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You Owe the IRS, But Can't Pay

If you can't immediately pay the IRS what you owe, you must still file your return on time. If you don't, you’ll also pay a late-filing penalty along with the taxes you owe.

If you owe tax and you don't file your return on time:

  • The late-filing penalty is usually 5% of the tax you owe each month -- or part of a month -- that your return is late. This applies up to a maximum of 25% of the tax owed.
  • If your return is more than 60 days late, the minimum penalty for late filing is the smaller of these:
    • $135
    • 100% of the unpaid tax

Interest

Interest is usually charged on any unpaid tax from the due date of the return until the payment date. The interest rate is the federal short-term rate plus 3%. The rate is set every three months, and interest is compounded daily. The interest rate recently has been about 3%.

Interest is also charged on late-filing penalties.

If you file on time but you don't pay the total amount due, you'll usually have to pay a late-payment penalty. This is 0.5% of the tax you owe per month -- or part of a month -- until the tax is paid in full. You’ll be charged up to a maximum penalty of 25% of the tax due.

The 0.5% rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If you file by the return due date, the rate decreases to 0.25% for any month an installment agreement is in effect. However, that interest rate fluctuates.

Installment agreement

You can request an installment agreement by:

  • Completing an online payment agreement
  • Filing Form 9465: Installment Agreement Request

Send the completed document with your return.

You can file an online application if you owe $50,000 or less in combined taxes, penalties, and interest. If the IRS approves your request, they'll set up a monthly payment plan to pay off what you owe.

Your fees for entering into an installment agreement include:

  • Online payment agreement or payroll deduction: $120
  • Direct debit: $52

Lower-income individuals might qualify for a reduced fee of $43 by filing Form 13844: Application for Reduced User Fee For Installment Agreements.

Your request for an installment agreement can't be turned down if you owe less than $10,000 and all of these conditions apply:

  • During the past five tax years, you -- and your spouse if filing a joint return -- have:
    • Filed all of your returns on time
    • Paid all income tax due
    • Not entered into an installment agreement for payment of income tax
  • You agree to pay the full amount you owe within three years and to comply with the tax laws while the agreement is in effect.
  • You're financially unable to pay the liability in full when due. However, the IRS usually grants installment agreements even if you can pay in full if both of these is true:

    • Your liability isn't more than $10,000.
    • You meet the other criteria.

You might still qualify for an installment agreement if either of these applies:

  • The conditions above don't apply to your situation.
  • You owe $50,000 or more.

You might be better off using another payment method, like a bank loan or a credit card. You should determine which payment method results in the lowest overall cost.

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