It can be particularly stressful to complete your tax return, only to realize that you owe the IRS money, and you don't have the cash available to make a lump-sum payment. The IRS has dealt with this dilemma many times before, however, and it offers a few options and grace periods.
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, because the IRS will continue to assess late-payment penalties and interest up through the date you pay in full.
The IRS will let you pay the debt over time if paying in one lump sum simply isn't possible. The downside to this option is that interest and late charges will continue to accrue until the entire balance is paid off.
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
Send in a partial payment using the Form 1040-V payment voucher at the time you file your tax return if you can't pay your tax bill in its entirety right now, but you know you'll be able to do so within 45 days. Most tax preparation software provides this form, and it's also available on the IRS website.
Then wait for the IRS to send you a letter detailing your outstanding balance and any late charges that have been added. The IRS usually provides a grace period of of 21 days after sending that letter, to avoid additional interest and penalties. If payment is not received within 60 days, the IRS can proceed with collection activity. Pay your remaining balance by the deadline set by the IRS if you possible 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 wait for the IRS to send you a letter telling you how much you owe, including interest and late charges. Then call the IRS at the number shown on the letter to request a short-term extension of time to pay beyond the date set in the letter.
This deadline is normally 120 days, but it was extended by two additional months to 180 days for tax year 2020 in response to the coronavirus pandemic.
Propose a definite deadline for paying off your balance in full, and the IRS will note that date in its 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, because it will prevent the agency from taking more aggressive collection actions. You're letting the IRS know that you're on top of the situation and that you're trying to fix it.
If You Need More Than 120 Days
The IRS will usually let you set up a monthly payment plan called an "installment agreement" if you're going to need a more significant amount of time to pay off your tax debt. This is a formal agreement to pay the IRS over time, and 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, but streamlined installment-agreement applications are available for taxpayers who owe up to $50,000.
The IRS does charge a fee to set up these plans. It's $225 as of tax year 2020, but options and reduced fees are available to low-income taxpayers who qualify. The $225 is a one-time fee that's paid upfront and is typically included with your first payment.
You can apply for an installment agreement on the IRS website if you owe $50,000 or less, or you can file your request on Form 9465. Your interest rate will drop to .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, and 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 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," but penalties and interest will continue to accrue.
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
Your best bet is to seek advice from a tax professional who's authorized to represent you before the IRS if you can't afford to make any payment toward your taxes at all. Typical examples are CPAs, attorneys, and enrolled agents.
Many tax clinics provide free or low-cost access to tax professionals, and that's generally a good place to start if you need help. A competent tax professional can evaluate your options, such as requesting a temporary delay, setting up a partial payment plan, or negotiating a settlement through the offer-in-compromise program.
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.
Special Provisions for 2020 and 2021
The IRS extended the payment date in 2020 for 2019 taxes, from April 15 to July 15, in response to the coronavirus pandemic. Interest and penalties didn't begin to accrue on any balance owed until July 15, 2020.
In Texas, Oklahoma, and Louisiana—states declared winter storm disasters in 2021—the IRS extended filing deadlines to June 15.
The 2021 payment date for 2020 taxes was extended to May 17, 2021. You have one additional month before penalties and interest begin to accrue.
The Bottom Line
The worst thing you can do is to do nothing if you owe the IRS money. The agency typically welcomes all overtures to get tax debts paid, and it might even accept less than what you owe if your financial situation qualifies.