Can't pay your taxes? Here's what to do

It’s the least wonderful time of the year: tax season. Filing taxes and managing the onslaught of paperwork can be stressful. But if you owe Uncle Sam and can’t pay up, that stress compounds.

What are you supposed to do next? While it’s tempting to avoid your tax bill altogether, that will make your situation much worse. 

If you’re facing an unexpected tax bill, it can be an unpleasant surprise. But there are common culprits for this. It could be due to not withholding enough taxes from your wages. For self-employed individuals, it could be from skipping out on estimated quarterly taxes. 

What happens if you don’t pay?

The IRS will follow up with you if you fail to pay your tax liability. Despite advancements in technology, the IRS is still very old-school. 

"If you don't make a payment on those taxes within 30 days, you're going to get a letter from the IRS. It says, 'Hi, you owe X number of dollars. You haven't paid them yet.' But it will come in a letter. I want to emphasize the IRS is never going to reach out to you by phone," said Rob Burnette, CEO, investment advisor representative and professional tax preparer at Outlook Financial Center.

This is important to note in order to avoid potential tax scams by phone, text or email. You can report tax scams through the Federal Trade Commission or by emailing phishing@irs.gov with "IRS phone scam" in your subject line. 

Consequences of not paying

If you’re unable to file your tax return by the April 15 deadline, you can request a six-month extension by submitting Form 4868. This gives you until October 15. The most important thing to be aware of is that this extends the amount of time you have to file your tax return. It does not extend the payment deadline. 

"When you don't pay your taxes on time, the IRS charges you penalties and interest. So the penalty is called the 'failure to pay' penalty and it's equal to half a percent a month for every month that your taxes go unpaid," said Logan Allec, CPA and owner of Choice Tax Relief.

The penalty maxes out at 25%. If you fail to file your tax return on time there’s a separate failure to file penalty. Note that first-time offenders may get penalty relief under an administrative waiver if certain conditions are met. 

If you don’t pay your tax bill, it can balloon quickly. "The interest is charged not only on the balance due but also on those penalties. The interest is also charged on itself. So it's compounded daily," Allec said. The IRS evaluates interest rates quarterly. For the first quarter of 2025, taxes owed have a 7% interest rate. 

Eventually, the IRS can take action to try and recover the outstanding tax debt. Through an IRS levy, you could face wage garnishment, have funds taken from your bank account or have your property seized. 

"The IRS can also file a notice of federal tax lien against you if you don't pay your taxes. What that is is basically just a notice in public record, typically with the county reporter just putting the world on notice that you owe the IRS," said Allec. 

Your lingering tax debt can haunt you for a while and won’t go away easily. The IRS typically has 10 years to collect your outstanding balance from you. 

What options are available?

If you owe the IRS and can’t pay your taxes, you have a number of options. Some are more reasonable than others. 

"A common option these days — most recently — is to bury your head in the sand and pray that Donald Trump will abolish the income tax," said Allec. 

This Hail Mary may not get you far, but the IRS has various options to help you manage your tax debt. 

Short-term payment plan

If your total tax debt, including penalties and interest, is below $100,000 you may qualify for a short-term payment plan with the IRS. There’s no cost to sign up for a short-term payment plan, which gives you up to 180 days or six months to pay your tax debt. However, your balance will still accrue interest and potential penalties. You can apply online for a short-term payment plan.

Installment agreement

The IRS also offers a long-term payment plan which is referred to as an installment agreement. If your total tax liability, plus penalties and interest is $50,000 or less you may qualify for this option. This extends the repayment term up to 72 months of six years. 

Having such a long runway of time to pay all your taxes, penalties and interest comes at a cost. Installment agreements have two different setup fees. You’ll pay a $22 setup fee if you agree to make monthly payments through automatic withdrawals. If you pay each month without direct debit, the setup fee is $69. 

Low-income taxpayers may qualify to get these fees waived or reduced. Be aware that if your balance exceeds $25,000 you’re required to pay through automatic withdrawals. You typically can apply for an installment agreement online or Form 9465.

Apply for an undue hardship extension

If you’re experiencing financial hardship, you can use Form 1127, which is the Application for Extension of Time for Payment of Tax Due to Undue Hardship. To qualify, you must fill out the form and explain how paying your taxes would cause financial hardship. You also must provide information about your assets, liabilities, income and expenses. 

