Unable to Pay Your Tax Bill? Here’s What To Do

You should always file your tax return on time—even if you can’t afford to pay your tax bill.

It’s the smartest move you can make and helps you avoid facing more severe consequences for not filing at all.

You file your taxes … and instead of a refund, you get a bill.

Not exactly the outcome you were hoping for.

It doesn’t feel great to find out you owe money to the IRS, but you do have several options if you find yourself in this predicament. If you find yourself with a large tax bill and you can’t pay the full amount on tax day, you’re not alone. Keep reading to find out all of the options available to you to help you meet your tax obligations and avoid getting an unwanted letter from the IRS.

File your tax return, even if you can’t pay

Filing on time helps you avoid the failure-to-file penalty, which continues to grow until it hits 25% of your total unpaid tax. This penalty is much higher than the 0.5% penalty you would be liable for if you filed your tax return on time but didn’t pay your tax due. It also gives you the chance to take advantage of more payment options with the Internal Revenue Service.

Your options if you can’t pay your taxes

If you can’t afford your tax bill, you need to be proactive to stop the IRS from beginning collection efforts. Over time, the IRS has options that include placing a lien on your property or garnishing your wages in more serious cases.

If you can’t afford to pay your tax bill, the good news is that the Internal Revenue Service does offer several ways to manage and gradually pay down your balance.

The right option depends on your financial situation and whether you need a little more time, monthly payments that extend for a longer period of time, or more significant relief.

In general, your options fall into a few categories:

• Short-term payment plans if you can pay within 180 days
• Long-term monthly payment plans (also known as installment agreements), which give you up to 72 months to pay
• Offer in Compromise (OIC) settlements if you can’t afford to pay the full amount
• Temporary relief if you can’t make any payments at all

Each option comes with different requirements and tradeoffs, so it’s worth taking a closer look at what might work best for you.

Request a short-term payment plan

If you just need a little more time to pay your tax bill due to a temporary financial situation, you can apply for a short-term payment plan, which gives you up to 180 days to pay your balance.

There’s no setup fee for a short-term payment plan, but interest and penalties will continue to accrue until your balance is paid in full. You can apply online if you owe less than $100,000 in combined tax, penalties, and interest. In most cases, you’ll need to file your tax return before applying.

Set up a long-term IRS installment agreement

If you can’t pay your tax bill right away, another common option is to set up a long-term installment agreement with the Internal Revenue Service, which allows you to pay your balance over time—typically up to 72 months.

An installment agreement is a monthly payment plan with the IRS that lets you pay down your balance over time instead of all at once.  There is a setup fee that must be paid when applying which ranges from $22 to $178 depending upon the method you use to apply for the installment agreement.

If you owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns, you can apply online using the IRS Online Payment Agreement application.

When applying, you’ll propose a monthly payment amount based on what you can realistically afford, since the IRS expects you to choose a payment you can maintain. You’ll also need to select the day of the month your payment will be made — typically between the 1st and the 28th.

It’s important to note that interest and penalties will continue to accrue until your balance is paid in full. However, the failure-to-pay penalty rate is reduced from 0.5% to 0.25% per month while your installment agreement is in effect.

The IRS offers several easy ways to make payments, including direct debit from your bank account, payment by check or money order, Electronic Federal Tax Payment System (EFTPS), and credit or debit card payments online or by phone. The IRS will notify you once your request has been reviewed.

You typically have up to 10 years to pay off your balance. But you will continue to owe interest and penalties until then.

Settle your tax debt with an Offer in Compromise

If you can’t afford to pay your full tax bill — even over time — you may be able to settle your debt for less through an Offer in Compromise (OIC) with the Internal Revenue Service. 

This option is sometimes described as settling your tax debt for less than you owe, but approval depends on your financial situation.

The IRS reviews your financial situation (including your income, expenses, assets, and overall ability to pay) to determine whether your offer is acceptable. Your offer should reflect the amount the IRS believes it can reasonably collect from you based on your assets and future income, so it’s not just what you’d like to pay, but what you can realistically afford.

The IRS charges a $205 application fee. However, if you meet the Low-Income Certification guidelines, you won’t have to pay the fee or make an initial payment. Depending on the payment option you choose, you may also need to submit an upfront payment with your application and continue making payments while your offer is under review.

To qualify, you’ll need to be current on all required tax filings and payments. Also, you will not be eligible if you’re currently in an open bankruptcy proceeding. If your offer is accepted, you’ll need to stay compliant with all tax obligations for the next five years, or the agreement can be revoked.

Request a temporary delay of IRS collection

If you aren’t able to pay your full tax liability in the foreseeable future (as opposed to a short-term hardship), you may need to request a temporary delay. If you can’t pay any of your tax debt, your account may be classified as “currently not collectible,” and the Internal Revenue Service may temporarily delay collection until your financial situation improves.

If you truly can’t afford to pay your taxes at all, this option may temporarily pause collection efforts.

Being currently not collectible doesn’t mean the debt goes away—it just means the IRS has determined you can’t afford to pay right now. Before approving your request, the IRS may ask you to complete a Collection Information Statement (Form 433-F, Form 433-A, or Form 433-B) and provide documentation about your financial situation, including your assets, monthly income, and expenses.

This option typically comes into play when other payment options, like an installment agreement, aren’t realistic and you truly can’t make any payments. It’s not intended to be a permanent solution but just a reprieve for the moment.  The IRS may review your situation later and restart collection if your ability to pay improves.

Request an extension for payment due to undue hardship

In very limited cases, you may also qualify for an extension using Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. This is a separate process and requires you to show significant financial hardship. As with other IRS payment options, you’ll need to file your tax return on time to be eligible.

Understand IRS penalties and interest

If you can’t pay your taxes, the IRS may charge:

• A failure-to-pay penalty (typically 0.5% per month)
• Interest on your unpaid balance

These charges continue until your balance is paid in full.

IRS penalties for late payment  and interest charges can add up quickly, which is why it’s important to explore your options as soon as possible.

You can learn more about how penalties work, here.

Pay your taxes with a credit card or a loan?

The IRS allows you to pay your taxes using a credit or debit card, though processing fees apply. Some taxpayers choose to pay taxes with a credit card or use a personal loan, especially if it helps them avoid higher IRS interest and penalties.

This may make sense if you can get a lower interest rate than the IRS charges—but it’s important to compare costs carefully.

Whatever option you choose, the most important step is to act early and communicate with the IRS. If you can’t afford your tax payment, taking action early can help you avoid bigger problems and find the best solution for your situation.

You don’t have to figure this out on your own

Whether you’re trying to file your return, understand your options, or get help managing a tax bill you can’t pay, TurboTax can guide you every step of the way. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll help you get every dollar you deserve and make sure you understand your next steps.

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