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I cannot pay my taxes – IRS penalties to be aware of!

IRS tax penalties to be aware of
IRS tax penalties to be aware of
Photo by Drew Angerer/Getty Images

You've prepared your tax return only to find out that you owe taxes. Now you need to know if you have any options for paying down your outstanding balance to Uncle Sam.

Not paying your taxes by the given due date will cause you to have to pay a penalty of ½ of 1% of the unpaid taxes each month that they are not paid. This penalty could go up to as much as 25% of your unpaid taxes.

Even if you do not file you cannot escape the penalty. Not filing your taxes causes you to have to pay 5% per month. However, for any month that both penalties are applied the 5% failure to file penalty is reduced by the failure to pay penalty.

In the event that you have a good excuse to why you did not pay by April 15, it is possible the IRS will not make you pay the failure to pay penalty. We recommend filing your taxes by the deadline so you can work out something with the IRS.

Furthermore, when you do not pay your taxes by the deadline you have to pay interest on the unpaid taxes until they are paid in full. Your interest rate is determined quarterly and is 3% plus the federal short-term rate.

When you cannot pay all of the taxes that you owe, always file and pay what you can, before turning to other payment options. The IRS is willing to work with you and offer you alternative payment arrangements.

Installment payment plan

If your amount owed is under $50,000 you can set up a payment plan by going to and filling out their Online Payment Agreement or by calling them at 800-829-1040. Additionally, the IRS sends out bills with payment options, which include instructions for setting up an installment agreement.

If you owe more than $50,000 to the IRS, you will have fill out a complete financial statement so they can determine how much you need to pay them each month.

Hardship cases

In the event that you become destitute and have to pay taxes, you can fill out Form 911, Request for Taxpayer Advocate Service Assistance, to ask the IRS to delay tax collection. This is not the best option, nor should it be your first choice, because you will have penalties and interests adding up. Additionally, the IRS can file a lien against you too.

Offer in compromise (OIC)

If you have no options left, you should ask the IRS for an OIC. This allows you to pay them a settlement amount for less than the amount owed. To apply for this option you have to complete Form 656 and show them that you are not able to pay.

Bottom line

If you cannot pay the IRS, you should not just ignore them. We suggest always filing your taxes by the deadline and resorting to one of these strategies when you cannot pay the taxes owed. Also, make sure you file with Turbo Tax, so they can make it so you pay the IRS the least money possible by answering their simple questions.

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