What Should I Do If I Owe Taxes to the IRS?

When taxpayers owe the Internal Revenue Service (IRS), the agency offers procedures and options to help resolve tax obligations. This guide provides insights into managing a tax bill, even when immediate full payment is not possible.

Paying Your Tax Bill

Paying the full amount by the tax deadline, typically April 15th, is the most straightforward way to avoid additional costs. The IRS provides several electronic payment methods. IRS Direct Pay allows payments directly from your checking or savings account without fees. To use it, you need your Social Security number, bank routing and account numbers, and information from a prior tax return for verification. You can specify the reason for payment and the tax period.

The Electronic Federal Tax Payment System (EFTPS) is a free online service available to individuals, primarily for businesses. EFTPS requires prior enrollment and allows scheduling payments up to 365 days in advance. Payments can also be made with a debit or credit card through third-party processors, though these typically involve a processing fee.

For traditional payments, use a check or money order payable to the “U.S. Treasury.” Include your name, address, phone number, Social Security number, tax year, and related tax form (e.g., “2024 Form 1040”) on the memo line. Consult IRS instructions for the correct mailing address, as it depends on your location and form filed. Never send cash through the mail.

Cash payments can be made in person. The IRS partners with retail stores for cash payments, often with a limit of up to $1,000 per payment and a fee. This requires generating a payment barcode online and taking it to a participating retailer. Some IRS Taxpayer Assistance Centers (TACs) also accept cash payments by appointment. Paying your tax bill on time helps prevent penalties and interest, which increase the amount owed.

Options When You Cannot Pay in Full

If you cannot pay your tax bill in full by the deadline, the IRS offers programs and arrangements for structured payment over time. These options help prevent more severe collection actions.

A Short-Term Payment Plan grants up to 180 additional days to pay your tax liability in full. While this plan has no setup fee, interest and penalties continue to accrue until the balance is paid. This option is available if you owe less than $100,000 in combined tax, penalties, and interest, and can be requested online, by phone, or through tax software.

An Installment Agreement allows monthly payments for a longer period, typically up to 72 months. Individuals generally need to owe $50,000 or less in combined tax, penalties, and interest to qualify, and businesses typically $25,000 or less. You can apply online through the Online Payment Agreement (OPA) tool, by phone, or by mailing Form 9465, Installment Agreement Request. Setup fees vary based on the application method and whether direct debit payments are chosen. Interest and penalties still apply, but the failure-to-pay penalty rate may be reduced while the agreement is in effect.

An Offer in Compromise (OIC) allows certain taxpayers to resolve their tax liability for a lower amount than what is owed. This option is considered when there is doubt as to collectibility (you cannot pay), doubt as to liability (uncertainty about whether the tax is owed), or when collection would cause economic hardship. The OIC process requires detailed financial disclosure using forms like Form 656, Offer in Compromise, and financial statements such as Form 433-A (for individuals) or Form 433-B (for businesses). The IRS evaluates your ability to pay, income, expenses, and asset equity when considering an OIC.

A Temporary Delay in Collection, also known as “Currently Not Collectible” (CNC) status, is available for taxpayers experiencing severe financial hardship. If the IRS determines you cannot pay due to your current financial condition, they may temporarily delay collection. During this period, the IRS will not actively pursue collection, but interest and penalties continue to accrue. The IRS may periodically review your financial situation, and collection efforts can resume if your financial condition improves.

Understanding Penalties and Interest

The IRS imposes penalties and charges interest when taxpayers do not meet their tax obligations. Penalties are distinct from interest, though both increase the total amount due.

The Failure to File Penalty is assessed if you do not file your tax return by the due date, even if you cannot pay. This penalty is 5% of the unpaid taxes for each month or part of a month the return is late, up to a maximum of 25% of your unpaid tax. If your return is more than 60 days late, a minimum penalty may apply, which for returns due in 2025 is the lesser of $510 or 100% of the tax owed. Filing your return on time, even if you cannot pay, helps avoid this larger penalty.

The Failure to Pay Penalty applies if you do not pay the tax shown on your return by the due date. This penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25% of the unpaid tax. If an installment agreement is in place, this penalty rate may be reduced to 0.25% per month. When both failure to file and failure to pay penalties apply for the same month, the failure to file penalty is reduced by the failure to pay penalty, resulting in a combined monthly penalty of 5%.

Accuracy-related penalties can be imposed if you understate your tax liability due to negligence, disregard of rules, or a substantial understatement of income tax.

Interest is charged on underpayments from the original due date of the tax until it is paid in full. The interest rate is determined quarterly and is generally the federal short-term rate plus 3%. Interest also applies to unpaid penalties.

The IRS may provide penalty relief, known as penalty abatement. You may qualify if you can show reasonable cause for failing to file or pay on time, demonstrating you exercised ordinary care but were unable to comply due to circumstances beyond your control. Examples include natural disasters, serious illness, or inability to obtain records. A first-time penalty abatement may also be available for certain penalties if you have a clean compliance history for the preceding three tax years.

Addressing Errors or Disagreements

Taxpayers may discover an error on a previously filed return or receive a notice from the IRS disputing their reported information.

If you made a mistake on your original tax return, such as overlooking deductions or misreporting income, you can amend your return using IRS Form 1040-X, Amended U.S. Individual Income Tax Return. This form allows you to correct errors that affect your tax liability, whether it results in additional tax owed or a refund due. The general timeframe for amending a return is within three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.

When you receive a notice from the IRS, review it carefully. A common notice is CP2000, which indicates a discrepancy between the income or payment information reported on your tax return and information the IRS received from third parties. This notice proposes changes to your tax return. Compare the information in the notice with your records to determine if the proposed changes are accurate. If you agree, sign and return the response form. If you disagree or partially disagree, provide a clear explanation and supporting documentation.

If you receive a Notice of Deficiency, often called a “90-day letter,” it means the IRS has formally determined an additional tax liability and gives you 90 days to respond. This notice is typically sent after an audit or if you did not file a return. You can agree with the assessment and pay the tax, or you can dispute it. To dispute the assessment, you can petition the U.S. Tax Court within the 90-day period. This action prevents the IRS from proceeding with collection until the Tax Court addresses the case. In some instances, you may engage with the IRS Office of Appeals to resolve the disagreement before pursuing Tax Court.