You have filed your returns but didn't have the money to pay
what was owed. You may think, "Oh well---I will catch up next year." Before you
know it you find yourself several years in arrears and suddenly
there is a notice from the IRS, stating that you owe
three or four times the original amount.
It's truly amazing how fast tax penalties and interest add up. Now
you have a choice, you can write a big fat check and pay the full amount,
including interest and penalties. Or you can just keep
ignoring them while the penalties and interest keep piling
What happens if you owe taxes?
Here’s what could happen if you owe taxes and can’t pay them on time: You might face IRS penalties and
interest. Even if you can’t pay by tax day, you should still file your return or at least file for a
six-month extension. Then, review your options for how you can pay the IRS what you owe.
In this article, we outline the consequences of not filing or paying on time, as well as what you can do if
you owe the IRS.
What happens if you owe the IRS and don’t file or pay
You may wonder if it’s necessary to file your return if you can’t pay your tax bill. However, this is the
most important thing. You should file your return or an extension to avoid the
failure to file penalty
.This penalty is equal to 5% of the unpaid balance, per month or part of a month, up to a
maximum of 25% of unpaid tax.
Note: The 5% per month penalty increases to 15% per month if the failure to file is due to fraud. For
returns filed more than 60 days after the due date or extended due date, the minimum penalty is equal to the
lesser of $210 or 100% of the unpaid tax (for returns required to be filed in 2019).
Whether you owe back taxes or current taxes, you may be hit with significant penalties and interest
accruals over time if you don’t pay. The failure to pay penalty starts at 0.5% of your balance due per month
(capped at 25% of the back taxes you owe). The interest rate for underpayment of taxes is currently 6% in
May of 2019 but can change quarterly.
What to do if you owe the IRS
Understanding your options will help you determine what to do if you owe the IRS. That way you can come up
with a plan. Here are some of the most common options for people who owe and can’t pay.
1. Set up an installment agreement with the IRS.
Taxpayers can set up IRS payment plans, called installment agreements. The type of agreement you can
get depends on your situation, including how much you owe and how soon you can pay the balance. You
shouldn’t set up an installment agreement if you can pay the balance within 120 days (see #2 below).
Fees or cost: For online payment agreements, the application fee is $149, or $31 if
payments are made electronically. The fee is $43 for low-income taxpayers. To apply for a low-income
application fee, submit
Action required: Complete an payment agreement or
Form 9465. You won’t need to submit a financial statement for installment agreements of $50,000 or
less. You can also get an expert to evaluate your situation and identify your best solution.
Advantages or disadvantages: If you set up an installment agreement, the penalty on
your unpaid balance reduces to 0.25% per month, until you pay the full balance on schedule. Interest is
charged at the short-term federal rate plus 3% (interest may change each quarter). Generally,
the IRS can void agreements if you don’t pay on schedule.
Form 433-A or
Form 433-F is required if the balance is more than $50,000. You can pay through payroll deductions (
Form 2159, Payroll Deduction Agreement).
2. Request a short-term extension to pay the full balance.
The IRS will provide up to 120 days to taxpayers to pay their full tax balance.
Fees or cost: There’s no fee to request the extension. There is a penalty of 0.5% per
month on the unpaid balance.
Action required: Complete an
online payment agreement, call the IRS at (800) 829-1040 or get an expert to handle it
Advantages or disadvantages: This option is convenient for taxpayers who need a short
time to pay their full tax bill. The IRS will charge interest at the short-term federal rate plus 3%
(interest may change each quarter). With short-term extensions, you avoid the installment payment
application fee (see #1), but not late-payment
penalties and interest.
3. Apply for a hardship extension to pay taxes.
The IRS offers options for people in hardship situations, including currently not collectible status
offer in compromise
. For an extension based on hardship, you’ll qualify only if you can prove that paying the tax you owe would
cause financial hardship, based on IRS financial standards.
Fees or cost: There’s no cost to apply for a hardship extension. There are no
penalties, but interest is calculated at the short-term federal rate plus 3% (interest may change each
Action required: File IRS
Form 1127, Application for Extension of Time for Payment of Tax Due to
Undue Hardship. You must include a statement of your assets and liabilities.
4. Get a personal loan.
You could ask a personal contact – maybe a friend or family member – to loan you the money. Fees and cost
will vary widely depending on the source. This could be an inexpensive option, but you should use your best
5. Borrow from your 401(k).
If your 401(k) plan allows for this type of loan, you are generally limited to 50%, with a $50,000 maximum,
and you must repay the money within five years.
Fee or cost: There is a possible minimal fee. The plan must also charge interest.
Action required: Check with your plan administrator for details.
Advantages or disadvantages: If it’s allowed, a loan from your 401(k) plan can be a
ready and inexpensive source of cash to pay the current or back taxes you owe. However, taking a loan could
negatively impact your future retirement savings if you don’t repay it. The loan is treated as a taxable
distribution if you don’t make timely payments, leave your company without repaying the loan, or your plan
terminates. Also, if you are not yet age 59½, a taxable distribution is subject to the 10% early
6. Use a debit/credit card.
Various service providers are available for this option.
Fees or cost: Varies; generally about $2.49 to $3.95 (debit card) or 1.87% to 2.35% of the
tax balance due (credit card).
Action required: Check with the IRS for a list of service providers.
Advantages or disadvantages: This type of payment is convenient and gives taxpayers
greater control and flexibility for making payments. They may also earn points, miles, or other credit
card rewards. However, higher credit card balances could negatively impact your credit score, and paying
with credit may not be appropriate for people with unmanageable credit card debt.
Failure to File Penalty
A failure to file penalty is charged on returns filed after the due date or extended due date, absent a
reasonable cause for filing late.
The combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that
your return was late, up to 25%.
The late filing penalty applies to the tax that remains unpaid after the due date. Unpaid tax is the total
tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed
If after five months you still haven’t paid, the failure to file penalty will max out, but the failure to
pay penalty continues until the tax is paid, up to 25%.
The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of
However, if your return was over 60 days late, the minimum failure to file penalty is the smaller of $205
or 100% of the tax required to be shown on the return.
Owe the IRS and not sure what to do? We can help
Nugent & Associates can help you figure out which steps to take if you owe taxes but can’t pay. Call
today and make an appointment for a free consultation.