You can pay back taxes to the IRS in a single payment, through a short-term or long-term payment plan, or in some cases settle for less than you owe. The right approach depends on how much you owe and how quickly you can pay. Every month you wait, penalties and interest add to your balance, so acting sooner saves real money.
What Unpaid Taxes Cost You Each Month
The IRS charges a failure-to-pay penalty of 0.5% of your unpaid balance for each month (or partial month) the debt goes unresolved, up to a maximum of 25% of the original amount. On a $10,000 tax debt, that’s $50 per month in penalties alone. On top of that, interest compounds daily at the federal short-term rate plus 3%, which the IRS recalculates every quarter.
If the IRS issues a notice of intent to levy your property and you still haven’t paid after 10 days, the monthly penalty doubles to 1%. On the other hand, if you set up an installment agreement, the penalty drops to 0.25% per month while the agreement is active. That alone is a strong reason to get on a payment plan quickly, even if you can’t pay the full amount right away.
Pay in Full Right Now
If you can afford to clear the balance, paying in full stops penalties and interest immediately. The IRS accepts several payment methods:
- IRS Direct Pay: Free bank transfer from your checking or savings account at irs.gov/payments.
- Debit card: A flat fee of $2.10 to $2.15, depending on the payment processor.
- Credit card: A processing fee of 1.75% to 1.85% of the payment amount (minimum $2.50). On a $5,000 payment, that’s roughly $88 to $93 in fees.
- Digital wallets: PayPal and Click to Pay are accepted through the IRS payment processors.
- Check or money order: Mail it with Form 1040-V to the address listed in your notice. No fee, but slower.
None of these processing fees go to the IRS. They’re charged by third-party processors like Pay1040 or ACI Payments. If you’re paying business taxes, the card processing fee is tax deductible. For personal taxes, it is not.
Short-Term Payment Plan (180 Days or Less)
If you need a few months to pull together the money, a short-term payment plan gives you up to 180 days to pay your balance in full. There’s no setup fee whether you apply online, by phone, or by mail. Penalties and interest continue to accrue during the repayment period, but you avoid the more aggressive collection actions the IRS takes against taxpayers who simply ignore a bill.
Individual taxpayers can apply online through the IRS Online Payment Agreement tool. You’ll need your most recent tax return, your Social Security number, and your billing notice number if you have one. Businesses need to apply by phone or mail.
Long-Term Installment Agreement
When you need more than 180 days, a long-term installment agreement lets you pay in monthly installments. Setup fees vary based on how you apply and how you choose to pay:
- Direct debit (automatic bank withdrawal), applied online: $22 setup fee.
- Direct debit, applied by phone, mail, or in person: $107 setup fee.
- Non-direct debit (you send payments manually), applied online: $69 setup fee.
- Non-direct debit, applied by phone, mail, or in person: $178 setup fee.
Low-income taxpayers, defined as individuals with adjusted gross income at or below 250% of the federal poverty level, get the direct debit setup fee waived entirely. For non-direct debit plans, the fee drops to $43 and may be reimbursed if certain conditions are met.
The cheapest route for most people is applying online and choosing direct debit. You save on the setup fee and your monthly penalty rate drops from 0.5% to 0.25% while the agreement is active. Interest still accrues, but the overall cost of carrying the debt is significantly lower than ignoring it.
Offer in Compromise: Settling for Less
An offer in compromise lets you settle your tax debt for less than the full amount you owe. The IRS approves these when the amount you offer is the most they can realistically expect to collect from you. This isn’t a shortcut for people who simply don’t want to pay. The IRS evaluates your income, expenses, asset equity, and overall ability to pay before accepting any offer.
To be eligible, you must have filed all required tax returns, made all required estimated payments, and not be in an open bankruptcy proceeding. Employers also need to have made tax deposits for the current and past two quarters.
The application costs $205 (non-refundable) and requires a financial disclosure using Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, plus the actual offer on Form 656. You’ll also need to include an initial payment, which depends on which repayment structure you choose:
- Lump sum offer: Include 20% of your total offer amount upfront. If the IRS accepts, pay the rest in five or fewer payments.
- Periodic payment offer: Include your first monthly payment with the application, then continue making monthly payments while the IRS reviews your case.
If your income falls within the low-income certification guidelines, you don’t have to pay the application fee or the initial payment, and you won’t owe monthly installments during the review period. The IRS provides a pre-qualifier tool on its website that can give you a rough sense of whether an offer in compromise is realistic for your situation before you invest time in the paperwork.
Currently Not Collectible Status
If paying anything right now would prevent you from covering basic living expenses, you can request “currently not collectible” (CNC) status. This temporarily pauses IRS collection activity until your financial situation improves. You still owe the full balance, and penalties and interest keep accruing, but the IRS won’t garnish your wages or seize your assets while the status is active.
To request it, call 800-829-1040 or the number on your IRS notice. You’ll likely need to complete a Collection Information Statement (Form 433-F, 433-A, or 433-B) and provide documentation of your income, monthly living expenses, bank accounts, and other assets. The IRS uses this to verify that you genuinely can’t pay.
There are trade-offs. The IRS may file a federal tax lien, which is a public record that can affect your credit and your ability to sell property. They’ll also apply any future tax refunds to your debt. And the IRS periodically reviews your finances. If your income increases or your situation changes, they can resume collection.
Steps to Take Right Now
Start by figuring out exactly what you owe. Log in to your IRS online account at irs.gov to see your current balance, including any penalties and interest that have been added. If you’ve never created an account, you’ll need to verify your identity through ID.me.
Next, decide which option fits your situation. If you can pay within 180 days, the short-term plan costs nothing to set up and keeps your total penalty bill lower. If you need longer, a direct-debit installment agreement applied online is the cheapest long-term option at $22. If you’re in serious financial hardship and the balance is genuinely more than you can ever repay, explore the offer in compromise or CNC status.
Whatever you do, file any unfiled returns first. The IRS won’t approve a payment plan or offer in compromise if you have outstanding returns. Filing also stops the separate failure-to-file penalty, which runs 5% per month and maxes out at 25% of the tax owed, a much steeper penalty than the failure-to-pay charge. Even if you can’t pay a dollar today, filing your return and then requesting a payment plan is dramatically cheaper than doing nothing.