to provide financial details, and interest and penalties will still accrue, but the IRS will pause any collection efforts while you're unable to pay.

Borrowing Money To Pay Taxes

Choosing a payment option with the IRS is generally the best option, but not always. If you have lower-interest forms of debt available to you, it may be cheaper to borrow money to pay your tax balance in full. Since the  IRS’ penalty interest rate can be high and the penalty amount is 0.5% or 1% per month, the costs of not paying can add up quickly.

If you have good credit, you might have access to a credit card or personal loan with cheaper rates. Another option is to use a 0% intro APR credit card, but only if you're sure you'd be able to pay it off before interest charges kick in.

Home equity loans and home equity lines of credit are common and relatively cheap options, but keep in mind it's generally best to avoid using these for unsecured debts like tax debt. You could lose your home if you default on the loan.

The Bottom Line

When it comes to tax debt, time is of the essence. If you can, file your tax return early so you have more time to figure out how to pay any potential tax debt. If you still owe by April 15, reach out to the IRS to make a partial payment, get on an installment plan, or set up an offer in compromise immediately.

The sooner you do these things, the fewer consequences you'll have, and the sooner you can remove this source of stress and worry from your life.

Frequently Asked Questions (FAQs)

How do I pay quarterly estimated taxes?

You'll use Form 1040-ES as your one-stop shop for paying estimated quarterly tax payments. It has worksheets in it to help you figure out how much you'll need to send in each quarter, as well as payment vouchers and information about how to pay your estimated quarterly taxes online.

What should I do if I can’t pay my state taxes?

If you can't pay your state taxes, reach out to your state's tax department as soon as possible to find out your options. Depending on the state you live in, you may be able to set up an installment plan or make an offer to settle your tax bill for less than you owe.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Filing Season Statistics for Week Ending May 20, 2022.”

  2. IRS. “Topic No. 653 IRS Notices and Bills, Penalties, and Interest Charges.”

  3. IRS. “IRS Announces Interest Rate Increases for the Fourth Quarter of 2022; 6% Rate Applies to Most Taxpayers Starting Oct. 1.”

  4. IRS. “Failure to File Penalty.”

  5. IRS. “Additional Information on Payment Plans.”

  6. IRS. “Topic No. 204 Offers in Compromise.”

  7. IRS. “Form 656 Booklet: Offer in Compromise.” Page 3.

  8. IRS. “2022 Form 1040-ES.”

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