File anyway, on time. This is the move that saves you the most, and most people get it backwards. The penalty for not filing is ten times the penalty for not paying: 5% of the unpaid tax per month for not filing, against 0.5% per month for not paying. So even if you cannot send a dollar, file the return (or file for an extension by April 15), pay what you can, and deal with the rest after. Not filing can stack up to nearly half the tax owed in penalties. Filing and not paying is a slow 0.5% a month.
Here is the arithmetic behind that, because it is more lopsided than it sounds:
- The failure-to-file penalty is 5% a month and stops at 25%, which it reaches after five months.
- The failure-to-pay penalty is 0.5% a month and also stops at 25%, but it takes fifty months to get there.
- In any month where both apply, the 5% is reduced by the 0.5%, so you are charged 4.5% plus 0.5%, not 5.5%.
- And if a return lands more than 60 days late, there is a floor. The penalty is the lesser of 100% of what you owe or a fixed minimum: $525 for a return that was due after 31 December 2025, rising to $535 for one due in 2027.
That floor is the reason "file anyway" is not just good manners. Owe $600, file 61 days late, and the minimum penalty is $525 of it. Owe the same $600 and file on time with nothing attached, and the failure-to-pay penalty in month one is $3.
Once you have filed, you have real options, and you can set most of them up yourself.
A payment plan (most people's answer)
You can set up an installment agreement online at IRS.gov/paymentplan, no accountant needed:
- Short-term: up to 180 days to clear it, for balances under $100,000, with no setup fee. The IRS states this one as "paying in 180 days or less" and "you owe less than $100,000 in combined tax, penalties and interest", so the test is the total including what the penalties have already added, not the tax on its own.
- Long-term (monthly): for balances of $50,000 or less in combined tax, penalties and interest, up to 72 months, and the IRS approves it automatically through the online tool. Three things the IRS attaches to that 72. The term is 72 months or the date its collection window closes, whichever comes first, so a debt with only three years left to collect gets a three-year plan and higher payments. If you do not name a monthly figure, the IRS sets one by dividing what you owe by 72. And between $25,000 and $50,000 the plan has to be paid by direct debit, not by you remembering.
Interest (currently around 6 to 7% a year) and a reduced 0.25% monthly penalty keep running while you pay, so clearing it early costs less.
Settling for less than you owe (Offer in Compromise)
An Offer in Compromise lets you settle the debt for less than the full amount if you genuinely cannot pay it, even over time. It is real, but it is not a magic wand, and it has a price and a set of conditions before anyone even looks at your figures. There is a $205 application fee, and it is non-refundable. If you offer a lump sum you must send 20% of the total offer with the application, also non-refundable, and pay the balance in five or fewer payments if it is accepted. If you offer periodic payments you keep paying monthly while the IRS considers it. You must have filed all your returns and kept up your current-year estimated payments even to apply, and it takes months rather than weeks. Use the free Pre-Qualifier tool at irs.gov before you spend a cent chasing one.
A hardship pause (Currently Not Collectible)
If paying anything would stop you covering necessary living expenses, you can ask the IRS to mark your account Currently Not Collectible. Collection stops and liens and levies pause, but the debt does not go away and interest keeps running. You document your income and expenses on Form 433-F and request it directly.
The free one most people miss (First-Time Abatement)
If your record is clean for the last three years, you can ask the IRS to wipe a failure-to-file or failure-to-pay penalty under First-Time Abatement, just by asking, by phone or on Form 843. No hardship story required. It is one of the most underused reliefs there is.
"Clean" has a definition, and it is more forgiving than people assume. You need the same return type filed on time for the prior three years, and either no penalty in that window or a penalty that was later removed for reasonable cause or an IRS error. An estimated tax penalty in those three years does not disqualify you. It covers failure to file, failure to pay and failure to deposit. So a contractor who has filed on time for years and has one bad year is the exact person this was written for, and the only thing that stops him getting it is not asking.
Common questions
What happens if I just ignore the tax bill?
It gets worse fast. Penalties and interest keep stacking, and the IRS escalates to liens and then levies on your accounts and pay. The relief options shrink or vanish once collection escalates, so acting early is what protects you. A notice is easiest to deal with the day it arrives.
Can the IRS take my house or my tools if I owe them?
It can file a lien and, in serious cases, levy assets, but it does not happen overnight, and getting into a payment plan generally stops collection from escalating. The tools of your trade have some protection from levy. The move that keeps you safe is setting up an agreement before it gets that far.
Can I set up a payment plan if I owe from more than one year?
Usually yes, as long as your total balance is within the limits and you have filed all your returns. The plan can roll multiple years of balances together. You have to stay current on this year's taxes too, or the agreement can default.
Will owing the IRS hurt my credit?
A payment plan itself does not go on your credit report, but a tax lien is public record and can affect your ability to borrow. Setting up an agreement before the debt reaches the lien stage is the way to keep it off your record.
Can I still get a refund next year if I owe back taxes?
No, not as cash. The IRS applies any refund you are owed to your outstanding balance until it is cleared. Count on that when you set your estimated payments, so you are not banking on a refund that gets swallowed by the old debt.
The honest bit
- Interest and penalties keep accruing until the balance is cleared, on every option except an accepted settlement. Sooner is always cheaper.
- Never ignore an IRS notice. The options above shrink or disappear once collection escalates to liens and levies.
- This is general guidance, not tax advice. For a large or contested balance, an enrolled agent or tax attorney can represent you and deal with the IRS on your behalf.
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Keep reading
Templates you might need
Sources
- IRS - Payment Plans, Installment Agreements · Short-term and long-term payment plan eligibility, and that penalties and interest continue to accrue
- Instructions for Form 9465, Installment Agreement Request · The 72 month term and its two conditions: the proposed payment must pay the assessed liability in full within 72 months or by the Collection Statute Expiration Date, whichever is less, and where no amount is proposed the IRS divides the balance due by 72. Read 2026-09-02.
- IRS - Failure to File Penalty · The 5% monthly rate and its 25% maximum, the reduction of the failure-to-file penalty by the failure-to-pay penalty in any month both apply, and the minimum penalty for a return more than 60 days late: the lesser of 100% of the underpayment or $525 for a return due after 31 December 2025. The $535 figure for a return required to be filed in 2027 is Rev. Proc. 2025-32 section 4.52. Read 2026-09-02.
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