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What happens if you don’t pay taxes on time? Next steps & helpful tips

5 min read

5 min read

Taxes are a part of life for most people, and sometimes they catch us off guard, financially speaking. Say you file a tax return and don’t have enough money in the bank to cover your tax bill.

If you’re like many other taxpayers, you may question, “What if I can’t pay my taxes?”

First, don’t delay taking action – tax compliance is critical. When you owe taxes and don’t pay, you could get hit with an IRS late payment penalty as well as interest on taxes owed.

Second, don’t panic! There’s something called an IRS installment agreement that helps individuals set up a payment plan to cover taxes owed to the IRS.

Nonetheless, if you can’t pay your taxes on time, you’ll want to get informed on the right course of action to take. Read along to learn what happens if you don’t pay taxes owed – on time or at all – and how to resolve the situation. Luckily, there are just a few steps to master!

Interest on taxes owed

In most cases, if you don’t pay your owed taxes on time, you’ll accrue interest on any unpaid tax from the tax return’s due date until the payment date. The IRS interest rate is the federal short-term rate plus 3%. The IRS states the rate is set every quarter and interest compounds daily.

You’ll also accrue interest on late-filing penalties, which we’ll outline in the next section.

IRS late payment penalty

Unfortunately, those who don’t pay their owed taxes on time also face an IRS late payment penalty. Rather than a flat amount, it’s a graduated rate based on how much you owe and how late the payment is. Let’s dig into the details.

The IRS late payment penalty (sometimes called the failure to pay penalty) is 0.5% for each month, or part of a month, up to 25% of the tax amount that is unpaid from the due date of the return (until the tax is paid in full.) The 0.5% increases to 1% if the tax is unpaid 10 days after an IRS notice of intent to levy property has been issued. If you file your return by the due date and request an installment agreement, the one-half of 1% rate lessens to one-quarter of one percent for any month in which an installment agreement is active.

Keep in mind, this formula still applies if you only pay some of your taxes by the due date. Say you file on time but don’t pay the total amount due. In this case, you’ll usually have to pay a late payment tax penalty.

Learn more about IRS late payment penalty details.

IRS installment agreement

There’s good news if you haven’t missed the tax deadline on tax day and know you can’t pay what you owe. You can turn to something called an IRS installment agreement. It’s a formal agreement between you and the Internal Revenue Service to pay your federal tax debt over a period of time when you can’t pay the total amount owed by the tax deadline.

Request an installment agreement using the steps below.

Need more help with an extension, an IRS installment agreement, or a payment plan? Contact our experienced tax pros!

  1. Complete an online payment agreement if you qualify (instead of completing and filing Form 9465: Installment Agreement Request on paper). You can file an online application if you have an outstanding tax balance of $50,000 or less in combined taxes, penalties, and interest, and have filed all required tax returns. If the IRS approves your request, they’ll set up a monthly payment plan to pay off what you owe.
  2. If you don’t qualify to complete an online agreement, complete and send Form 9465 to the IRS.
  3. Make sure you pay the following fees along with your long-term payment plan application. They are as follows:
  • Online long-term payment agreement: $130
  • Online long-term payment agreement with direct debit: $31
  • Regular installment agreement: $225
  • Regular installment agreement application by phone, mail, or in-person with direct debit: $107
  • Lower-income individuals might qualify for a reduced fee of $43 by filing Form 13844: Application for Reduced User Fee for Installment Agreements.

The IRS can’t turn down your request for an installment agreement if you owe less than $10,000, and all 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
  • You have 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 tax liability in full when due. You might still qualify for an installment agreement if:

  • The conditions above don’t apply to your situation
  • You owe no more than $50,000

There are situations where you could 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.

Can you add to an old installment agreement?

If you need to change your installment agreement, you may be able to do so. You may modify your payment amount or due date online or by calling the IRS. There is a fee to modify your instalment agreement. When you enter or modify an installment agreement, you are agreeing to meet all your future tax obligations. To avoid falling behind in future years, you should check that you have enough withholding or make enough estimated tax payments so that you are paid in full in future years.

Get help determining your eligibility with H&R Block

While being unable to pay taxes on time can be stressful, remember the options available to help you through this situation! It’s essential to act promptly and connect with a tax professional with whom you can explore the best solution for your unique case and work to communicate with the Internal Revenue Service, if needed. Get help from a trusted professional at H&R Block.

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