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What Happens If I Owe The IRS?

What Happens If I Owe The IRS?

What Happens If I Owe The IRS?

Zoe Team

Jul 2, 2020

4 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Key Takeaways

File your return on time even if you cannot pay to avoid failure-to-file penalties.
The IRS offers short-term extensions and installment plans for those who owe back taxes.
Consult a financial advisor to integrate tax repayment into your broader financial plan.

Frequently Asked Questions

Frequently Asked Questions

What happens if I cannot pay my taxes by the deadline?

The IRS offers options like short-term extensions and installment agreements. Filing on time is crucial to minimize penalties.

Does the IRS charge interest on tax debt?

Yes, interest and penalties apply. Short-term extensions generally carry a monthly penalty, while installment plans have specific interest rates.

Should I borrow from my retirement account to pay taxes?

It is usually discouraged, as withdrawing from a 401(k) can hurt your retirement savings and may trigger additional taxes.

In 1789, founding father Benjamin Franklin famously noted, “(…) nothing can be said to be certain, except death and taxes.” Franklin wasn’t the first person to associate taxes with a fearful reality. Being in debt with the government can be a nerve-wracking experience: one in five Americans fear owing money to the IRS. If you do owe taxes, you’re not alone. According to U.S. Internal Revenue Service data, over 14 million Americans owed more than $131 billion in back taxes, penalties, and interest in 2018. From being too busy to file to feeling confused about tax strategy, there are plenty of reasons someone might fall behind and end up owing the IRS back taxes. To get over the fear of owing money to the IRS, learning how to tackle owing taxes can help.

Don’t Be Afraid of Owing the IRS

After the latest tax reform, more people have ended up owing money in taxes. This has led to some individuals finding themselves unable to pay taxes within the established deadlines. If this is your case, focus on filing the return to avoid penalties ranging from 5% to a maximum of 25% of the tax value that wasn’t paid. Contrary to the scary image that comes to mind when thinking about the IRS, they do offer several alternatives to make your tax payment without incurring penalties. These include short-term payment extensions, installment payment agreements, and temporary deferment of collection.

How Does Each Option Work?

Before deciding on any of the alternatives offered by the IRS, consult an independent fiduciary financial advisor. They can help shed some light on which tax repayment strategy is most in line with your cash flow and long-term, holistic financial plan.

Short Term Extension

Taxpayers who use this option have up to 120 more days after the established tax filing due date to pay the full balance of their taxes. This alternative does not carry a fixed rate but generates a 0.5% penalty interest per month on the outstanding balance. If you owe taxes, short term extensions can be an excellent solution for those who can have the funds readily available in the near future.

Installment Agreements or Payment Plans

Installment agreements are built according to a taxpayer’s unique situation. It all depends on the amount owed and the defined time to make the payment. According to the IRS, the defined time is typically greater than 120 days. Otherwise, it’s more convenient to take advantage of the Short Term Extension. Note that this agreement has an application fee of $149. While you may still be fined, the fine is reduced to 0.25% per month until the outstanding value is settled. Interest is charged at the federal short-term rate plus 3% (interest may change quarterly). Additionally, you may be able to work out payment through payroll deductions.

Temporary Postponement of Collection

The IRS offers temporary postponement of collection for people in difficult financial situations. To apply for this alternative, the taxpayer must demonstrate that the payment of the tax would generate serious financial difficulties, following the financial standards of the IRS. This alternative does not carry penalties and its interests are calculated according to the Federal Short-Term Rate, plus 3%.

Other Financial Alternatives

While there are other financial alternatives to paying your taxes, such as pulling funds from a retirement account or using a debit/credit card, it’s never a wise decision to get into more debt or risk your financial future. For example, borrowing money from your 401k can end up both negatively affecting your retirement savings and potentially garnering you future taxes on those funds that you’ve withdrawn.

Best Practices for Paying Your Taxes

While it may feel scary or overwhelming, reporting and paying your taxes is always the best option. If you do owe taxes, there are various strategies offered by the IRS to help relieve your tax burden. There are plenty of financial tax strategies to avoid being caught in this uncomfortable position in the future. With the help of a tax strategy expert, you can align your tax planning with a holistic financial life plan.

In 1789, founding father Benjamin Franklin famously noted, “(…) nothing can be said to be certain, except death and taxes.” Franklin wasn’t the first person to associate taxes with a fearful reality. Being in debt with the government can be a nerve-wracking experience: one in five Americans fear owing money to the IRS. If you do owe taxes, you’re not alone. According to U.S. Internal Revenue Service data, over 14 million Americans owed more than $131 billion in back taxes, penalties, and interest in 2018. From being too busy to file to feeling confused about tax strategy, there are plenty of reasons someone might fall behind and end up owing the IRS back taxes. To get over the fear of owing money to the IRS, learning how to tackle owing taxes can help.

Don’t Be Afraid of Owing the IRS

After the latest tax reform, more people have ended up owing money in taxes. This has led to some individuals finding themselves unable to pay taxes within the established deadlines. If this is your case, focus on filing the return to avoid penalties ranging from 5% to a maximum of 25% of the tax value that wasn’t paid. Contrary to the scary image that comes to mind when thinking about the IRS, they do offer several alternatives to make your tax payment without incurring penalties. These include short-term payment extensions, installment payment agreements, and temporary deferment of collection.

How Does Each Option Work?

Before deciding on any of the alternatives offered by the IRS, consult an independent fiduciary financial advisor. They can help shed some light on which tax repayment strategy is most in line with your cash flow and long-term, holistic financial plan.

Short Term Extension

Taxpayers who use this option have up to 120 more days after the established tax filing due date to pay the full balance of their taxes. This alternative does not carry a fixed rate but generates a 0.5% penalty interest per month on the outstanding balance. If you owe taxes, short term extensions can be an excellent solution for those who can have the funds readily available in the near future.

Installment Agreements or Payment Plans

Installment agreements are built according to a taxpayer’s unique situation. It all depends on the amount owed and the defined time to make the payment. According to the IRS, the defined time is typically greater than 120 days. Otherwise, it’s more convenient to take advantage of the Short Term Extension. Note that this agreement has an application fee of $149. While you may still be fined, the fine is reduced to 0.25% per month until the outstanding value is settled. Interest is charged at the federal short-term rate plus 3% (interest may change quarterly). Additionally, you may be able to work out payment through payroll deductions.

Temporary Postponement of Collection

The IRS offers temporary postponement of collection for people in difficult financial situations. To apply for this alternative, the taxpayer must demonstrate that the payment of the tax would generate serious financial difficulties, following the financial standards of the IRS. This alternative does not carry penalties and its interests are calculated according to the Federal Short-Term Rate, plus 3%.

Other Financial Alternatives

While there are other financial alternatives to paying your taxes, such as pulling funds from a retirement account or using a debit/credit card, it’s never a wise decision to get into more debt or risk your financial future. For example, borrowing money from your 401k can end up both negatively affecting your retirement savings and potentially garnering you future taxes on those funds that you’ve withdrawn.

Best Practices for Paying Your Taxes

While it may feel scary or overwhelming, reporting and paying your taxes is always the best option. If you do owe taxes, there are various strategies offered by the IRS to help relieve your tax burden. There are plenty of financial tax strategies to avoid being caught in this uncomfortable position in the future. With the help of a tax strategy expert, you can align your tax planning with a holistic financial life plan.

Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017

Copyright © 2026 Zoe Financial, Inc. | All rights reserved

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017

Copyright © 2026 Zoe Financial, Inc. | All rights reserved

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017

Copyright © 2025 Zoe Financial, Inc. | All rights reserved