What to do when you owe the IRS and can't pay it all

Where you stand

Opening a bill you cannot cover is stressful, but it is a common situation, and the IRS has several routes for people who owe more than they can pay at once. None of them requires you to have the full amount in hand.

The first fact to hold onto is that an unpaid balance does not stay still. Interest builds on unpaid tax, penalties and earlier interest until the balance is paid in full. The late-payment penalty is generally 0.5% of the unpaid tax for each month or part of a month, up to a cap of 25% of the unpaid tax. The IRS page describes it as lower during an approved payment plan and higher after a notice of intent to levy. Interest rates are reset on a schedule, so check the IRS interest page for the current figure rather than relying on a number you read elsewhere.

That is why the practical goal is usually to get some arrangement in place soon, even a modest one.

Options compared

These are the main paths the IRS describes. Which one fits depends on your income, your expenses, what you own and whether your returns are filed. The IRS decides each case, so treat this as a map, not a prediction.

• Pay what you can now. A partial payment lowers the balance that interest and penalties build on, and you can still arrange a plan for the rest.
• A short-term or long-term payment plan. Many individuals can apply online when they owe under the IRS threshold and have filed all returns. If you cannot apply online, you can request a monthly plan by phone or by mailing Form 9465. Setup fees vary by plan type and how you pay, so check the IRS page for current amounts.
• Currently not collectible status. If paying would leave you unable to meet basic living expenses, you can ask the IRS to delay collection. The debt is not cancelled, interest and penalties keep accruing, a lien notice may still be filed, and refunds may be applied to the balance. The IRS may ask for financial statements and proof.
• An offer in compromise. This lets some people settle for less than the full amount, but the IRS generally will not accept an offer if you can pay in full another way. It looks at income, expenses and equity in assets, and it requires that required returns are filed and required estimated payments are made. An application fee applies unless you qualify as low income, so check the IRS page. The IRS Pre-Qualifier tool is the starting point.

A quick example of how people sort this out

Suppose a freelance designer files her return on time and finds she owes more than she saved. She cannot pay it all, but she can send a portion now and about the same amount each month. For her, a monthly payment plan is the natural fit, and she would want to confirm that her returns for every other year are filed, since the online plan requires that.

Now suppose a retiree whose only income barely covers rent and medicine receives a bill. A monthly payment would mean skipping essentials. That is the situation the currently-not-collectible option is built around, and he would expect to be asked for detailed financial information.

What not to do

Do not skip filing because you cannot pay. Filing and paying are separate obligations, and the late-filing penalty is a different and larger charge than the late-payment penalty. File by the due date even if the check will have to come later.

Do not ignore the notices. A payment plan or a request for a pause is much easier to arrange before the IRS escalates. The IRS page notes that enforced collection is generally not taken while a plan is being considered or in effect, for 30 days after a rejection or termination, or during an appeal.

Do not agree to a plan you cannot keep. Defaulting can bring a reinstatement fee, continued penalties and interest, your refunds applied to the debt, and possible lien or levy action. A smaller payment you can actually make is better than an ambitious one you miss.

If you disagree or a request is denied

You have appeal rights. If the IRS rejects or ends a payment plan, the Collection Appeals Program is available, and your letter explains the window, which is generally 30 days for those decisions. If the IRS has sent a final notice of intent to levy, you may also have a right to a Collection Due Process hearing, and the deadline is printed on that notice. Read the notice itself for the exact date.

How a written response fits

Many of these requests are handled by phone or online, but a short written explanation is useful when your situation is unusual, when the IRS asks for more information, or when you want a record of what you told them. IRS Audit Defense Pro is software that helps you organize your facts and draft a letter you review and send yourself. It is not a law firm, CPA or enrolled agent, and it does not give legal or tax advice. If your balance is large or your finances are complicated, a qualified tax professional or a Low Income Taxpayer Clinic may be worth contacting.

Frequently asked questions

Sources

• IRS: Payment plans and installment agreements
• IRS: Offer in compromise
• IRS: Temporarily delay the collection process
• IRS: Failure to pay penalty
• IRS: Quarterly interest rates

Related guides

• How to set up an IRS payment planIf you cannot pay in full, the IRS offers short-term and long-term monthly payment plans.
• CP504: a serious collection notice and how to respondA CP504 is an IRS collection notice about an unpaid balance that the IRS describes as a notice of intent to levy, including a state tax refund.
• How to request penalty abatement from the IRSStart by checking whether your penalty qualifies for administrative relief based on a clean compliance history.
• The Taxpayer Advocate Service: Help When an IRS Problem StallsThe Taxpayer Advocate Service is an independent office within the IRS that can help when an IRS problem is causing financial hardship, has gone unresolved for more than 30 days, or the IRS missed a promised date.
• How to request a Collection Due Process hearingFind the Collection Due Process notice, note the deadline printed on it (generally about 30 days), complete Form 12153 with your reasons, attach what applies, and send it to the hearing address on the notice.