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WalletPrep worksheet · Taxes

What to do if you owe taxes and can't pay

Name ____________________ Date __________

Key ideas

  1. Always file on time, even unpaid. The late filing penalty is 5% of the unpaid tax per month. The late payment penalty is only 0.5% per month.
  2. Short-term plans have no setup fee. If you owe less than $100,000 in total, you can get up to 180 days to pay with a $0 setup fee.
  3. Interest keeps running until it's paid. The IRS charges interest, 7% a year in late 2026, plus a monthly penalty. Paying sooner always costs less.

Vocabulary

Installment agreement
An IRS payment plan that lets you pay a tax bill in monthly payments. Interest and a reduced penalty keep adding up until it is paid.
Offer in compromise
An agreement that lets some people settle an IRS tax debt for less than the full amount, when the IRS agrees it can't expect to collect more.
Tax withholding
Income tax your employer takes out of each paycheck and sends to the IRS for you, as a prepayment of your yearly tax.
Form W-4
The form you give your employer to set how much federal income tax is withheld from each paycheck.

Work it out

Sam, a barista with a side gig, owes $3,000 he can't pay on April 15. He pays it off 3 months later. Here are his penalties, before interest, filing on time or late.

  1. Late payment, month 1 (0.5%)
  2. Late payment, month 2
  3. Late payment, month 3
  4. Penalty if he files on time
  5. Late filing, 3 months (4.5% each)
  6. Late payment, 3 months
  7. Penalty if he files late

Check yourself

  1. You owe $2,000 and file on time but pay 4 months late. What is the late payment penalty, before interest?

    • A. $400
    • B. $100
    • C. $40
    • D. $10

  2. What does filing Form 4868 for an extension do?

    • A. Gives you until October 15 to file, but payment is still due April 15
    • B. Gives you until October 15 to file and pay
    • C. Removes all penalties and interest
    • D. Starts a payment plan

  3. You owe $8,000 and can pay it within 5 months. What is the cheapest IRS setup?

    • A. A long-term plan by phone
    • B. A short-term plan, with a $0 setup fee
    • C. A long-term plan online

Your turn

If you owe and can't pay, file your return or extension on time and pay what you can through IRS Direct Pay. Then sign in to your IRS online account and request a short-term or long-term payment plan.

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Answer key

What to do if you owe taxes and can't pay

Work it out

  1. Late payment, month 1 (0.5%)$15
  2. Late payment, month 2$15
  3. Late payment, month 3$15
  4. Penalty if he files on time= $45
  5. Late filing, 3 months (4.5% each)$405
  6. Late payment, 3 months$45
  7. Penalty if he files late= $450
  1. The late payment penalty is $3,000 × 0.5% = $15 a month, so 3 months cost $45.
  2. When both apply, the 5% late filing penalty is reduced by the 0.5%, so it is 4.5%: $3,000 × 4.5% = $135 a month, or $405 for 3 months.
  3. Filing late costs $405 + $45 = $450, ten times more. Interest is charged either way. A short-term plan of $3,000 ÷ 6 = $500 a month works too.

Check yourself

  1. C. $40 $2,000 × 0.5% = $10 a month. Over 4 months, $10 × 4 = $40.
  2. A. Gives you until October 15 to file, but payment is still due April 15 An extension is extra time to file, not to pay. Pay what you can by April 15 to keep penalties and interest down.
  3. B. A short-term plan, with a $0 setup fee Short-term plans cover up to 180 days for balances under $100,000, with no setup fee.