Every spring some people finish their return, see the number they owe, and quietly put the whole thing in a drawer. That is the single most expensive thing you can do. The IRS charges one penalty for not filing and a separate, much smaller one for not paying, and it charges interest on both. Filing on time with no payment attached stops the big penalty cold. Here is what to do after that.
Step one is always the same
File the return by the deadline, or file an extension and then file the return by the extended deadline. An extension gives you more time to file, not more time to pay, so interest still runs on the balance. But the failure-to-file penalty is calculated as a percentage of the unpaid tax per month, and it is several times the failure-to-pay rate. Filing protects you from it even when you send nothing.
Pay whatever you can with the return. Every dollar paid now is a dollar that stops accruing interest and penalty.
The options, from simplest to most involved
- Short-term payment plan: for balances you can clear within a few months. Set up online, no setup fee, interest and late-payment penalty continue until paid.
- Installment agreement: monthly payments over a longer period, up to several years. There is a setup fee, reduced for direct debit and for low-income taxpayers. Once it is in place, the failure-to-pay penalty rate is cut in half.
- Offer in compromise: a request to settle for less than the full amount. The IRS only accepts it when your income and assets show you genuinely cannot pay the full balance before the collection period runs out. It requires detailed financial disclosure and most applications are rejected.
- Currently not collectible status: if paying anything would leave you unable to cover basic living expenses, the IRS can pause collection. The debt does not go away and interest continues, but levies and garnishment stop.
- Penalty abatement: if this is your first time owing and you have a clean filing history, you can ask for the penalties to be removed. Interest cannot be removed, but penalties often can.
What not to do
Do not ignore the letters. The IRS sends a sequence of notices before it takes money, and each one gives you a window to respond. The final notices before a levy are the ones people finally open, and by then most of the easy options require more paperwork than they would have a few months earlier.
Do not pay a company that advertises settling your tax debt for pennies before you know whether you even qualify for an offer in compromise. The IRS publishes its own pre-qualifier tool. Most people who owe a few thousand dollars are better served by a plain installment agreement.
If the balance came from a 1099 year with no withholding, the plan is only half the fix. Set up quarterly estimated payments for the current year at the same time, or next April you will be in the same place with two years of debt instead of one.
Frequently asked questions
Will a payment plan hurt my credit?
An installment agreement is not reported to the credit bureaus. A federal tax lien, which the IRS can file on larger unpaid balances, is public record. Getting a plan in place early is how you avoid the lien.
Can I still get a refund next year if I owe this year?
Any refund will be applied to the balance you owe first. If it covers the whole balance, the rest comes to you.
I owe from a joint return and my ex will not pay. Am I stuck?
On a joint return both spouses owe the whole amount. There is a relief process for a spouse who did not know about the income or errors that caused the balance, but it has strict requirements and deadlines. Ask about it early.
Bring the notice
If you have a balance or a letter you have been avoiding, bring it in. We will tell you which option fits and set it up with you, in English or Spanish. Call (432) 257-7547 or come by 700 C Andrews Hwy in Midland.
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