What If You Can’t Pay Your Taxes This Year?

What to Do if I Can't Pay My Taxes?It’s been an eventful few years with the IRS taking on major companies and even countries to recover taxes and penalties owed by businesses and individuals.

With the economy sluggish, and tax revenues falling, the IRS and many State governments are trying to close the tax gap (the difference between taxes owed and taxes paid) with increased tax collection efforts.

Here are a few guidelines for avoiding and reducing IRS interest, filing penalties, and underpayment penalties if you’re asking, “what if I can’t pay my taxes” assessed or owed in full by this year’s tax deadline:

File Your Tax Return (Most Important!)

Unless you made less than minimum IRS requirement, you should file.

If you cannot pay all or part of your taxes then send what you can but always file your tax return otherwise a failure to file penalty of 5% per month will take effect on any taxes owed. If you fail to file for 5 months, this interest rate can be as high as 25%.

Pay What You Can Without Compromising Basic Necessities

This will lower the 4% (subject to change per qtr) underpayment penalty. This is calculated by taking the federal short-term interest rate of 1% and adding it to the general underpayment penalty for individuals of 3%.

This gives you a combined penalty of 4%. The more taxes you pay, the less interest accrued.

Reduce the Failure to Pay Penalty

You can reduce the failure to pay penalty from .5% on taxes owed to .25% monthly with an IRS Installment Agreement or IRS Payment Plan. This essentially saves you 50% percent in terms of the normal failure to pay penalty per month.

Even though it is compounded monthly, this brings the annual nominal yearly interest rate down from 6% to 3%. Fill out IRS form 9465 or use the Online Payment Agreement Application if you owe less than $25,000.

If you will have $25,000 in tax debt you will need to include Form 433-A (Collection Information Statement or CIS) with Form 9465. It is recommended if you owe over $25,000 to work with a tax professional here as the CIS can be challenging.

Bottom-Line: You save up to 3% (nominal) annually with an Installment Agreement (paid monthly), avoid the 5% per month failure to file penalty by filing, and reduce your underpayment interest amount by paying what you can afford if you are unable to pay all or some of the taxes owed.

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Last Edited: February 12, 2017 @ 11:09 pmThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, podcaster, FinCon Founder, husband, and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or Google+. Listen to the new podcast, Masters of Money!


  1. This was the first year I got a refund in a few years, thanks to getting married, but when I had to pay I always planned ahead to avoid any late payments or partial payments. I always set aside money into savings outside of my emergency fund, so if a big bill comes, from the IRS or otherwise.

  2. I found your site a few weeks ago PT and I’ve enjoyed going through and reading some of your past articles. Thank you for the helpful info!

  3. Good advice, Jon. Thanks for dishing out some free money wisdom. 🙂

  4. Yes, follow the IRS guidelines, they are not something you want to mess with. They will hunt you down to find the last penny they deem they are owed. Get on a payment plan and make that your focus for your personal finances.