What to Do If You Have a Balance Due on Your Tax Return

Owing money on your tax return can be stressful, but it’s important to address the situation promptly to avoid additional costs and penalties. The IRS expects taxpayers to pay their balance by the filing deadline, but if that’s not possible, there are options to manage the payment.

Understanding how to handle a tax balance due can prevent unnecessary financial strain. There are ways to settle what you owe, as well as consequences for delaying or ignoring the debt.

Reasons for Owing a Balance

A tax balance can arise for several reasons, often tied to how income is earned and reported. One common cause is insufficient tax withholding from wages. Employers withhold federal income tax based on Form W-4, but if too little is withheld, a shortfall occurs. This often happens when taxpayers claim too many allowances or don’t update their W-4 after salary increases or new income sources.

Self-employed individuals and independent contractors frequently owe taxes because they don’t have an employer withholding taxes on their behalf. Instead, they must make estimated tax payments each quarter. If these payments are too low or missed, a balance will be due when filing. The IRS requires estimated payments if a taxpayer expects to owe at least $1,000 after subtracting withholding and refundable credits.

Investment income, such as capital gains, dividends, and interest, also contributes to tax liability. Unlike wages, these earnings aren’t subject to automatic withholding, so taxpayers must account for them when calculating estimated payments. Selling stocks, real estate, or other assets at a profit triggers capital gains taxes, with rates ranging from 0% to 20% depending on taxable income and filing status.

Tax credits and deductions also affect tax liability. Refundable credits, like the Child Tax Credit or Earned Income Tax Credit, can reduce tax liability beyond zero, potentially resulting in a refund. Nonrefundable deductions, such as the Mortgage Interest Deduction or Student Loan Interest Deduction, only lower taxable income. Overestimating eligibility for deductions or credits can result in owing more than expected.

Penalties and Interest

Failing to pay a tax balance by the deadline results in additional charges. The IRS imposes a failure-to-pay penalty of 0.5% per month on the unpaid amount, up to 25%. If the tax remains unpaid for more than 10 days after a final notice of intent to levy, the rate increases to 1% per month.

Interest accrues daily on unpaid taxes. The IRS calculates interest based on the federal short-term rate plus 3%. As of 2024, this results in an annual interest rate of around 8%, though it fluctuates quarterly. Interest continues to accrue indefinitely until the full balance is paid, even if a taxpayer sets up a payment plan.

For example, if someone owes $5,000 and does not pay for a year, they could see over $600 in penalties and more than $400 in interest added to their balance, depending on prevailing rates. This makes prompt action important, even if full payment isn’t immediately possible.

Payment Arrangements

If paying the full tax balance by the deadline isn’t feasible, the IRS offers options to help manage obligations.

Full Payment

Paying the entire balance at once avoids further penalties and interest. The IRS accepts multiple payment methods, including electronic funds withdrawal, credit or debit cards, checks, and money orders. Using IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) ensures secure and immediate processing without additional fees.

For those using a credit card, third-party processors charge a convenience fee, typically around 1.85% of the payment amount. While this may seem like a quick solution, credit card interest rates can be significantly higher than IRS interest rates, making it a costly option if not paid off quickly. Some taxpayers consider a personal loan or home equity line of credit (HELOC) to cover the tax bill, as these often have lower interest rates than credit cards.

If paying in full requires liquidating assets, it’s important to consider potential tax consequences. Selling investments, for example, could trigger capital gains taxes. Consulting a financial advisor or tax professional can help assess the best course of action.

Installment Plans

For those unable to pay in full, the IRS offers installment agreements to spread payments over time. Short-term payment plans are available for balances under $100,000 and must be paid within 180 days. Long-term installment agreements, which extend beyond 180 days, are available for balances up to $50,000 and require monthly payments.

Setting up an installment plan can be done online through the IRS website, by phone, or by submitting Form 9465, Installment Agreement Request. A setup fee applies, ranging from $31 for direct debit agreements to $130 for non-direct debit plans. Low-income taxpayers may qualify for reduced fees or fee waivers.

Interest and penalties continue to accrue, but the failure-to-pay penalty is reduced to 0.25% per month once an installment agreement is in place. Missing a payment can result in default, leading to potential enforcement actions such as wage garnishments or bank levies.

Payment Extension

If a taxpayer needs additional time but can pay the full amount within a short period, the IRS may grant a temporary extension. Filing Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, allows individuals to request up to six additional months to pay. Approval requires demonstrating financial hardship, such as an inability to meet basic living expenses.

Unlike an installment agreement, an extension doesn’t eliminate penalties or interest. The failure-to-pay penalty still applies, and interest continues to accrue. This option is best for those who expect to have the necessary funds within a few months but need extra time to arrange payment.

For taxpayers who need only a short delay, the IRS may allow a 60- to 120-day grace period without requiring a formal extension request. This can be arranged by calling the IRS or applying online. While this doesn’t stop interest from accruing, it avoids the setup fees associated with installment agreements.

Important Filing Deadlines

The deadline for filing federal individual income tax returns is April 15, unless it falls on a weekend or holiday, in which case it is extended to the next business day. Missing this deadline without an approved extension results in a failure-to-file penalty of 5% of the unpaid tax per month, capped at 25%. Submitting Form 4868 grants an automatic six-month extension, moving the due date to October 15. However, this extension applies only to filing the return, not to paying any taxes owed.

State tax deadlines may differ, requiring taxpayers to check with their state’s revenue department. Some states automatically grant extensions if a federal extension is approved, while others require a separate request. Taxpayers living abroad, including military personnel stationed outside the U.S., receive an automatic two-month extension until June 15, though interest on any unpaid balance still accrues from April 15.

Consequences of Not Paying

Failing to pay a tax balance can lead to escalating consequences. The IRS has various tools to collect unpaid taxes, and the longer a balance remains outstanding, the more aggressive these measures become.

One of the earliest consequences is the issuance of a Notice of Federal Tax Lien. A lien is a legal claim against a taxpayer’s property, including real estate, vehicles, and financial assets. While it doesn’t result in immediate asset seizure, it can damage creditworthiness and make it difficult to secure loans or sell property. If the debt remains unpaid, the IRS may escalate collection efforts through a levy, allowing them to seize bank accounts, garnish wages, or take other assets. In extreme cases, taxpayers who willfully evade payment may face criminal charges, though this is rare and typically reserved for cases involving fraud or significant tax avoidance.

Potential Refund Offsets

If a taxpayer is owed a refund in a future year but has an outstanding balance, the IRS can apply the refund to the unpaid tax debt through the Treasury Offset Program. This process, known as a refund offset, allows the government to automatically redirect refunds to cover past-due federal income taxes before issuing any remaining balance to the taxpayer.

Beyond federal tax debts, refund offsets can also be used to satisfy other government obligations, including unpaid state income taxes, delinquent child support, and defaulted federal student loans. Taxpayers can verify whether their refund will be offset by contacting the Bureau of the Fiscal Service or reviewing their tax account transcript through the IRS website. If an offset is applied in error, individuals may dispute it by providing documentation proving the debt has already been paid or doesn’t belong to them.