Making IRS payments: What happens if you owe taxes?

Owing federal taxes and paying your tax liability can be stressful, especially if you can’t pay on time. In most cases, you’re not going to prison for tax evasion; rather, you’ll face interest or penalties if you can’t pay what you owe the Internal Revenue Service (IRS) by the original due date of the return.

Even if you can’t pay by Tax Day, you should still file your tax return or at least file for a six-month extension. Then, review your options for how you can pay the IRS what you owe.

In this article, we outline the consequences of not filing your tax return or paying what you owe on time, as well as what you can do if you owe the Internal Revenue Service.

What happens if you owe the IRS and don’t file or pay?

Taxpayers may wonder if it’s necessary to file their return if they can’t pay their tax bill. The answer is yes — it’s important to file your return or an extension to avoid the failure to file penalty. This penalty is equal to 5% of the unpaid balance, per month or part of a month, up to a maximum of 25% of unpaid tax.

Note: The 5% per month penalty increases to 15% per month if the failure to file is due to fraud by the taxpayer. For returns filed more than 60 days after the due date or extended due date, the minimum penalty is equal to the lesser of $485 or 100% of the unpaid tax (for returns required to be filed in 2024).

Whether you owe back taxes or current taxes, you may be hit with significant penalties and interest accruals over time if you don’t pay. If you don’t pay the balance on your federal income tax return in full by the due date, you’ll create tax debt for yourself. You can be charged penalties and interest on your IRS tax debt until you pay it off. The failure to pay penalty starts at 0.5% of your unpaid balance due per month (capped at 25% of the back taxes you owe). The interest rate for late payment of taxes is currently 8% for July-September of 2024 but can change quarterly.

If you have a good tax compliance history, you may be eligible for IRS “first-time abate” to waive late filing and late payment penalties (but not interest).

What to do if you owe the IRS

Understanding your payment options will help you determine what to do if you owe the IRS. That way you can come up with a payment plan. Here are some of the most common options for people who owe federal tax and can’t pay.

1. Set up an installment agreement with the IRS.

Taxpayers can set up an IRS payment plan, called an installment agreement. The type of agreement you can get depends on your tax situation, including how much you owe and how soon you can pay the balance. You shouldn’t set up an installment agreement if you can pay the balance within 180 days (see #2 below).

Fees or cost: The setup fee for an online direct debit payment plan is $22 (the fee is waived for low-income taxpayers). The setup fee is $69 ($43 for low-income taxpayers that may be reimbursed) for an online plan with non-automatic payments, such as monthly checks. To apply for a low-income application fee, submit Form 13844.

Action required: Complete an online payment agreement or Form 9465. You won’t need to submit a financial statement for installment agreements of $50,000 or less. You can also get a tax professional to evaluate your situation and identify your best solution.

Advantages or disadvantages: If you set up an installment agreement, the penalty on your unpaid balance reduces to 0.25% per month, until you pay the full IRS tax debt on schedule. Interest is charged at the short-term federal rate plus 3% (interest may change each quarter). Generally, the IRS can void agreements if you don’t pay on schedule.

Forms: Form 433-A or Form 433-F is required if the balance is more than $50,000. You can pay through payroll deductions (Form 2159, Payroll Deduction Agreement).

Related: Does an installment plan or IRS debt show up on a credit report? Find out from our experts.

2. Request a short-term extension to pay the full balance.

The IRS will provide taxpayers up to 180 days to pay their full tax balance.

Fees or cost: There’s no fee to request the extension. There is a penalty of 0.5% per month on the unpaid balance. The penalty is reduced to 0.25% per month on the unpaid balance for individuals who file on time and have an approved payment plan.

Action required: Complete an online payment agreement, call the IRS at (800) 829-1040, or get an expert to handle it for you.

Advantages or disadvantages: This option is convenient for taxpayers who need only a short time to pay their full tax bill. The IRS will charge interest at the short-term federal rate plus 3% (interest may change each quarter). With short-term extensions, you avoid the installment payment application fee (see #1), but not late-payment penalties and interest.

3. Apply for a hardship extension to pay taxes.

The IRS offers options for people in hardship situations. For an extension based on hardship, you’ll qualify only if you can prove that paying the tax you owe would cause financial hardship, based on IRS financial standards.

Fees or cost: There’s no cost to apply for a hardship extension. There are no penalties, but interest is calculated at the short-term federal rate plus 3% (interest may change each quarter).

Action required: File IRS Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. You must include a statement of your assets and liabilities.

4. Borrow from your 401(k).

If your 401(k) plan allows for this type of loan, you are generally limited to 50% of your vested account balance unless that balance is less than $10,000, with a $50,000 maximum, and you must repay the money within five years.

Fee or cost: There is a possible minimal fee. The plan must also charge interest.

Action required: Check with your plan administrator for details.

Advantages or disadvantages: If it’s allowed, a loan from your 401(k) plan can be a ready and inexpensive source of cash to pay the current or back taxes you owe. However, taking a loan could negatively impact your future retirement savings if you don’t repay it. The loan is treated as a taxable distribution if you don’t make timely payments, you leave your company without repaying the loan, or your plan terminates. Also, if you are not yet age 59½, a taxable distribution is generally subject to the 10% early distribution penalty.

5. Use a debit/credit card.

Various service providers are available for this option.

Fees or cost: Varies; IRS processing fees are generally about $2.14 to $2.50 (debit card) or 1.82% to 1.98% of the tax balance due (credit card).  On top of the fees from the IRS, you may also encounter fees from the card issuer. Keep in mind, putting tax debt on a credit card can mean that you’re paying interest on your debt – an expensive option as Annual Percentage Rates (APR) have reached over 20% in recent years.  

Action required: Check with the IRS for a list of service providers.

Advantages or disadvantages: This type of payment is convenient and gives taxpayers greater control and flexibility for making payments. They may also earn points, miles, or other credit card rewards. However, higher credit card balances could negatively impact your credit score, and paying with credit may not be appropriate for people with unmanageable credit card debt.

6. Get a personal loan.

You could ask a personal contact — maybe a friend or family member — to loan you the money. Fees and costs will vary widely depending on the source. This could be an inexpensive option, but you should use your best judgment.

Owe the IRS and having trouble paying your tax bill? We can help

Received an IRS notice about unpaid taxes? Our tax professionals can help you figure out which steps to take if you owe taxes but can’t pay. Get help from a trusted tax pro who can help you understand your options for tax relief.