What to Do When You Have a Tax Balance Due
Understand why a tax balance occurs and learn the practical, official steps to manage and resolve your payment obligation with the IRS.
A balance due on your tax return represents the remaining amount of tax you owe to the government for the year. This situation occurs when your total tax payments—including federal income tax withheld from paychecks, estimated tax payments, and applicable tax credits—are less than your total tax liability. When you file your return, these items are reconciled against the final tax amount calculated on your income.
How a Balance Due Occurs on Your Tax Return
A tax balance shortfall can happen for several reasons. A primary cause is having insufficient taxes withheld from paychecks, which can occur if the information on your Form W-4 is not updated after a life event like a pay raise or a change in dependents.
Another cause is earning income that is not subject to withholding, such as from self-employment, freelance work, or the gig economy. Since no taxes are automatically taken out of these earnings, the responsibility falls on you to make quarterly estimated tax payments. Failing to make these payments, or underpaying them, will likely result in owing taxes when the return is filed.
Realizing capital gains from the sale of assets like stocks or real estate can also trigger a balance due. These profits are considered taxable income, and if the gain is substantial, it can increase your tax liability beyond what your paycheck withholdings cover. Other situations, such as receiving unemployment compensation or converting a traditional IRA to a Roth IRA, can also create tax obligations.
Methods for Paying Your Tax Balance
The IRS provides several methods for payment. One of the most direct is IRS Direct Pay, a free and secure service on the IRS website that allows you to pay directly from a checking or savings account. You do not need to register to use this service, making it a convenient choice.
You can also pay your tax bill using a debit card, credit card, or a digital wallet. These payments are processed through third-party payment processors, not the IRS directly, and they charge a fee for their services. Fees for debit cards are a flat amount, while credit card processing fees are a percentage of the payment amount.
For a more traditional method, paying by check, money order, or cashier’s check is also an option. When paying by mail, make the payment out to the “U.S. Treasury” and include a Form 1040-V, Payment Voucher. It is important not to send cash through the mail.
What to Do If You Cannot Pay in Full
If you are unable to pay your tax balance in full by the deadline, the IRS offers several payment solutions. It is better to file your return on time and explore these options rather than not filing at all, as this helps minimize potential penalties. One option is a short-term payment plan, which grants you up to 180 additional days to pay. While interest and a failure-to-pay penalty will still apply, there is no fee to set up this plan.
For those who need more time, a long-term payment plan, also known as an installment agreement, may be appropriate. This allows you to make monthly payments for up to 72 months. You can apply for an installment agreement online through the IRS website, and many taxpayers with a combined balance under a certain threshold can have their request automatically approved.
Setting up a formal payment plan with the IRS can prevent more severe collection actions, such as a federal tax lien or levy. Establishing an agreement demonstrates your intent to pay and keeps you in good standing with the agency. In some cases, an Offer in Compromise (OIC) may be an option for taxpayers experiencing significant financial hardship, though the qualification requirements are stringent.