3 Alternatives When You Can't Pay Your Income Taxes on Time

couple looking at taxes


RyanJLane/Getty Images

What happens if tax day rolls around and you can't come up with the money to pay your federal income tax? You might be in a panic, but you do have options when you're not able to pay your income taxes on time. Understanding what those options are—and what the penalties are for paying or filing late—can help you decide which path to take to handle a looming tax bill.

Late Payment and Late Filing Penalties

The IRS assesses penalties for filing your return late and for paying your taxes late.

The "failure to file" penalty is much worse than the "failure to pay" penalty (please note that the interest rates used in these examples vary each quarter).

Here's how they compare:

  • Failure to file on time penalty: 5 percent of the balance due per month, up to a maximum of 25 percent.
  • Failure to pay on time penalty: 0.5 percent of the balance due per month, up to a maximum of 25 percent.

The easiest way to reduce your penalties and interest is to file and pay your taxes by the filing deadline. But if you can't pay right away, you should at the very least file your return by the deadline anyway to avoid the higher failure to file penalty. Note also that when you fail to pay on time, interest accrues on the balance until your tax bill is paid in full.

What to Do When You Can't Pay Your Income Taxes on Time

If you can't pay on time, leave no stone unturned when looking for alternatives. For example, if your cash shortage is a temporary one, an advance on your paycheck could solve the problem. Or you might have family members who'd be willing to lend you the money. Selling things you no longer use is another way to raise the money. If those aren't options, below are three other ways to pay so you can avoid penalties and interest.

1. Use a Credit Card

You can charge your taxes on your credit card (American Express, MasterCard, Visa, or Discover) by contacting a service provider approved by the IRS. You'll be charged a convenience fee of around 2.5 percent of the amount you're paying, so if you owe $2,000, the fee will be around $50. If you owe $10,000, the fee will be around $250.

Don't forget that you'll incur interest charges if you can't pay your credit card balance off quickly. Two service providers you can consider making your payment to are Pay1040 and Official Payments Corporation. If you're uncertain about paying through a service provider, call the IRS for more information.

Negotiate an Installment Plan

If you simply can't come up with the money to pay your taxes on time, you may be able to negotiate an installment payment plan with the IRS. You can complete Form 9465, Installment Agreement Request, and attach it to the front of your income tax return. Depending on how much you owe, you may be able to request a payment plan online.

Keep in mind that an installment agreement doesn't allow you to avoid paying interest on what you owe.

Interest continues to accrue until the debt is satisfied. The IRS can, however, reduce any failure to pay penalties that were assessed.

Consider an Offer in Compromise

If you owe so much that there's no way you'll ever be able to pay it, the IRS may accept less than the full amount through a program called Offer in Compromise. This is essentially a settlement agreement in which the IRS agrees to accept less than the full amount owed as payment.

To initiate an Offer in Compromise, you'll need to complete Form 656, Offer in Compromise, and Form 433A, Collection Information Statement, and submit them to the IRS with the application fee.

You'll have to provide a complete personal financial statement—including everything you own of value, all the debts you owe, your income, and the amount you're prepared to pay immediately in order to settle your account. The IRS will evaluate your financial situation and future income potential to determine whether to accept your settlement offer. If the IRS believes it won't be able to collect the full amount, your offer may be accepted. This program is for people in dire financial straits.

Regardless of an installment plan or Offer in Compromise agreement, the IRS will require you to pay all your federal tax liabilities on time for the next five years or until the amount you settled on is paid in full, whichever is longer. If you default on the terms of the Offer in Compromise agreement, all of your back taxes will once again be due in full. The IRS may file a lien on your property to ensure payment, and this will show up on your credit report.

The Bottom Line

This can all be very confusing, but the bottom line is this: Even if you can't pay your taxes due, don't compound your problems by failing to file your income tax return. You could end up paying penalties totaling half the amount you owe before interest is even added on, so be sure to get your return in on time.