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

There's no need to panic if you can't pay your tax bill

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

Pamela Moore / Getty Images

You've just finished preparing your tax return, and you notice that you owe Uncle Sam a hefty sum, but you can't afford to pay it. Are you going to jail? Probably not. The realization that you can't afford to pay your taxes can make you feel uneasy, but you have options.

Here are some things you can do to remedy the situation and avoid landing in hot water with the Internal Revenue Service (IRS).

File Your Return on Time

Even if you don't have enough money to pay the taxes due, you still need to send in your return by the filing deadline. The IRS typically assesses two types of tax penalties: one for filing late and one for failing to pay.

The penalty for filing late is 5% of your taxes owed for each month your return is late, up to a maximum penalty of 25%. The late-payment penalty, by comparison, is 0.5% of the unpaid taxes due per month past the due date, up to a maximum penalty of 25%.

As you can see, the penalty for not paying is much lower than the one for not filing. Therefore, even if you know that you can't afford to pay your tax bill, you should still make every effort to get your return filed on time.

When you file, pay as much of your taxes owed as you can afford. The late-payment penalty is assessed as a percentage of the total bill owed, so anything you can pay while filing will reduce the size of your penalties down the road.

Review Your Options for Paying

Whether you owe $100 or $10,000, the first thing you should do is find possible sources for the money you need to pay.

For example, you may consider tapping the equity in your home, using a credit card, digging into your savings, getting a personal loan, borrowing from friends and family, or cashing out paid time off at work. Another more extreme option is to pull money out of your IRA or other retirement savings; however, doing so can trigger tax penalties, so it's best to view that as the option of last resort.

Carefully consider the potential downsides before using retirement savings, a loan, or a credit card to pay off a tax debt.

If you're considering a loan or credit card to pay your tax bill, remember to weigh the interest rate and fees in the balance. If you can repay a loan or credit card fairly quickly or use a credit card with a 0% APR, the cost may be minimal. However, if you owe a larger tax bill, the interest can add up quickly. Be aware that the IRS charges processing fees for paying income taxes with a credit card, which can increase your total cost.

To estimate your loan payments, use the calculator below.

Check Your Timeline

While it's always best to pay the taxes you owe in full and on time, there are scenarios in which you need to wait for your next paycheck to pay off your tax debt.

When you know that you have a relatively short timeline to pay off the debt, it may make sense for you to file your return and accept the late-payment penalty. As long as you filed your taxes on time, the IRS will send you a letter in the mail stating how much you owe, plus any additional interest or penalties that are due.

The downside to this strategy is that your tax bill will be lingering over your head a bit longer, and what you owe will accrue penalties and interest until you pay. The upside, however, is that the interest cost will be relatively low compared to financing the money with another source.

This shouldn't be considered a long-term solution for people with large tax bills. Your goal should be to pay the IRS as soon as possible. The longer you wait, the more the penalties and interest can add up.

If you wait too long to pay, the IRS may take action against you and place a lien against your property or garnish your wages or bank account.

Consider an Installment Agreement

The government, like anyone else, would rather get the money over a period of time rather than not at all, so the IRS offers an installment plan when you can't afford to pay it all at once. To request an installment plan, you can use Form 9465 to set a plan up to take a direct debit from a bank account to make the process easier. However, it is often easier and less expensive to request an installment agreement online, since the IRS charges higher fees when you apply by phone, mail, or in-person.

A short-term installment agreement can be established if you think you can pay your tax bill in full in 120 days or less. A long-term plan is available if you need more than 120 days to pay. There's a fee to apply for an installment agreement.

Individuals can apply online for a short-term payment plan if they owe less than $100,000 in combined tax, penalties, and interest. Long-term plans are available online for those who owe $50,000 or less. If you owe more than that, you'll have to mail in your Form 9465 to apply. The IRS prefers that payments be made via direct debit from your bank account. Penalties and interest continue to accrue until your balance is paid in full.

The IRS has a First-Time Penalty Abatement Program for taxpayers that fall behind on their taxes and are levied with a penalty or interest charges for the first time. In such a case, this program may afford a taxpayer relief.

Use an Offer in Compromise

If you can't find the money, and you can't get an installment plan, there's one final option available: an "offer in compromise."

Offers in compromise are intended only for extreme circumstances.

If you request an offer in compromise, you can offer to make either a lump-sum payment or fixed payments over a short period of time. In exchange for the expedited payment plan, the IRS agrees to accept less than the full amount owed to satisfy your tax obligation. This process requires you to submit a complete personal financial statement and an application fee of $205 in addition to Form 656.

These offers are evaluated on a case-by-case basis, and there are no guarantees that you'll be approved. If the IRS determines from the information you've provided that you're unable to pay the full amount, it may accept your offer. If it does, you agree to pay your taxes in full and on time for a period of five years after the offer is established.

Evaluate Your Options Carefully

Paying the taxes you owe is very important, so you must explore all of your options instead of panicking. Above all, file your return by the deadline to avoid the late-filing penalty. Then, take the time to consider how realistic it is for you to pay your taxes and what avenues are available.

Key Takeaways

  • Filing your tax return on time, even if you can't pay your tax bill, is always the best option to keep penalties at their lowest level.
  • Once filed, you can pay at your own speed, with interest accruing at 0.5% per month, but indefinite, lengthy nonpayment could result in a tax lien, garnishment or levy.
  • Consider only as last resort any accounts for your retirement, such as IRAs.
  • Sometimes the IRS will negotiate a lower "offer in compromise" if you can prove hardship.
  • You can apply to the IRS for a no-fee, short-term payment plan with direct payment from your bank account if you can pay your overdue taxes within 180 days.

Article Sources

  1. Internal Revenue Service. "Topic No. 653 IRS Notices and Bills, Penalties, and Interest Charges."

  2. Internal Revenue Service. "Pay Your Taxes by Debit or Credit Card."

  3. Internal Revenue Service. "Additional Information on Payment Plans."

  4. AICPA. "IRS First-Time Penalty Abatement."

  5. Internal Revenue Service. "Offer in Compromise."

  6. Internal Revenue Service. "Topic No. 204 Offers in Compromise."