Can You Defer Tax Payment to the Next Year?

Delaying tax payments can help manage cash flow, but it’s essential to understand the rules and consequences. The IRS offers options for deferring payment, though penalties and interest may still apply.

Filing an Extension

An extension provides extra time to file a return but does not delay payment. Individuals and businesses can request an automatic six-month extension using Form 4868 for personal returns or Form 7004 for certain business entities. While the filing deadline extends to October 15 for most individuals, taxes owed are still due by April 15 to avoid penalties and interest.

Failing to pay at least 90% of the total tax liability by the original due date results in a failure-to-pay penalty of 0.5% per month on the unpaid amount, up to 25%. Interest compounds daily based on the federal short-term rate plus 3%. To reduce costs, taxpayers should estimate their liability and submit a partial payment when requesting an extension.

Taxpayers expecting a refund face no financial penalties for filing late with an extension. However, those who owe should make payments as soon as possible to limit penalties and interest. Some states require separate extension requests, so checking state tax agency guidelines is necessary.

Installment Payment Arrangements

For those unable to pay their full tax liability by the deadline, the IRS offers installment agreements to spread payments over time and avoid collection actions.

A short-term payment plan allows taxpayers to settle their balance within 180 days without setup fees, though interest and penalties continue to accrue.

For longer repayment periods, individuals owing $50,000 or less in combined tax, penalties, and interest can apply online for a streamlined installment agreement without financial documentation. Businesses with a balance of $25,000 or less qualify for similar terms. Higher balances may require additional financial disclosures. Setup fees range from $31 for direct debit agreements to $130 for non-direct debit plans, with possible fee reductions for low-income taxpayers.

Interest accrues based on the federal short-term rate plus 3%. Missing a scheduled payment can result in default and enforcement actions. Taxpayers should choose a manageable monthly payment and ensure timely payments. The IRS may allow modifications if financial circumstances change, but missed payments can lead to penalties or termination of the agreement.

Eligible Relief Options

Financial hardships can make it difficult to meet tax obligations, and the IRS provides relief programs for those in significant distress.

An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the full amount owed if full payment would create financial hardship. The IRS evaluates applications based on income, expenses, asset equity, and ability to pay. Taxpayers must submit Form 656 and a non-refundable $205 application fee, though low-income applicants may qualify for a waiver. If approved, the reduced amount can be paid in a lump sum or periodic payments. However, fewer than 40% of applications are approved annually.

For those who do not qualify for an OIC, the IRS offers “Currently Not Collectible” (CNC) status, which temporarily halts collection efforts if a taxpayer can prove that making payments would prevent them from covering basic living expenses. CNC status does not eliminate the debt but suspends enforcement actions like wage garnishments or bank levies. Interest and penalties continue to accrue, and the IRS periodically reviews the taxpayer’s financial situation to determine if payments can resume.

Penalty abatement may be available for taxpayers facing significant penalties due to circumstances such as natural disasters, serious illness, or reliance on incorrect tax advice. The First-Time Penalty Abatement (FTA) program is open to taxpayers with a clean compliance history for the past three years. To request abatement, taxpayers must submit a written explanation or call the IRS. While interest on unpaid taxes remains, reducing penalties can lower the total balance owed.

Confirming Compliance

Staying compliant requires accurate reporting and adherence to IRS rules. Taxpayers must report their liabilities on the appropriate tax forms, ensuring all income, deductions, and credits are properly documented. Underreporting income or misclassifying expenses can trigger audits, leading to additional assessments, penalties, or fraud investigations if intentional misrepresentation is found.

Proper tax planning helps manage obligations while remaining compliant. Businesses can use accrual accounting methods to align revenue recognition with tax liabilities, smoothing cash flow. Tax-deferred accounts like 401(k) plans or IRAs can shift taxable income to future years. Corporations may use tax-loss carryforwards to offset future taxable income, reducing immediate liabilities without unlawfully delaying payments.