You’re not a criminal because you can’t pay your tax bill. The real mistake is doing nothing. Fear and embarrassment stop a lot of taxpayers from even opening IRS letters. I’ve had clients call me in tears, convinced they’re headed to jail. They’re not. But ignoring the problem guarantees bigger penalties, liens, and bank levies.
Here’s the good news: with the right steps you can stop the bleeding, buy time, and get back in control.
1. File First, Even If You Can’t Pay
The penalty for not filing is ten times worse than the penalty for not paying. That’s not an exaggeration.
• Failure-to-File Penalty: 5% per month (up to 25%) of the unpaid tax.
• Failure-to-Pay Penalty: 0.5% per month (up to 25%).
Ignore both, and they combine for a brutal 47.5% hit over time, plus interest.
This year, the deadline for individual returns is April 15, 2025, or October 15 if you’ve filed an extension. Just remember, extensions only give you more time to file—not more time to pay.
Now, keep in mind, the IRS won’t even talk payment plans or hardship relief unless you’re compliant. That means all your required returns are filed (the last six years, at minimum) and you’re current on estimated taxes if you’re self-employed. File something, even if you’re missing information. You can amend later, filing keeps the door open.
2. Calculate the Damage and Face It
FDR’s old line still fits: “The only thing we have to fear is fear itself.” In my experience, the unknown is always scarier than the actual tax bill. Clients work themselves into a panic imagining they owe triple what the IRS actually says.
By filing, you see the real number, and that alone reduces stress. For 2025, the IRS interest rate on unpaid balances is 7% annually, compounded daily. Add penalties, and it adds up fast. A $10,000 balance can climb toward $15,000 before you know it.
I won’t sugar coat this: an IRS debt is not going to go away. It will snowball. And the more you ignore the situation, the worse it will get. Don’t listen to anyone that says if you wait long enough, the IRS will give up and go away. It’s not true, and it’s not worth waiting to find out. The key is to stop the bleeding early, know what you owe, and put a plan in motion.
3. Pay State Taxes Before Federal
Most taxpayers don’t realize state tax agencies are often tougher than the IRS. California, New York, New Jersey, Wisconsin—states like these will garnish wages or record liens faster than the feds, and they’re stingier with penalty relief and payment plans.
If you owe both the IRS and your state, start with the state. Getting state taxes paid first (especially if you have rental property or businesses in another state) allows you to focus fully on the IRS debt. It also gives you a boost of confidence, similar to the “debt snowball” effect. If you can get all of your other tax debts paid and out of the way, you’ll start to see that you can dig yourself out of the hole with the IRS as well.
4. Find Cash Before You Panic
The IRS is not your go-to lender. Its interest and penalties can eat you alive, which is why I always tell clients to look for money somewhere else before locking into a payment plan.
Start with the obvious: borrow from relatives or friends. It’s almost always cheaper than paying the IRS interest and penalties over the long haul. Next, take a hard look at the extra “stuff” in your life—things you can sell on eBay, Craigslist, or Facebook Marketplace. I call it a blessing in disguise. Tighten the belt, clean house, and use the situation as a wake-up call to get more organized.
Other options include tapping a Home Equity Line of Credit (HELOC) or even taking a loan from your 401(k). I’ve had clients sell unused equipment, vehicles, or collectibles. None of this is fun, but it’s less painful than letting the IRS carry your debt.
Tackle the problem head on, find the money, and make the necessary changes in life to prevent this from happening again. The important thing is to act, not hide.
5. Use a Short-Term IRS Payment Option
If you can’t pay in full, the IRS does have payment options.
Short-term payment plans give you up to 180 days to pay in full. They’re available for balances up to $100,000, and interest and penalties still run, but collection action is paused while you catch up. There’s no paperwork, and no need to call, write or visit the IRS. Any taxpayer that owes less than $100,000 in tax, penalties, and interest automatically is approved. Simply fill out the Online Payment Agreement (OPA) on the IRS Website.
And if you end up in a payment plan, don’t beat yourself up. I have had thousands of successful clients enter into an IRS payment plan at one point or another in their lives—even I’ve been on one! And that’s okay.
Here’s where liens come into play. A “silent lien” technically arises as soon as you don’t pay, but it stays behind the curtain. Once your balance is over $50,000, the IRS is more likely to file a Notice of Federal Tax Lien, which makes it public record. If you’re near that threshold, pay it down quickly to stay under and avoid a black mark on your financial record.
