What If You Can’t Afford to Pay Your Taxes?

The Internal Revenue Service (IRS) and state tax agencies have structured processes to help taxpayers manage their obligations when they cannot afford to pay. Understanding these options is the first step toward resolving the debt. Ignoring a tax bill will not make it disappear; it will lead to greater financial consequences as penalties and interest accumulate. By engaging with the available systems, you can find a manageable way to settle your tax liability.

The First Step: File Your Return on Time

When you realize you cannot pay your full tax liability, the most important action is to file your tax return by the April 15th deadline. The IRS imposes separate penalties for failing to file and failing to pay. The penalty for not filing is significantly more severe, making a timely filing necessary to minimize your overall debt.

The failure-to-file penalty is 5% of the unpaid taxes for each month a return is late, capped at 25% of your tax bill. In contrast, the failure-to-pay penalty accrues at a lower rate. When both penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty.

Filing on time, even without payment, stops the failure-to-file penalty from starting. For returns filed more than 60 days late, the minimum penalty for returns due in 2025 is the smaller of $510 or 100% of the tax owed. Submitting your return acknowledges your tax debt and is a prerequisite for accessing IRS payment solutions.

Even if you file for an extension using Form 4868, which gives you until October 15 to file, the extension only applies to filing, not to paying. Your tax payment is still due on the original April deadline. Filing the return itself remains the first action to control the financial damage.

Available IRS Payment Solutions

After filing your tax return, the next step is to evaluate the payment solutions the IRS provides. These options are designed to accommodate different financial situations, from temporary shortfalls to long-term hardship. Understanding each one allows you to determine the most appropriate path for your circumstances.

Short-Term Payment Plan

For those who can pay their tax debt relatively quickly, a short-term payment plan offers an extension of up to 180 days. This option is suitable for individuals waiting on a specific source of funds or who just need a few extra months to gather the full amount. There is no setup fee, though interest and the failure-to-pay penalty will accrue until the balance is paid in full. Taxpayers who owe less than $100,000 in combined tax, penalties, and interest can apply for this plan online.

Installment Agreement

If you need more than 180 days, a long-term installment agreement (IA) allows you to make monthly payments for up to 72 months. This is one of the most common solutions for managing a significant tax debt. To be eligible for a streamlined IA, you must owe $50,000 or less in combined tax, penalties, and interest and have filed all required tax returns. You will need to calculate a proposed monthly payment that will satisfy the debt within the 10-year collection statute period. Setup fees for installment agreements vary, with lower fees for online applications and direct debit payments.

Offer in Compromise

An Offer in Compromise (OIC) allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than what they originally owed. This option has strict eligibility requirements based on an evaluation of your financial situation, including your ability to pay, income, expenses, and asset equity. An OIC is for those whose financial circumstances are such that paying the full debt would create a significant economic hardship. The process requires a non-refundable $205 application fee and an initial payment, though these may be waived for low-income taxpayers.

Currently Not Collectible Status

For taxpayers experiencing severe financial hardship, such as unemployment or living on a fixed income that only covers basic living expenses, the IRS may grant Currently Not Collectible (CNC) status. This is a temporary suspension of collection efforts, so the IRS will not levy your assets or garnish your wages. The status does not erase the tax debt; interest and penalties continue to accrue. To request CNC status, you will need to provide detailed financial information to prove that you cannot afford your basic living expenses and your tax debt. If your financial situation improves, the IRS can remove the CNC status and resume collection efforts.

How to Formally Request a Payment Solution

Once you have determined the best payment solution, the next step is to formally submit your request to the IRS. The submission process varies depending on the type of plan you are seeking. Follow the correct procedure to ensure your application is processed efficiently.

For short-term payment plans and most installment agreements, the most direct method is using the IRS’s Online Payment Agreement (OPA) tool. To use this system, you will need to create an IRS Online Account and verify your identity. The OPA tool will guide you through the application and provide immediate notification of approval.

If you do not use the online tool, you can apply for an installment agreement by mail. You must complete Form 9465, Installment Agreement Request. If your total debt exceeds $50,000, you will also need to attach a completed Form 433-F, Collection Information Statement. The IRS will typically respond within 30 days.

Requesting an Offer in Compromise is a paper-based process. You must assemble a package that includes Form 656, Form 433-A (OIC) with supporting financial documents, and the required application fee and initial payment. This package must be mailed to the specific IRS location found in the Form 656 instructions.

How Penalties and Interest Increase Your Debt

When a tax bill is not paid by the due date, the total amount owed grows due to the addition of penalties and interest. These charges are applied to your account automatically and can significantly increase your liability.

The failure-to-pay penalty is 0.5% of the unpaid taxes for each month the tax remains unpaid, capped at 25% of your total unpaid tax. If you enter into a formal installment agreement with the IRS, this penalty rate is reduced to 0.25% per month for the duration of the agreement.

The IRS also charges interest on the entire unpaid balance, including the original tax and accrued penalties. Interest is compounded daily, and the rate is adjusted quarterly. For early 2025, the annual rate on underpayments was 7%.

Handling Unpaid State Taxes

A federal tax liability with the IRS is separate from any taxes you may owe to a state government. Each state has its own tax agency, often called the Department of Revenue, which administers and collects state taxes. You must deal directly with that specific state agency, as their rules and procedures are distinct from those of the IRS.

State tax authorities have their own systems for penalties, interest, and collection actions. While many states offer payment solutions similar to the IRS, the eligibility requirements and application processes can vary. An agreement with the IRS will not automatically apply to your state tax debt.

To resolve unpaid state taxes, you must contact your state’s tax agency. Visit the agency’s official website, which can be found by searching online for “[State Name] Department of Revenue.” Their website will provide information on payment options, necessary forms, and contact details. Addressing state tax issues promptly is important to avoid collection actions like wage garnishments or bank levies.