In a NutshellNot being able to pay the federal income tax you owe can be a scary feeling. Don’t panic! Being proactive and communicating with the IRS as soon as you know there’s a problem can help you manage the situation and minimize any penalties, interest charges and fees for not paying on time.
This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma.
You’ve done the math (or are just guessing), and you know come Tax Day you’re going to owe money you just don’t have right now.
What should you do if you can’t pay your taxes by the filing deadline for federal income tax returns? Let’s start with four things you shouldn’t do:
- Panic: It solves nothing. Plus, you do have options.
- Ignore the problem: Your tax bill isn’t going to go away on its own, and neither will the IRS.
- Wait: If you don’t pay your taxes on time, you will definitely get a bill from the IRS. And it will come with fees and penalties on top of what you already owe.
- Fake it: While not paying your taxes on time almost certainly won’t land you in jail, tax evasion can. Faking information on your federal income tax return in order to reduce or eliminate the amount you owe can result in severe consequences.
The deadline approaches
The IRS usually begins accepting federal income tax returns for the preceding tax year in January each year and the filing deadline for most taxpayers is typically April 15. You either need to e-file by Tax Day or submit your paper return postmarked by that date. That’s also the deadline for paying any income tax you owe.
However, if your employer withheld too little tax from your wages throughout the year, or you’re self-employed and haven’t been making estimated tax payments, it’s possible to face a big tax bill. It’s also possible for that bill to be far more than you can afford to pay by Tax Day.
If you fail to pay and don’t make payment agreements, you will get a bill from the IRS. Don’t wait for that to happen.
“File your tax return by the due date anyway. Then, pay as much as you can, even if it’s not the full amount, with your return,” says Cindy Hockenberry, an enrolled agent and director of tax research and government relations for the National Association of Tax Professionals. “Penalties and interest start accruing on any unpaid balance due on the first day after the due date.”
Immediately upon filing, start exploring your options for paying the balance you owe.Should I take out a personal loan to pay my taxes?
Options when you can’t pay your taxes
The IRS wants you to be able to pay your taxes.
In fact, the IRS provides multiple options for paying your taxes on time, including a direct debit from your checking or savings accounts, debit or credit card payment, a free app (IRS2Go), electronic funds withdrawal that you can schedule when you e-file, online or phone payments, and even paper checks.
When you can’t pay your taxes on time, you also have options, although they’ll come at a cost (which we’ll discuss shortly).
Plus, says Hockenberry, “rules are strict.”
Possible payment options could include a short-term extension to pay, an installment agreement, offer in compromise, or temporarily delaying collection, the IRS says. While the IRS can sometimes waive penalties for late payment, it can’t waive interest charges on unpaid tax bills.
Full payment in 120 days
If you can’t pay your full tax bill on time, you might qualify for a short-term extension to pay, although you still must file your return on time. The IRS may agree to give you up to 120 days to pay your taxes, and there’s no fee for this type of arrangement. However, you’ll still accrue interest on the unpaid balance and might be subject to penalties.
Installment agreements are the most common arrangement when you can’t pay your taxes on time, Hockenberry says.
Depending on your situation, you may be able to apply for an installment agreement through the IRS’ online portal. The IRS online payment agreement will allow you to pay the amount you owe in monthly installments over a period of time.
However, fees, interest and possibly penalties will still apply, and you must meet certain requirements, including:
- You may have to pay a user fee. Fees vary depending on the type of installment agreement and how you’ll pay, but typically range from $31 to $225. And if you want to change your agreement in the future, you’ll pay an $89 fee to do so.
- Be current on all filing and payment requirements.
- Not be in a bankruptcy proceeding.
- Tell the IRS the amount you can pay per month and choose the day of the month you want to pay (any day from the first to the 28th).
- If you choose a direct debit installment payment, provide your checking account number and bank routing number, plus written authorization for the automated withdrawal.
