Can’t Pay Your Tax Bill? What to Do Before the IRS Takes Action

The day your tax return is due, the clock starts. If you file your return and can’t pay the balance in full, the IRS doesn’t just wait patiently. Penalties and interest begin to accumulate immediately, and the notices follow shortly thereafter.

The good news is, there are legitimate options for almost every tax situation. The key is understanding what those options are—and acting on them before the IRS does.

Key Takeaways: What Happens If You Can’t Pay Your Taxes

• Filing your return on time is critical, even if you can’t pay the full amount. It stops the failure-to-file penalty, which is 10x more expensive than the failure-to-pay penalty.
• IRS notices begin within weeks of a missed payment, and collection actions can quickly escalate to liens and levies if ignored.
• Most taxpayers with tax debt of $50,000 or less qualify for a streamlined installment agreement with minimal paperwork.
• You can pay taxes in installments, by credit card, or through a short-term payment plan. Each option has different costs and tradeoffs.
• If your tax bills have grown across multiple tax years or you’re already receiving collection notices, a licensed tax professional can stop the escalation and negotiate on your behalf.

What Happens the Day You File Without Paying

Two IRS penalties come into play here, depending on what action you take: the failure-to-file penalty and the failure-to-pay penalty. They’re two separate things, and the distinction makes a big difference.

• If you don’t file your tax return at all, the IRS charges a failure-to-file penalty of 5% of your unpaid taxes per month, up to a maximum of 25%.
• If you file, but don’t make any payment, you’ll face a failure-to-pay penalty. It’s just 0.5% per month, also capped at 25%.

That means filing late without paying costs you ten times more per month than filing on time and simply not paying.

Even if you can’t pay a dime, file your return on time—and if you have years of unfiled returns, get current as soon as you can. It’s one of the simplest ways to limit how fast your tax debt grows.

Interest Piles On Top of Penalties

In addition to penalties, the IRS charges interest on any unpaid balance. The rate is the federal short-term rate plus three percentage points, compounded daily. It adjusts quarterly, so the longer a balance sits unpaid, the more it compounds.

Penalties and interest together are why tax debt grows faster than most people expect. A balance that might have been manageable in April can look very different by December.

When Do IRS Notices Start Arriving?

Your first notice is typically a CP14. It’s a straightforward bill for the amount the IRS says you owe. It usually arrives within a few weeks of your return being processed.

If you don’t respond, the notices escalate. CP501, CP503, and CP504 follow in sequence, each more urgent than the last. CP504 is significant: it’s the IRS’s “intent to levy” notice, and it’s a sign that collection action is close.

What the IRS Can Actually Do If You Owe Money

Ignoring IRS notices doesn’t make the debt disappear; it just gives the IRS authority to act.

Collection actions include:

• Filing a Notice of Federal Tax Lien, which attaches to your property and can damage your credit
• Issuing a levy against your bank account, retirement funds, or other assets
• Garnishing your wages directly from your paycheck

None of these requires a court order. The IRS has broad authority to collect, and once a lien or levy is in motion, stopping it requires active intervention.

Can You Pay Taxes in Installments? What Buys Time and What Costs More

Short-Term Individual Payment Plans

A short-term payment plan gives you up to 180 days to pay your balance in full. There’s no setup fee, but penalties and interest continue to accrue until the balance is paid.

If you owe less than $100,000 in combined tax, penalties, and interest, you can apply online. If you’re over that threshold, you can still apply by phone or mail. The threshold determines how you can apply, not whether you qualify.

Best for: Taxpayers who have the funds coming but need a short runway (a pending bonus, a property sale, or a temporary cash-flow gap). If you can realistically pay the full amount within six months, this is your lowest-cost path.

The tradeoff: Penalties and interest don’t pause. If your timeline slips or the funds don’t materialize, you’re back to square one with a larger balance.

Long-Term IRS Payment Plans

An IRS back taxes payment plan, formally called an installment agreement, lets you make monthly payments over time. This option is available to most taxpayers regardless of balance, though how you apply depends on what you owe.

If you owe $50,000 or less in combined tax, penalties, and interest across tax years and have filed all required returns, you can apply online. If your balance exceeds that threshold, you can apply by phone, by mail, or by submitting Form 9465, the installment agreement request.

Setup fees for a long-term payment plan vary. As of 2025, online applications cost $22 with direct debit from a bank account, or $69 without. Low-income taxpayers may qualify for reduced or waived setup fees.

Best for: Taxpayers who need a structured, predictable monthly payment amount and can’t realistically pay the full balance within 180 days. A long-term plan stops the escalation of collection activity while you work toward resolution.

The tradeoff: Penalties and interest continue to accrue on the unpaid balance until it’s paid in full. The monthly payment you agree to also needs to satisfy the IRS before the ten-year collection statute expires, and getting that number right is important. A licensed tax professional can help you structure a payment that works for your situation without creating new financial strain.

IRS Offers in Compromise and Other Resolution Options

For taxpayers who genuinely cannot pay the full amount—ever—there are IRS offers and programs worth knowing about. An Offer in Compromise lets eligible taxpayers settle their tax debt for less than the full balance. Eligibility is strict, and the IRS rejects most applications that aren’t carefully prepared.

Currently Not Collectible status is another option: if paying would leave you unable to cover basic living expenses, the IRS can temporarily pause collection activity. Neither of these is a quick fix, and neither should be pursued without professional guidance.

Can I Pay My Taxes with a Credit Card?

You can, though it’s worth running the numbers first. The IRS accepts credit card payments through third-party processors, each of which charges a processing fee of roughly 1.82% to 1.92% of the payment amount. That’s added immediately, regardless of whether you pay off the card.

The thing is, most credit cards carry interest rates well above what the IRS charges in combined penalties and interest. That means you’re likely to end up paying significantly more by shifting the debt to a card. And unlike an installment agreement, a credit card balance doesn’t come with a structured resolution timeline.

Credit card payment really only makes sense if you can pay off the balance quickly, and the processing fee is less than what you’d accrue in IRS penalties in the same period.

When to Involve a Licensed Tax Professional

Most people can handle a simple installment agreement on their own. But certain tax situations call for professional representation:

• Your tax debt spans multiple tax years or has been growing for more than a year
• You’ve received a CP504, a Notice of Federal Tax Lien, or any notice referencing a levy
• Your bank account or wages have already been targeted
• You owe significantly more than you can feasibly pay, even with an installment agreement

A licensed tax resolution professional doesn’t just negotiate payment amounts. At Lothamer, we contact the IRS directly on your behalf within 24 hours, request a stay on collections, and identify which resolution path actually fits your situation. Our Enrolled Agents have represented taxpayers at every stage of the collection process, from the first CP14 to full resolution.

The sooner you get someone in your corner, the more options remain on the table.

Get Help Before the IRS Acts First

At Lothamer Tax Resolution, we contact the IRS the same day you retain our services—by phone, not by electronic submission that can take weeks to process. With offices throughout the Midwest, we’re the local team of licensed tax professionals you can count on when you need a financial lifeline.