What If I Owe Taxes and Can’t Pay?

The deadline for filing your 2022 tax return is fast approaching. You have until April 18 to send in your federal tax return by mail or electronically—which is a few extra days than the traditional April 15 deadline. However, that might not be enough time to come up with the cash you need if you can’t afford to pay your tax bill.

So what happens if you owe the IRS money and don’t pay? For starters, you shouldn’t simply ignore your tax bill. There are options to help you pay what you owe over time if you can’t pay your taxes by the tax-filing deadline.

File a return even if you can’t pay your tax bill

Don’t assume that you won’t have to pay what you owe if you don’t file a tax return. In fact, not filing a return will get you into more trouble than not paying what you owe on time. That’s because you’re required by law to file a tax return.

You can be subject to the failure to file penalty if you owe taxes and don’t file a return by the due date (including extensions, which is October 16, 2023, for 2022 returns). The failure to file penalty, also known as the late filing penalty, is 5% of your unpaid taxes for each month or part of a month that your tax return is late—up to a maximum of 25% of your unpaid taxes, according to the IRS. Plus, the IRS charges interest on penalties.

The failure to file penalty actually is higher than the penalty for not paying what you owe when you file your tax return. The failure to pay penalty is 0.5% of the amount owed for each month or part of a month that the tax remains unpaid—up to a maximum of 25% of your unpaid taxes, according to the IRS.

On top of penalties and interest, the IRS can impose a range of civil and criminal sanctions if you fail to file a tax return. So if you’re wondering if you can go to jail for not paying taxes, it is possible if you owe money and fail to file a return. However, if you do file your tax return on time, you won’t end up behind bars just because you can’t afford to pay your tax bill. ‍

What happens if you don’t pay taxes?

If you file your tax return and don’t pay what you owe or only a portion of what you owe, the IRS will send you a bill for the amount due, including penalties and interest. As mentioned above, the failure to pay penalty is 0.5% of what is owed, and the current interest rate the IRS charges for underpayment of taxes is 7%.

If you don’t pay by the due date listed on the first bill, the IRS will send another bill. Keep in mind that penalties and interest will continue to accrue. If you don’t pay after receiving a second bill, the IRS will begin the collection process. This can include applying your future tax refunds to the amount owed, seizing your property and assets, or even an unannounced visit from and IRS officer to your home or business.

If you can’t pay in full, pay what you can

Even if you can’t pay all of what you owe, file a tax return by the April 18 deadline—or apply for an extension to file by October 16, 2023, by filling out Form 4868. The extension doesn’t give you more time to pay what you owe, though. So, your best bet is to pay what you can by April 18.

Paying a portion of what you owe to the IRS will reduce the late penalties and interest you’ll have to pay. When you send in your payment, tax professionals recommend including a note instructing the IRS to apply the payment to your tax bill—not to the penalty or interest—to reduce the amount to which the late filing penalty and interest is applied.

Then, visit IRS.gov or call the IRS at 800-829-1040 to explore payment options.

Apply for an IRS payment plan

You can apply online for an IRS payment plan to pay off what you owe over time. It’s better to apply online than request a payment plan when filing a tax return electronically because the IRS will process the online request faster. Two IRS payment plan options are available:

• The short-term payment plan is available if you owe less than $100,000 in taxes, penalties and interest. The payment period is 120 days or less. There is no set-up fee for this plan, but you will have to pay the late payment penalty and interest until your balance is paid in full.
• The long-term payment plan is available if you owe less than $50,000 in taxes, penalties and interest. The payment period can be more than 120 days. There’s a $31 set-up fee (in addition to penalties and interest) if you pay monthly through automatic withdrawals or $130 set up fee if you don’t want payments to be automatically debited.

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If you are a low-income taxpayer, you might qualify for a waiver for the IRS payment plan set-up fee. Form 13844 will walk you through the steps to determine if you qualify for a waiver.

If you don’t qualify for an online payment plan, you can request an IRS installment agreement.

Request an IRS installment agreement

You can request an IRS installment agreement by submitting Form 9465, Installment Agreement Request along with your tax return (or you can submit it separately). If you owe more than $50,000, you must also file a Form 433-F, Collection Information Statement.

If the IRS approves your request, it will send you a notice with the terms of your agreement and a request for a user fee, which ranges from $107 to $225. Typically, you will have a maximum of 72 months to pay off what you owe through an installment agreement.

Apply for a hardship extension

You can apply for an extension to pay your taxes due to hardship with Form 1127. You must be able to prove that paying your tax bill in full would create a substantial financial loss for you, such as having to sell property for less than its market value. Form 1127 requires that you include a detailed explanation of the undue hardship and documentation to support your claim.

Hardship extensions can range from six months to 18 months. Interest continues to accrue on the amount owed until it is paid in full.

Find out if you’re eligible for an IRS offer in compromise

You might be able to settle your tax debt for less than you owe if you qualify for an IRS offer in compromise. Through this program, you can make an offer to the IRS for the amount you can afford to pay based on your financial situation and what the IRS expects is your ability to pay. The IRS provides a calculator you can use to figure this amount on Form 656.

The IRS recommends exploring its other payment options before applying for an offer in compromise and won’t accept your offer if you can pay in full through an installment plan. To qualify, you can’t currently be in bankruptcy proceedings, and you must have filed all of the tax returns you are required to file. In other words, if you’ve failed to file tax returns in the past, you’re not eligible.

You must pay a $205 application fee (unless you meet low-income certification guidelines). You must also include an initial payment with your offer. If you apply and aren’t eligible, the IRS will return your application fee. However, it will apply your initial payment toward your tax balance.

Other options to pay your tax bill

You can pay with a credit card, personal loan, or a loan or withdrawal from your 401(k) or similar retirement account. However, all of these options can cost more in the long run than the IRS payment plan options.

If you pay your tax bill with a credit card, you’ll be hit with a charge by one of the payment processors the IRS partners with—in addition to the interest rate on the card you use. Card processing fees range from 1.85% to 1.98% of the amount paid.

Personal loan interest rates can be lower than credit card interest rates. However, even the lowest rates currently available are comparable with the interest rate the IRS charges on past-due balances. If you don’t have a good credit score, you likely won’t qualify for the best rates on personal loans.

Borrowing from your 401(k) can be an easy way to access cash if your plan provider allows you take a loan from your account. The maximum amount you can borrow is $50,000 or 50% of your account balance, whichever is less. You must pay back the amount you borrow, plus interest. If you don’t, the loan will be considered a withdrawal, and you will have to pay income taxes on the amount withdrawn. Plus, you’ll have to pay an early withdrawal penalty if you’re younger than 59 ½.

Bottom line

If you owe taxes and can’t pay, your best option is to contact the IRS to discuss your options. The Taxpayer Advocate Service is an independent organization within the IRS that can help guide you through the process of resolving tax problems. The IRS has a searchable database that can help you find a taxpayer advocate in your state.

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