Quick answer: File your return on time even if you cannot pay, because the penalty for not filing is far larger than the penalty for not paying. Then pay what you can and set up a payment plan: the IRS offers short-term extensions of up to 180 days and longer-term installment agreements, many of which you can set up online without calling anyone. If you truly cannot pay, options like currently-not-collectible status or an offer in compromise exist, and New York has its own payment plans for state balances.
Owing money you do not have is stressful, and the instinct is to put the envelope in a drawer. That is the one move that makes everything worse. We have helped plenty of Central New York individuals and business owners work through tax balances, and almost every situation has a workable path if you deal with it early.
Why should I file even if I cannot pay?
There are two separate penalties, and they are very different in size:
- Failure to file: generally 5 percent of the unpaid tax for each month or part of a month the return is late, up to 25 percent.
- Failure to pay: generally 0.5 percent per month of the unpaid tax, also capped at 25 percent, and reduced while an approved installment agreement is in place.
Interest also runs on unpaid tax and penalties, at a rate the IRS sets each quarter. The IRS penalty page explains each one. The point is simple: filing on time, or on extension, cuts your exposure dramatically even if the payment comes later. An extension gives you more time to file, not more time to pay, so pay what you can by the April deadline.
What payment plans does the IRS offer?
For most people, a payment plan is the right answer. The main options:
- Short-term payment plan. If you can pay in full within 180 days, you can request more time with no setup fee. Penalties and interest still accrue until it is paid.
- Long-term installment agreement. Monthly payments over a longer period. If your combined tax, penalties, and interest are under the IRS's online threshold and your returns are filed, you can usually apply through the IRS Online Payment Agreement tool and get approval right away. Direct debit plans carry lower setup fees and are less likely to default.
- Larger balances. Above the online threshold, you can still get an installment agreement, but the IRS may ask for a financial statement showing your income, expenses, and assets.
Once you are on a plan, stay current on it and on all future returns and payments. Missing a payment or owing again next year can put the agreement in default.
What if I cannot afford any payment plan?
There are options for genuine hardship:
- Currently not collectible status. If paying anything would leave you unable to cover basic living expenses, the IRS can pause collection. Interest and penalties keep accruing, and the IRS may keep future refunds, but active collection stops.
- Offer in compromise. The IRS may accept less than the full balance if it concludes it cannot reasonably collect more. The calculation is based on your income, expenses, and the equity in your assets. Many applications are rejected, so use the IRS's pre-qualifier tool first and be skeptical of anyone who advertises "pennies on the dollar."
- Partial payment installment agreement. Monthly payments that will not fully pay the balance before the collection period expires.
Can I get penalties removed?
Sometimes. Two common routes:
- First-time abatement. If you have a clean record for the prior three years, filed all required returns, and paid or arranged to pay the tax, the IRS will often remove failure-to-file and failure-to-pay penalties for one year on request.
- Reasonable cause. Serious illness, a death in the family, a natural disaster, or records destroyed through no fault of your own may justify penalty relief. You need to show you acted with ordinary care.
Interest generally cannot be removed except to the extent it was charged on a penalty that is later abated.
What about a New York State balance?
New York runs its own collection process through the Department of Taxation and Finance. If you owe state tax, you can often request an Installment Payment Agreement through your Online Services account. New York can issue tax warrants, garnish wages, and in some cases suspend a driver's license for large unpaid balances, so do not let a state bill sit. Our article on what to do when you get a letter from the New York Tax Department walks through reading the notice.
Then fix the cause. If you owe because of side income or a retirement distribution with no withholding, adjust your withholding or estimated payments now so next year does not repeat the problem. Our personal tax preparation clients get a projection so they know where they stand before April.
Frequently asked questions
Will the IRS put me in jail for not paying my taxes?
No. Not being able to pay is a civil matter handled with penalties, interest, and collection actions. Criminal cases involve willful evasion or fraud, such as hiding income or filing false returns. Filing honestly and on time, even with a balance due, keeps you on the right side of that line.
Does an IRS payment plan hurt my credit?
The IRS does not report installment agreements to credit bureaus. A federal tax lien is a separate matter, and the IRS may file one on larger balances, which can affect your ability to borrow. Setting up and keeping a payment plan can help avoid or resolve a lien in some cases.
Should I use a credit card or loan to pay the IRS?
Sometimes. If a loan or card carries a lower overall cost than IRS penalties and interest, it may make sense, but card processing fees and high card rates often make it more expensive. Compare the numbers, and do not trade a manageable IRS plan for unmanageable consumer debt.
How long can the IRS collect a tax debt?
Generally ten years from the date the tax was assessed. Certain events, such as filing for bankruptcy or submitting an offer in compromise, pause that clock. That is not a reason to wait it out, since collection can be aggressive in the meantime.
This article is general information for 2026, not tax or legal advice for your situation. Tax rules and figures change; confirm current amounts with the IRS, New York State, or your accountant before acting.
Related service: Personal Tax Preparation & Planning