Owing money to the IRS and not being able to pay it in full is stressful, but it is more manageable than most people realize. The worst thing you can do is ignore the bill. The IRS has several options for people who can’t pay all at once — and acting quickly reduces the penalties and interest you’ll owe.
File Your Return Even If You Can’t Pay
The first and most important step: file your tax return on time even if you cannot pay the full amount. The failure-to-file penalty is much steeper than the failure-to-pay penalty. Filing on time stops the larger penalty from accumulating, even if you still owe a balance.
If you need more time to file, request an extension by the April deadline using Form 4868. An extension gives you until October 15 to file — but it does not extend the time to pay. You still owe any taxes due by the original deadline.
Pay What You Can Now
Even a partial payment reduces the balance subject to interest and penalties. Pay as much as you can afford when you file. Every dollar paid now is a dollar that stops accruing interest at the IRS rate, which is currently higher than most savings accounts pay.
Set Up a Payment Plan
The IRS offers installment agreements that let you pay your balance over time. If you owe $50,000 or less in combined tax, penalties, and interest, you can set up a payment plan online at IRS.gov without calling or mailing anything. Plans can extend up to 72 months.
There is a setup fee (as low as $31 if you pay by direct debit), and interest and the failure-to-pay penalty continue to accrue while you pay off the balance — but at a much lower effective rate than credit card debt or personal loans.
Currently Not Collectible Status
If paying your tax debt would prevent you from covering basic living expenses, you may qualify for currently not collectible (CNC) status. The IRS temporarily stops collection activity while you are in CNC status. Interest and penalties still accumulate, but you are not pursued for payment. This is typically a temporary measure while your financial situation improves.
Offer in Compromise
An Offer in Compromise (OIC) lets you settle your tax debt for less than the full amount you owe if paying in full would cause financial hardship. The IRS evaluates your income, expenses, assets, and ability to pay. Not everyone qualifies — the IRS accepts roughly 40 percent of OIC applications. You can use the IRS’s pre-qualifier tool at IRS.gov to see if you might be eligible before applying.
Penalty Abatement
If this is your first time owing a penalty, you may qualify for first-time penalty abatement. The IRS will waive certain penalties for taxpayers with a clean compliance history — no penalties in the prior three years. This does not reduce the underlying tax or interest, but it can meaningfully reduce the total amount you owe.
Avoid Tax Relief Scams
Be cautious of companies that promise to settle your tax debt for “pennies on the dollar.” Many charge large upfront fees and deliver little or nothing. The IRS programs described above are available directly through IRS.gov at no cost, or with minimal fees.
Owing taxes is not the end of the world. The IRS would rather work with you than pursue aggressive collection. Reaching out early gives you the most options.
Money Instructor does not provide tax, legal, or investment advice. This material has been prepared for educational and informational purposes only. You should consult your own advisors regarding your own financial situation.