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What Happens If You Owe Taxes and Can’t Pay?

Not being able to pay the taxes you owe is a scary spot to be in. Unfortunately, you can’t just file for an extension and wait to pay. Your option is to set up a payment plan with the IRS by April 15th.

What Happens If You Owe Taxes and Can't Pay-For many Americans, tax-time means a refund check. But others may owe Uncle Sam a big chunk of change. Happened to you? You’ll want to make quarterly estimated tax payments this year so it doesn’t happen again. But what if you owe the IRS but don’t have the money now? (Hint: You can’t just file an extension until you have the money to pay).

Although it’s easy to request an extension to file your federal income tax return, you still must pay any taxes owed by April 15th or face additional penalties and interest. If you owe the IRS but can’t pay now, you still need to file your tax return and then file a request for an installment agreement using IRS Form 9465 or online via the IRS online payment agreement (OPA) application.

IRS Installment Agreement

An IRS Installment Agreement is essentially a loan from the government to repay back taxes over a period of no longer than three years. There’s a fee to enroll in the agreement of $105 or $52 if you sign up for automatic checking account withdrawals. (You can avoid the fee if you can pay the total amount due in 120 days or less.) Plus, you’ll be charged interest equal to the federal short-term interest rate plus 3%.

The IRS will generally accept your installment agreement if you owe $25,000 or less in taxes. If you owe more than $25k or cannot even make the payments required of a full installment agreement, you’ll need to request a partial payment agreement and will most likely need to enroll the help of an accountant or attorney experienced with tax debt.

Avoid Paying Taxes With Credit Cards

The IRS tells you—even encourages you—to pay any taxes owed with a credit card. (They would rather get their money now than over time). But paying taxes with a credit card is expensive. Not only will you pay a much higher interest rate on a credit card than with an installment agreement, there is a fee of 2-3% for paying taxes by card.

Even a great rewards program won’t make up for that fee. The one exception is if you have a 0% APR offer on a credit card. Then you can save money by paying the fee in lieu of interest on an installment agreement. Still, I’d rather make a fixed monthly payment at a low interest rate than carry a balance on a credit card—even at 0%.

Published or updated on March 30, 2009

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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