Payment Options if You Owe the IRS

The IRS will work with you if you simply cannot pay in full

A woman sits at her dining room table with laptop and tax paperwork
•••

RichVintage / Getty Images 

It's already stressful to complete your tax return, but it can be even worse to realize that you owe the IRS money when you don't have the cash available to make a lump sum payment.

The IRS, though, has dealt with this dilemma many times before. It offers a few options and grace periods.

Key Takeaways

  • If you owe money to the IRS, you'll have tax debt until you pay it off, but there are many options available to help you pay.
  • The sooner you are able to pay off your tax debt, the less you'll pay over time in interest charges or penalties.
  • If your debt is within a certain dollar range, and you can't pay within 120 days, you may qualify for an installment plan.
  • Help is available for taxpayers who cannot pay their debt at all, in the form of temporary delays in collection or potential offers in compromise.

How Soon Can You Pay?

First, figure out how quickly you can pay off the tax debt. Paying it all at once will save you some money if you can come up with the cash. The IRS will continue to assess late payment penalties and interest up through the date you pay in full.

The IRS charges interest at the rate of .5% of the amount you owe each month, up to a total of 25% of your tax debt.

If You Can Pay Within 45 Days 

Can't pay your tax bill in its entirety right now, but know that you'll be able to do so within 45 days? Send in a partial payment using the Form 1040-V payment voucher when you file your tax return.

Most tax preparation software provides Form 1040-V. It's also available on the IRS website. 

Then wait for the IRS to send you a letter, known as the Notice of Tax Due and Demand for Payment. It will detail your outstanding balance and any late charges that have been added.

The IRS usually provides a grace period of 21 days after sending that letter, to avoid additional interest and penalties. If payment is not received within 60 days, the agency can proceed with collection activity.

Pay your remaining balance by the deadline set by the IRS if you possibly can.

If You Can Pay Within 120 Days 

The process is similar if you can pay off the tax you owe within six months. Send in a partial payment using Form 1040-V, and then wait for the IRS to send you a letter telling you how much you owe, including interest and late charges.

Next, call the IRS at the number shown on the letter. Request a short-term extension of time to pay beyond the date set in the letter.

This deadline is normally 120 days. It was extended by two additional months to 180 days in 2020 in response to the coronavirus pandemic.

When you talk to an IRS representative, propose a definite deadline for paying off your balance in full. They will note that date in your records. Use the payment voucher that's included with the letter to make your next and final payment.

Calling the IRS is important with this payment tactic. It will prevent the agency from taking more aggressive collection actions. You're letting the agency know that you're on top of the situation and trying to fix it.

If You Need More Than 120 Days

Need a more significant time to pay off your debt? The IRS will usually let you set up a monthly payment plan called an "installment agreement."

This is a formal agreement to pay the IRS over time. The agency will likely approve your payment plan if it would pay off your tax debt in six years or less.

Depending on how much you owe, you might also have to submit a financial statement. Streamlined installment agreement applications are available, though, for taxpayers who owe up to $50,000.

The IRS does charge a fee to set up these plans. As of the 2020 tax year, it ranges from $31 to $225, depending on how you make your payment. There are options and reduced fees available to low-income taxpayers who qualify.

This is a one-time fee that's paid upfront. It is often part of your first payment.

You can apply for an installment agreement on the IRS website if you owe $50,000 or less. You also can file your request on Form 9465.

Your interest rate will drop to 0.25% if you commit to an installment agreement.

Temporarily Delay Collection

This option doesn't come with a set date by which you can pay off the IRS. It's available only if the IRS agrees that collecting from you at that point in time would present an undue financial hardship to you.

Your tax debt doesn't go away. It's just put on hold until such time as your finances recover.

You must be able to prove that you would not be able to meet your necessary living expenses if you were to pay the debt. The IRS will categorize your matter as "currently not collectible." Penalties and interest will continue to accrue, however.

The IRS is effectively agreeing not to aggressively pursue you for the money by way of levies and other collection avenues available to it when it agrees that your tax debt is "currently not collectible."

When You Can't Pay Your Taxes at All

If you aren't able to pay your taxes at all, it's best to seek advice from a tax professional who's authorized to represent you before the IRS. Typical examples are CPAs, attorneys, and enrolled agents.

Many tax clinics provide free or low-cost access to tax professionals. That's generally a good place to start if you need help. A competent tax professional can evaluate your options, which might include:

  • Temporary delay
  • Partial payment plan
  • Offer in compromise

The Taxpayer Advocate Service also provides free help to taxpayers who have problems with the IRS. In-person visits aren't available during the coronavirus pandemic, but you can still reach out for help by phone.

The Bottom Line

If you owe the IRS money, the worst thing you can do is to do nothing. The agency typically welcomes all overtures to get tax debts paid. It might even accept less than what you owe if your financial situation qualifies. 

Article Sources