6. Use a Long-Term IRS Payment Option
There are two major benefits for getting on a long-term installment agreement, one of the most common IRS payment options for taxpayers: collection procedures by the IRS are generally put on hold, and the Failure to Pay penalty rate is cut in half while an Installment Agreement is in effect. The usual penalty rate of 0.5% per month is reduced to 0.25%. But interest continues to accrue on any unpaid taxes.
There are three types of long-term payment plans, also referred to as installment agreements:
• If you have a total balance of less than $10,000, you’re eligible for a guaranteed installment agreement. To qualify, you must have never entered into an installment agreement before for the payment of income tax, agree to pay the full amount within three years, and be financially unable to pay the liability in full when due.
• If you have a total balance of less than $50,000 in combined tax, penalties, and interest, you can generally be automatically approved and make monthly payments for up to 72 months. You usually need to set up plan payments using direct debit (automatic bank withdrawal), and would apply with the same Online Payment Agreement (OPA) on the IRS Website.
• If you owe more than $50,000, the process is more intensive and must be approved by the IRS. Taxpayers make this request using Form 9465, and will generally also need to submit a financial disclosure such as Form 433-F, Collection Information Statement. Fees for setting up installment agreements have changed in recent years, and can depend on how you apply (online, by phone, or by mail) and whether you use direct debit.
7. Consider an Undue Hardship Extension
Before you enter into a payment agreement, check if you qualify for an Undue Hardship Extension. This option is designed for taxpayers facing a true life-altering event—serious medical expenses, job loss, or another crisis—that makes paying your bill on time impossible.
If approved, the IRS gives you an extra six months to pay without penalties, although interest will still accrue. In some cases, the extension can last up to 18 months, and in exceptional situations the IRS may tack on another 12 months.
Not everyone qualifies. The IRS won’t grant an extension if the balance due is the result of negligence, intentional disregard of the rules, or fraud. And there are a few key requirements:
• It isn’t enough to show that paying would be inconvenient. For example, if you’d have to sell property to pay your bill, the IRS won’t view that as undue hardship.
• You’ll need to show you don’t have enough cash or assets easily converted to cash to cover the balance, and that you can’t borrow the money except on terms that would cause serious loss.
• In many cases, you’ll also have to provide security for the tax debt—this could be a bond, a mortgage, a pledge, or another form of collateral. If you have no assets, the IRS may waive this requirement.
To apply, you’ll use Form 1127 and attach a statement of assets and liabilities, plus an itemized list of receipts and disbursements for the three months before the due date.
8. The Last Resort: an Offer in Compromise
As a last resort—and I really mean last resort—you may be able to use an Offer in Compromise (OIC) as a tax resolution. This is where you “cut a deal” with the IRS to pay less than the full amount of taxes, penalties, and interest. In theory, it’s based on your ability to pay. In reality, the IRS digs into everything you own and every dollar you could earn. It’s not quick, easy, or fun.
Scammers make this worse by promising they can settle your debt for “pennies on the dollar.” Don’t fall for it. Too many taxpayers pay big fees up front to shady companies and end up still owing the IRS. If you pursue an OIC, work only with a reputable law or accounting firm, and pay as you go.
Can you do it yourself? Yes, you can apply directly and even call the IRS for updates. But it’s a long process with low acceptance rates, so make sure it’s the right move before you go down this path.
9. Avoid Serious Consequences by Acting
Don’t hide your head in the sand when things get difficult and ignore filing your taxes. Tax liabilities don’t go away if left unaddressed, they get bigger.
If you ignore it long enough, the IRS can levy your bank accounts, garnish your wages, file liens against your property, and in extreme cases, seize and sell assets. None of this happens overnight, but every unopened letter is a missed chance to act before the situation escalates.
The way out is straightforward: file your return, pay your state first, look for other sources of cash, and use IRS programs like short-term payment plans, installment agreements, or hardship extensions. If all else fails, consider an Offer in Compromise. What matters most is that you act. Doing nothing is the only guaranteed way to make the problem worse.
The Bottom Line
If you can’t pay your taxes in 2025, you still have options for IRS debt relief. File first. Face the real number. Pay your state before the IRS. Look for smarter ways to cover the debt before relying on the IRS’s interest. Use short-term and long-term IRS payment options or hardship extensions when needed, and save an Offer in Compromise for last.
Shame and fear won’t solve the problem. Taking action will.
If you need help, reach out to the Main Street Tax Advisor Network. Our advisors are trained in tax resolution strategies and can guide you through the process. A little support now can save you thousands later, and give you peace of mind that the IRS isn’t lurking in your mailbox.
