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What happens if you owe the IRS but can't pay?

Tax form with a calculator
If you're unable to pay your tax debt to the IRS, don't panic — there are options to consider. Getty Images

When tax season rolls around, most people either look forward to a refund or brace for the payment they owe. For an increasing number of Americans, though, paying their tax bill is simply not an option. As of early 2024, hundreds of billions of dollars in back taxes were owed to the Internal Revenue Service (IRS), and with the shifts to the economic landscape — and the uptick in financial challenges Americans are facing — it's likely that even more people will find themselves in a position where they owe the IRS but lack the resources to pay.

For those who owe the IRS but can't pay, the situation can feel overwhelming, especially considering how much power the IRS has in terms of collecting what's owed. And having unanswered questions about the penalties, interest charges and potential legal actions you may face in this situation only adds to the stress. So, it's important to clear some of those questions up if you've found yourself in a position where you owe the IRS money but don't have the funds on hand to cover it. 

So what exactly will happen if you owe tax money to the IRS but can't pay? Below, we'll explain what happens if you find yourself in this position, as well as the options you have available to address your tax debt and practical steps you can take to resolve the issue.

Speak to a tax relief expert about your options today.

What happens if you owe the IRS but can't pay?

Owing money to the IRS is a serious matter, but it's not as dire as some might fear — at least not immediately, anyway. When you file your tax return and owe more than you can pay, the IRS will send you a bill for the outstanding balance. This bill outlines the amount due, including any penalties and interest accrued from the date your taxes were due.

If you don't pay your balance or make arrangements with the IRS, penalties and interest will continue to accrue. The penalty for failure to pay is 0.5% of the unpaid taxes for 2025, which is charged for each month or part of a month that the tax bill remains unpaid, according to the IRS. That penalty won't exceed 25% of your unpaid taxes, but over time, these added costs can significantly increase your total debt.

If several months go by without payment or contact, the IRS may escalate its collection efforts. This can include filing a federal tax lien, which publicly claims your property as collateral for the debt or issuing a levy, which allows the IRS to seize assets like bank accounts, wages or even Social Security benefits. This can also include filing a Notice of Federal Tax Lien, which becomes public record and impacts your credit score. In extreme cases, non-payment can lead to legal action or criminal charges. However, these types of penalties are rare and are typically reserved for cases involving tax evasion or fraud.

Find out how the right tax relief program could benefit you now.

How to get rid of unpaid IRS tax debt

Several options exist for managing tax debt, each with distinct advantages:

  • Payment plans: An installment agreement with the IRS allows you to pay off your debt in monthly increments. The IRS offers both short-term plans (up to 180 days) and long-term plans (up to six years). While interest and penalties still accrue during that time, spreading payments out over time can make the debt more manageable.
  • An Offer in Compromise (OIC): If paying in full would cause financial hardship, you may be eligible for an OIC, which allows you to settle your tax debt for less than the full amount owed. The IRS evaluates OIC applications based on your income, expenses, assets and ability to pay.
  • Currently Not Collectible (CNC) status: CNC status temporarily halts collection activities if paying your tax debt would create economic hardship. While interest continues to accrue, this status provides breathing room to improve your financial situation. 
  • Tax relief services: Private tax relief companies specialize in negotiating with the IRS on your behalf. These services can help you understand your options, file the necessary paperwork and advocate for a favorable resolution, whether that's settling your tax debt or something else entirely.

The bottom line

Owing money to the IRS can feel like an insurmountable challenge, but it's important to remember that you have options. Whether it's setting up a payment plan, working with a tax relief service on solutions, negotiating a reduced settlement or seeking another type of temporary relief, there are options to assist taxpayers in difficult financial situations. Taking action as soon as possible is crucial, though, if you want to minimize penalties and interest while avoiding severe collection measures.

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