File your return even if you can’t pay — the filing penalty is 10x worse than the payment penalty. Then set up a payment plan. The IRS is more flexible than most people realize.
Step-by-Step: What to Do When You Can’t Pay
| Step | Action | Why |
|---|---|---|
| 1 | File your return on time | Avoids the 5%/month failure-to-file penalty |
| 2 | Pay as much as you can | Reduces the balance that penalties and interest apply to |
| 3 | Apply for a payment plan | Available online at IRS.gov in minutes |
| 4 | Request penalty abatement | First-time penalty abatement waives penalties if you have clean history |
| 5 | Consider hardship options | CNC status or Offer in Compromise if you truly can’t pay |
Cost of Not Paying
Illustrative example: $8,000 tax bill, payment plan vs. ignoring it entirely (using current penalty rates and a 7% annualized interest rate, which resets quarterly):
| Approach | Month 3 (approx.) | Month 6 (approx.) | Month 12 (approx.) |
|---|---|---|---|
| Pay in full on time | $0 | $0 | $0 |
| Payment plan, current on payments (0.25%/month penalty + interest) | ~$150 | ~$300 | ~$610 |
| Ignore — filed late, no payment at all (5%/month combined penalty + interest) | ~$1,250 | ~$2,290 | ~$2,650 (penalty maxes, interest continues) |
Figures are approximate and illustrative — actual amounts depend on the exact rate in effect during your balance period and how quickly you pay down principal. Ignoring the problem costs dramatically more than entering a payment plan, and can also trigger liens, levies, and wage garnishment that a payment plan avoids.
All IRS Payment Options
| Option | How It Works | Who Qualifies |
|---|---|---|
| Pay in full | Pay as soon as possible to stop penalties/interest | Anyone |
| Short-term plan | Pay within 180 days. No setup fee | Owe under $100,000 |
| Long-term plan (online, direct debit) | Monthly auto-pay, up to 72 months. $29 setup | Owe under $50,000 |
| Long-term plan (online, no direct debit) | Monthly payments, up to 72 months. $69 setup | Owe under $50,000 |
| Long-term plan (phone/mail) | Monthly payments. $107 (direct debit) or $178 (other) setup | Owe under $50,000 |
| Partial payment agreement | Pay a portion monthly; rest may expire at CSED | Must prove inability to pay in full |
| Offer in Compromise | Settle for less than full amount. $205 application fee | Must prove can’t pay within collection period |
| Currently Not Collectible | IRS pauses all collection. No payments required | Must prove paying would cause financial hardship |
How to Apply
| Method | Best For | Time |
|---|---|---|
| IRS Online Payment Agreement (IRS.gov) | Balances under $50,000 | Minutes |
| Form 9465 (mail) | Any balance | 30-60 days |
| Call IRS (1-800-829-1040) | Complex situations | Varies |
| Form 656 (Offer in Compromise) | Can’t pay in full | 6-24 months |
| Form 433-F (financial disclosure) | Non-streamlined agreements | Varies |
The Bottom Line
You have options at every income level and every balance amount. The most important thing: file on time (even if you can’t pay) and contact the IRS (they’re more flexible than you think). A payment plan costs far less than ignoring the problem, and programs like Currently Not Collectible and Offers in Compromise exist for genuine hardship situations.
Related: What Happens If You Owe the IRS? | What Happens If You File Taxes Late?
Sources
- Internal Revenue Service. “Tax Information for Individuals.” irs.gov
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