Not being able to pay your tax bill is stressful, but it is not the end of the world. The IRS has formal programs for taxpayers who cannot pay in full. What matters is that you file your return on time regardless - the failure-to-file penalty is 10 times worse than the failure-to-pay penalty. Once you have filed, the IRS gives you several paths to resolve a balance you cannot pay immediately.
The Single Most Important Thing
File your return even if you cannot pay. The failure-to-file penalty is 5% per month of the unpaid tax, up to 25%. The failure-to-pay penalty is only 0.5% per month. Filing without paying costs you 0.5% per month. Not filing costs you 5% per month. Always file on time - or file an extension - even if you cannot pay a penny.
How Penalties and Interest Work While You Owe
While you have an unpaid balance, two things are running simultaneously: the failure-to-pay penalty (0.5% per month of the unpaid tax, up to 25% total) and interest (currently the federal short-term rate plus 3%, compounding daily). Both continue until the balance is paid in full. If you filed your return on time (including extensions), an installment agreement reduces the failure-to-pay penalty to 0.25% per month while the agreement is in effect - a small but real benefit. The failure-to-pay rate rises to 1% per month beginning 10 days after the IRS notice of intent to levy (or on notice and demand for immediate payment, if earlier).
Your Options - From Easiest to Most Complex
1. Pay in Full (Short Extension)
SimplestUp to 180 days
If you can pay the full balance within 180 days, request a short-term payment plan online at IRS.gov (irs.gov/payments). No fee for short-term plans. Interest and the failure-to-pay penalty continue to accrue until paid, but you avoid the installment agreement setup fee and ongoing compliance requirements.
2. Installment Agreement (Monthly Payments)
Most CommonPaid before the collection statute expires$29-$178 setup fee
If you owe $50,000 or less in combined taxes, penalties, and interest and have filed all required returns, you may qualify to apply online for a long-term payment plan (a "Simple Payment Plan" in IRS procedures) without providing financial information. The IRS sets the monthly payment so that the balance, including accruing penalties and interest, is paid in full before the collection statute expires. You must stay current on all future taxes while the agreement is in effect - failing to pay another tax liability when due can lead the IRS to alter, modify, or terminate the agreement (after 30 days notice). Setup fee is $29 online or $107 by phone, mail or in person for direct debit agreements, and $69 online or $178 by phone, mail or in person for other payment methods. For low-income taxpayers the fee is waived for direct debit agreements and is $43 (which may be reimbursed) for other payment methods.
3. Partial Pay Installment Agreement (PPIA)
When full payment impossibleFinancial disclosure required
If you cannot pay the full balance before the collection statute expires, you can propose monthly payments based on what you can actually afford after allowable living expenses. The IRS uses national and local expense standards to determine what is "allowable." You pay what you can; when the collection statute of limitations expires (10 years from assessment), the remaining balance is written off. The IRS reviews PPIAs every two years and may increase payments if your financial situation improves.
4. Currently Not Collectible (CNC)
Hardship statusTemporary relief
If paying anything would prevent you from meeting basic living expenses - housing, food, utilities, transportation - the IRS can place your account in Currently Not Collectible status. Collection activity stops. The balance does not go away - interest still accrues and the 10-year statute runs - but the IRS will not levy your wages or bank accounts. The IRS reviews CNC status periodically and will begin collection again if your financial situation improves. CNC requires filing Form 433-F or 433-A (Collection Information Statement) documenting your income, expenses, and assets.
5. Offer in Compromise (OIC)
Settle for less than owedStrict eligibilityComplex process
An OIC allows you to settle your tax debt for less than the full amount owed if the IRS determines you cannot pay the full liability or doing so would create economic hardship. In fiscal year 2025 the IRS received 38,797 offers in compromise and accepted 5,464 (about 14%). The amount the IRS will accept equals your "reasonable collection potential" (RCP) - essentially the net equity in your assets plus your future income capacity over a set period. The IRS offer formula: RCP = net asset equity + (monthly disposable income × 12 for lump sum offers or × 24 for periodic payment offers). If your total assets and future income stream produce an RCP less than what you owe, an OIC may be viable. Application fee is $205 (waived for low-income taxpayers). You must be current on all tax filings and not in an open bankruptcy.
Beware OIC mills. Companies advertising "settle your tax debt for pennies on the dollar" charge large upfront fees and often file OICs that have no realistic chance of acceptance - then keep the fee. The IRS's own OIC pre-qualifier tool at IRS.gov (free) will tell you if you are likely eligible before you pay anyone anything. If you do not qualify for an OIC, installment agreement or CNC is the right path.
First-Time Penalty Abatement can eliminate hundreds or thousands in penalties. If you have a clean compliance history (the required returns filed for the 3 preceding tax years with no unreversed penalties other than an estimated tax penalty), call the IRS and ask for first-time penalty abatement (FTA) of the failure-to-file and failure-to-pay penalties. It is a one-time administrative relief that requires no special application. Many people do not know it exists. It does not reduce the underlying tax or interest, but eliminating penalties can meaningfully reduce the total balance.
Authority: IRC §6159 (installment agreements - IRS authority to enter into agreements for payment of tax in installments); IRC §6159(b) (IRS may alter, modify, or terminate an IA if the taxpayer fails to timely pay any installment or other federal tax liability); IRC §6159(c) (guaranteed IA: tax of $10,000 or less and a clean 5-year filing, payment and prior-IA history); IRM 5.14.5.2 (Simple Payment Plans for unpaid assessed balances of $50,000 or less); IRC §7122 (offers in compromise - IRS authority to compromise tax liabilities; doubt as to collectibility, doubt as to liability, or effective tax administration grounds); Treas. Reg. §301.7122-1 (OIC regulations - grounds for compromise: doubt as to liability, doubt as to collectibility, and promote effective tax administration); IRM 5.8.4 (offers in compromise - investigation, including the reasonable collection potential (RCP) calculation and the 12 or 24 month future income multipliers); IRM 5.14 (installment agreements - streamlined, regular, and partial pay procedures); IRM 5.16 (currently not collectible procedures - CNC status, financial hardship standards, collection information statement requirements); IRC §6651(a)(1) (failure-to-file penalty - 5% per month up to 25%); IRC §6651(a)(2) (failure-to-pay penalty - 0.5% per month up to 25%; reduced to 0.25% while valid IA in effect); IRC §6601 (interest on underpayments); IRC §6621(a)(2) (underpayment rate - federal short-term rate plus 3 percentage points); IRC §6622 (interest compounded daily); IRC §6651(d) (failure-to-pay rate increases to 1% per month after notice of intent to levy); IRC §6651(h) (0.25% rate during an IA for an individual who timely filed); Form 433-A/433-F (Collection Information Statement - required for PPIA, OIC, and CNC); Form 9465 (Installment Agreement Request); IRS OIC Pre-Qualifier Tool at irs.gov/oic-pre-qualifier.