You can opt to pay your installments by check or money order, credit card over the phone or online, cash at a retail partner, through the Electronic Federal Tax Payment System, by a payroll deduction through your employer, or via direct debit from your bank account. Your payment will be due on the actual date you agreed to, so if you’re mailing a check be sure to give plenty of time for your payment to arrive by the due date.
How much is the average income tax bill?
Data from the Bureau of Labor Statistics show the average American household paid $8,367 in federal income taxes in 2016, the most recent year for which data are available. Average income before taxes was $74,664, and $64,175 after paying federal, state and local income taxes.
Offer in compromise
If you can’t pay your taxes on time or fear you can’t pay the full amount, the idea of getting the IRS to reduce the amount you owe can be appealing. An offer in compromise, or OIC, is an agreement between you and the IRS that allows you to pay an agreed-upon reduced amount.
“In the worst cases, an offer in compromise might be available, but the qualification requirements are strict, difficult and costly,” Hockenberry says. “This option is primarily used if there is doubt as to collectability.”
The IRS may allow an OIC if:
- The amount or existence of unpaid tax debt is genuinely up for dispute.
- If your assets and income are less than the full amount owed and it’s doubtful the debt is collectible from you.
- You undoubtedly owe the tax and the full amount could be collected, but doing so would create an economic hardship or special circumstances would make collecting the full amount unfair and inequitable.
You’ll also need to meet qualifications, including being current on all required filings and payments. You can’t enter into an OIC if you’re in bankruptcy proceedings, and you’ll need to use the IRS Offer in Compromise Pre-Qualifier tool to see if you’re eligible.
If the IRS agrees that financial hardship will make it impossible for you to pay your tax bill on time, you can ask the IRS to delay collecting the amount you owe until you are able to pay. You’ll still owe the debt, but won’t have to pay it until your financial position improves. However, penalties and interest will continue to accrue until you do pay, meaning not only will you still owe the unpaid amount, the sum you owe will continue to grow until you do pay.
And now the bad news …
By now, you’ve probably guessed it — not paying your taxes on time means you’ll face interest charges on the unpaid amount, penalties and fees.
Here’s a breakdown of penalties you could face if you can’t pay your taxes and don’t make arrangements to do so:
- If you don’t pay by Tax Day, the penalty charged is 0.5 percent of the tax not paid.
- If you have an installment agreement, the penalty is .25 percent of the tax not paid.
- Charges will recur monthly on remaining unpaid tax until the tax is fully paid, up to a maximum of 25 percent of the amount of tax that remains unpaid from the day after the due date of the return until the tax is paid in full.
You’ll also need to pay interest on the amount you owe. Interest starts accruing the day your tax is due. Interest rates are set quarterly and are usually based on the federal short-term interest rate plus 3 percent. As of the second quarter of 2017, the IRS interest rate for underpayments (which includes late or non-payments) was 4 percent.
Interest is calculated on the total amount you owe, including the original tax you didn’t pay, any penalty amounts that have accrued and the interest. In other words, interest will continue to rack up on the full amount you owe until you pay the bill in full.
In fact, interest and penalties can add up so quickly and so onerously that the IRS suggests you consider using a loan or credit card to pay your tax on time. The interest charges and fees from a bank or credit card company could well be less than what you would pay in IRS interest and penalties should you not pay on time, the IRS says.Learn more about IRS penalties
When you know you can’t pay your taxes on time, it’s crucial to be proactive.
Initiating a conversation with the IRS, whether online or by phone at 800-829-1040, could help you minimize or even avoid interest, fees and penalties. If you also feel as if you can’t pay your state income taxes, contact your state tax agency to find out what your options are.
“If the unpaid liability is only a year old and there is no doubt the tax is owed, chances are good a savvy taxpayer can handle the situation on their own,” Hockenberry says. “However, if there is any chance the assessed tax is in question, the taxpayer wants to request a penalty abatement, or there are collection issues involved, it’s best to seek the advice of an experienced tax professional. Professionals are trained to deal with the IRS in situations like this.”
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.