Taxpayers often discover after their federal income tax returns are prepared that they owe more than expected. If you can't pay your bill in full, you may be unsure what to do next. Here's what you need to know about the filing requirements and options available to resolve an unpaid balance.
File No Matter What
Many people consider putting off filing their returns until they can pay their tax bills, but that's usually an expensive mistake. Why? Because you'll begin incurring the monthly failure-to-file penalty on the day after your return is due (generally April 15, unless it falls on a weekend or holiday). Based on the unpaid amount of your tax bill, the penalty accrues at 5% per month (or part of a month) until it reaches a maximum of 25% of the amount due or you file your return, whichever comes first.
Although the penalty can't exceed 25% of your unpaid tax bill, it can amount to a considerable financial hit if your balance due is substantial. To avoid this situation, either file your return or request an automatic six-month extension by the tax-filing deadline. (For the 2025 tax year, the deadline is April 15, 2026.) To file for an extension, which will be automatically granted, you must submit IRS Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return." You then need to file your return no later than October 15; otherwise, the failure-to-file penalty will apply.
However, an extension gives you more time to file — not more time to pay. Even with an extension, you'll still incur a failure-to-pay penalty of generally 0.5% per month (or part of a month) of the unpaid balance plus interest. Currently, the IRS interest rate is 7% annually, subject to quarterly adjustments and compounded daily. Both the penalty and interest begin accruing the day after the original due date, and they'll continue accruing until you pay what you owe.
Important: If both the failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced so the combined monthly penalty is 5% under IRS rules.
Beware of Postmark Policy Change
If you still mail the IRS a paper tax return, or you use a paper Form 4868 to request an extension, be aware that machine-applied postmarks often reflect the date that mail is processed at a postal facility, not necessarily the date it's dropped off. Therefore, you should mail a paper return or extension request well before April 15 so the form will be postmarked on or before that date. Alternatively, you could mail either paper form by certified mail and request a manual postmark showing the date you dropped it off.
Important: Avoiding postmark hassles is just one reason why the IRS now strongly encourages taxpayers to file electronically. In addition, e-filing typically results in faster processing, immediate confirmation of receipt and fewer errors.
Consider a Payment Plan or Installment Agreement
As you can see, filing your return on time or requesting an extension is key to avoiding the potentially expensive failure-to-file penalty. But perhaps you're now wondering: When should I pay the balance due?
The simple answer is as soon as possible to stop penalties and interest from accruing. The IRS offers short-term payment plans — typically up to 180 days — to pay in full. There's no fee for such plans, though interest and any applicable penalties will continue to accrue until your bill is paid.
Long-term payment plans, called installment agreements, are also available by filing Form 9465, "Installment Agreement Request." You're automatically eligible for a "guaranteed" installment agreement if you can't pay the full balance immediately, don't owe more than $10,000 (excluding penalties and interest) and, during the past five tax years, you (and your spouse if you're married and file jointly) have:
- Timely filed all federal income tax returns,
- Paid any tax due, and
- Not previously entered into an installment agreement.
You must also agree to pay the full amount you owe within three years and comply with the tax rules while the agreement is in effect.
Taxpayers who owe $50,000 or less (including penalties and interest) may qualify for a "streamlined" installment agreement of up to 72 months without submitting detailed financial statements. If you owe more than $50,000, an installment agreement may still be possible, but it will require additional financial disclosures and closer IRS scrutiny. In larger-balance cases, the IRS is also more likely to file a Notice of Federal Tax Lien.
Important: When you enter into an installment agreement, you must pledge to stay current on your future federal income taxes. The IRS is willing to help with your 2025 unpaid liability, but it won't agree to defer payments for later years while you're still paying off your balance.
Bear in mind that, as long as you're paying off an installment agreement, you'll be charged interest at the aforementioned rate, subject to quarterly adjustments. However, depending on prevailing interest rates, the combined cost may be lower than that of commercial borrowing options.
In addition, you might have to pay a user fee to set up an installment agreement. The fee may be reduced or waived for eligible lower-income taxpayers. It's also lower if you set up an agreement online.
What to Expect From an Installment Agreement
After receiving your request for an installment agreement, the IRS will usually let you know within 30 days whether it's approved or denied. It may take longer, though, if the request is for tax due on a return filed after March 31.
If the IRS approves your request, you'll receive a notice detailing the terms of the installment agreement and requesting any applicable user fee. From there, even if you choose automatic withdrawals, you may still receive periodic IRS correspondence, including an annual statement summarizing your balance and payments.
Essentially, by approving your installment agreement, the IRS allows you to pay your tax bill in monthly payments instead of immediately remitting the amount in full. In return, you agree to make those payments on time and meet all future federal tax obligations during the agreement's term.
What's more, you must pay your tax obligation for future years in full when you timely file your returns. The IRS will apply any future refunds to the amount you owe — even if you have an installment agreement. In the event a refund is applied to your balance, you're still required to make your regular monthly payments.
Offers in Compromise
If you believe you can't pay your tax bill under any circumstances, or if doing so would create a financial hardship, consider an offer in compromise (OIC). This alternative allows you to settle your federal income tax debt for less than the full amount you owe.
In evaluating an OIC, the IRS will consider your assets, ability to pay, and income and expenses. It will generally approve an OIC when the amount you offer represents the most the IRS can expect to collect within a reasonable period.
To request an OIC, you must submit an application package that includes Form 656, "Offer in Compromise." Eligibility rules apply, and you should expect to pay a user fee. If you decide to pursue an OIC, ask your tax advisor for help because the process can be long and complicated.
You've Got Options
We've focused this article on potential options when you have an unpaid tax bill but haven't received an IRS notice to this effect because the filing deadline hasn't yet passed. The key takeaway is that filing on time preserves your options and helps limit additional penalties. Your tax advisor can assess your situation and help you chart the best course of action.