Rule #1: Always File, Even If You Can't Pay
The single most important thing to do if you owe taxes you can't pay: file your return on time.
| Penalty | Rate | Max |
|---|---|---|
| Failure to File | 5% of unpaid tax per month | 25% |
| Failure to Pay | 0.5% of unpaid tax per month | 25% |
Filing late without an extension is 10× more expensive than filing on time and not paying. A $5,000 tax bill unpaid for 5 months:
- Filed late: $5,000 × 25% failure-to-file penalty = $1,250 penalty
- Filed on time, didn't pay: $5,000 × 2.5% failure-to-pay = $125 penalty
Step 1: Pay What You Can by April 15
Even a partial payment reduces penalties and interest. Every dollar paid by April 15 is one fewer dollar accruing 0.5%/month in penalties.
How to pay what you can:
- IRS Direct Pay (free, immediate) at irs.gov/payments
- Debit/credit card via Pay1040.com or ACI Payments (processing fee applies)
- Check payable to "United States Treasury"
Step 2: Apply for an IRS Installment Agreement
If you owe ≤$50,000 in combined tax, penalties, and interest, you can set up a payment plan online at irs.gov/opa (Online Payment Agreement).
| Plan Type | Max Amount | Max Term | Setup Fee |
|---|---|---|---|
| Short-term (≤180 days) | $100,000 | 6 months | Free |
| Long-term installment (direct debit) | $50,000 | 72 months | $31 |
| Long-term installment (non-direct debit) | $50,000 | 72 months | $130 |
Interest (current rate: ~7–8% annually) continues to accrue until paid in full, but the failure-to-pay penalty drops to 0.25%/month while a payment plan is in effect.
Step 3: If You Genuinely Cannot Pay Anything
Currently Not Collectible (CNC) Status
If you can demonstrate you have no ability to pay (income barely covers basic living expenses), the IRS can temporarily classify your account as "currently not collectible." Collection activity stops, but the debt doesn't go away — interest and penalties continue to accrue. The IRS reviews CNC status periodically.
To request CNC status, call IRS collections at 1-800-829-7650 or work with a tax professional.
Offer in Compromise (OIC)
An OIC lets you settle for less than the full amount owed if:
- You cannot pay in full (Doubt as to Collectibility), OR
- There is genuine doubt the liability is correct (Doubt as to Liability), OR
- Exceptional circumstances make full payment unfair (Effective Tax Administration)
OIC eligibility requirements:
- Must be current on all tax return filings
- Cannot be in an open bankruptcy proceeding
- $205 application fee (waived for low-income applicants)
- Must meet the IRS's "Reasonable Collection Potential" formula
Realistic expectations: The IRS accepted about 40% of OIC applications in recent years. The process takes 6–12 months. Work with a licensed tax professional (CPA, enrolled agent, tax attorney) for complex situations.
What NOT to Do
- Don't ignore the IRS — ignoring notices leads to levies (wage garnishment), liens, and passport revocation for debts over $59,000
- Don't pay with high-interest debt unnecessarily — IRS installment rates (7–8%) may be lower than credit card rates (20%+), but compare carefully
- Don't file late to avoid the bill — the failure-to-file penalty makes this strategy backfire within a month
State Taxes: Same Rules Apply
Most states mirror IRS rules — file on time even if you can't pay, then set up a state payment plan. State interest rates and penalty structures vary. Check your state's department of revenue website.
Use our Tax Refund Estimator to confirm exactly how much you owe before April 15.