Can't pay the IRS? What to do next

The IRS charges two separate penalties. The failure-to-file penalty is 5% of the unpaid tax per month, while the failure-to-pay penalty is 0.5% per month. Both are capped at 25%, but the filing penalty grows ten times faster. Filing on time — or requesting an extension to file — cuts the most expensive penalty even if you send no money. Interest at the federal underpayment rate (7% a year, compounded daily) accrues either way, so paying something now still reduces the total.

If you could pay within about six months by saving, selling something or waiting for a bonus, a short-term payment plan gives you up to 180 days with no setup fee for balances under $100,000. Interest and the failure-to-pay penalty continue, but you avoid the cost of a long-term agreement. Most people can set one up in the IRS Online Account or through the Online Payment Agreement tool.

If you need longer, an installment agreement spreads the balance into monthly payments. Individuals owing $50,000 or less can usually apply online without a financial statement. Setup fees are lower with direct debit ($29 online). While the plan is in effect, the failure-to-pay penalty drops to 0.25% a month for timely filed returns. Use our payment plan calculator to see how the payment and total interest change with the term.

If paying anything would leave you unable to cover basic living expenses, you can ask the IRS to mark your account Currently Not Collectible. The IRS compares your income to its Collection Financial Standards. Collection pauses, but the debt isn't forgiven: interest and penalties still accrue, a lien may still be filed, and the IRS can keep future refunds. It reviews your finances periodically.

An Offer in Compromise settles the debt for less when the IRS agrees it can't collect the full amount within the 10-year collection statute. The IRS calculates your reasonable collection potential from asset equity and future disposable income. Most applicants don't qualify, so start with the free IRS Pre-Qualifier. There's a $205 application fee unless you meet the low-income certification.

Ignoring the balance escalates it. The IRS sends a series of notices — CP14, then CP501, CP503 and CP504 — followed by a final notice of intent to levy with Collection Due Process rights. After that, the IRS can garnish wages, levy bank accounts and file a federal tax lien. Responding early keeps more options open and usually costs less.

For small balances the IRS asks almost nothing beyond the payment amount you propose. For larger balances, or for hardship and offer requests, expect questions about monthly income from every source, housing, utilities, food, transportation, health insurance and out-of-pocket medical costs, court-ordered payments, and assets such as bank balances, vehicles, home equity and retirement accounts. The IRS caps many living expenses at national and local standards, so a budget that works for your household may still be adjusted. Gathering three months of bank statements and pay stubs before you call makes the conversation faster and the result more accurate.

1. File every required return, even without payment.
2. Pay what you can now to reduce interest.
3. Can you pay within 180 days? Use a short-term plan.
4. Can you afford a monthly payment? Apply for an installment agreement.
5. Can't afford anything after basic expenses? Ask about Currently Not Collectible status.
6. Will you never be able to pay in full? Check the Offer in Compromise Pre-Qualifier.
7. Penalties large? Ask about penalty abatement separately.