Note that some natural disasters such as the Los Angeles wildfires have prompted the IRS to offer tax deadline extensions. 

Offer in compromise 

If the amount you owe is causing a significant strain on your finances, an offer in compromise could be an option. Through an offer in compromise, you may be able to reduce your tax debt by settling with the IRS for a lower amount than you currently owe. But first, you need to be current with all of your tax filings. 

"You first have to have all your tax returns in and filed before you can do an offer in compromise or submit an offer in compromise. So they basically won't even look at it if you haven't," said Frank Remund, CFP, EA, wealth manager at Savvy Advisors.

It’s not just about being up to date with your current tax filings, but you must stay current with future ones as well. 

"You do have to remain in compliance in terms of filing on time and paying in time for the next five years after offer acceptance," said Allec. 

While it can sound great in theory to pay less than you owe, it’s difficult to qualify for an offer in compromise. The IRS reviews your income, assets, expenses and overall ability to pay the tax debt. If you’re able to pay your tax debt with an installment agreement, it’s unlikely you’d qualify for an OIC. 

You can use Form 656-B, Offer in Compromise Booklet for instructions on how to apply for an offer in compromise. You’re responsible for paying a $205 application fee and an initial payment. If you meet low-income certification guidelines, these requirements may be waived. 

To see if you stand a chance at getting approved for an OIC, you can use the IRS’ Offer In Compromise Pre-Qualifier tool. 

Currently not collectible 

If you’re living paycheck to paycheck and have absolutely nothing to pay the IRS, you may be able to pause the collection process — but not the interest and penalties that keep piling up. 

"You may be able to convince the IRS that you qualify for something called CNC or Currently Not Collectible status,” said Allec. “When you're in this status, the IRS can't collect from you and you don't have to pay them anything while you're in that status."

Your tax debt doesn’t magically disappear, though. You’re still on the hook, but with Currently Not Collectible status the IRS agrees that now is not the time to try and collect the money. To qualify for the pause, you’ll need to provide a Collection Information Statement and information about your financial situation. 

"However, the IRS does reserve the right to kick you out of that status if they think your financial situation has improved. For example, if next year you file a tax return showing you're making a lot more money they may kick you out of that status. So it doesn't have the finality of the offer in compromise," said Allec. 

What to know about tax relief agencies 

If you’re feeling overwhelmed with tax debt, you might be tempted to use a tax relief agency. These agencies can advocate for you and work on your behalf to help figure out a plan. So if your brain shuts off even thinking about solving this issue, it’s an option. But some agencies may be more legitimate than others. 

"So there's a spectrum of legitimacy when it comes to tax relief companies. There are companies where they're very transparent about who's working their cases. These companies are generally owned by a licensed professional, a tax attorney, a CPA, an IRS enrolled agent," said Allec.

If a company is making promises about what they can do or are being unclear on how they work or get paid, it's a red flag. 

"If on the sales pitch, they're kind of promising or implying that they can get that [tax relief] for you without asking anything about your financial situation, you should just hang up the phone and talk to another company," said Allec. 

Using a tax relief company could help save you time by working with an expert who knows what they’re doing. If the stakes are high and you owe a substantial amount, it may make sense. 

But you can also use the Taxpayer Advocate Service at no cost if you need additional support and can’t resolve things by yourself with the IRS. 

If you do opt to work with a company, look at the Better Business Bureau and Trustpilot for ratings and reviews. You can also search the company’s name and "lawsuits" to see what comes up.

What to consider next 

Dealing with tax debt and the IRS is nobody’s cup of tea. If you can’t pay what you owe now, work on filing your return and take advantage of one of the options above to get on track with a payment plan. 

To avoid this situation in the future, understand how life events can lead to unexpected tax consequences. For example, getting married, divorced and having children. "Those events have tax consequences that you may not think about," said Remund.

Update your W-4 to ensure you’re withholding the right amount. Self-employed individuals and business owners can save a minimum of 30% for taxes. You can also work with a trusted accountant who can help you navigate your taxes and be there to support you if there are any issues.