What to Do If You Owe Taxes This Year (And Can’t Pay in Full)

If you just finished your tax return and saw a balance due you can’t pay, take a breath.
You are not alone. Owing taxes is common. Not being able to pay the full amount immediately is even more common.
What matters now is what you do next.
The worst move is not owing.
The worst move is ignoring it.
Here’s how to handle it the right way.

1. File Your Return — Even If You Can’t Pay

This is the most important step.
If you owe and don’t file, the IRS charges a failure-to-file penalty, which is significantly higher than the failure-to-pay penalty.

Failure to file: up to 5% per month.
Failure to pay: generally 0.5% per month.

Filing protects you. Avoiding makes it worse.
Even if you can only pay a small portion right now, submit the return. It stops the largest penalties from piling up.
Extensions do not extend payment deadlines. If you owe, the balance starts accruing interest after the due date whether you file or not.

2. Understand What You Actually Owe
Before you panic, break the number down.
Your total amount due usually includes:
•   The tax itself
•   Interest (accrues daily)
•   Penalties
The interest rate fluctuates, but the key point is this:
The longer you wait, the more expensive it becomes.
For example, if you owe $10,000 and ignore it for a year, that number doesn’t stay $10,000. Between interest and penalties, it can grow quickly.
Action reduces damage.

3. IRS Payment Plan Options

The IRS would rather set up a structured payment than chase you. They are far more flexible when you act early.
Short-Term Payment Plan (Up to 180 Days)

No setup fee
Full balance paid within 180 days
Interest continues accruing

This works if you expect a bonus, business income, or liquidity soon.

Long-Term Installment Agreement

Monthly payments
Setup fee applies
Interest continues until paid off

This is the most common solution. Payments are structured around what you can realistically afford.
The key is setting the amount correctly. Too high, and you default. Too low without documentation, and it may not be approved.

Partial Pay Installment Agreement

If your income and assets genuinely can’t support full repayment, you may qualify for a reduced payment plan.
The IRS reviews:

Income
Living expenses
Assets
Equity

If approved, you pay what you reasonably can, and the remaining balance may expire under the statute of limitations.
This is more complex and requires careful documentation.

4. What About Colorado State Taxes?

If you owe the IRS, you may also owe the Colorado Department of Revenue.
Colorado also offers payment arrangements, but they operate independently from the IRS.
Important:
Ignoring the state because you’re focused on the IRS is a mistake. State collections can move quickly.
If you receive notices from Colorado, respond promptly. Payment plans are far easier to arrange early than after enforcement begins.

5. When You Might Qualify for Penalty Relief

Reasonable Cause Relief

If your inability to pay was caused by:

Serious illness
Job loss
Natural disaster
Divorce
Other documented hardship

You may qualify for penalty reduction.
Documentation matters here. This is not about storytelling — it’s about evidence.

Offer in Compromise (Be Careful)

You’ve probably seen ads promising to “settle for pennies on the dollar.”
Reality: Not everyone qualifies.
The IRS approves Offers in Compromise only when they believe the taxpayer genuinely cannot pay the full balance within the collection window.
These require detailed financial disclosure and careful calculation.
If done incorrectly, they’re rejected.
If done properly, they can be powerful — but they are not magic solutions.

6. What NOT To Do

This part matters.
Do not:

Ignore IRS letters.
Wait for wage garnishment before acting.
Drain retirement accounts impulsively.
Put the entire balance on high-interest credit cards without evaluating options.
Hire the first “tax relief” firm that promises unrealistic outcomes.

The IRS process is procedural, not emotional. Panic decisions are expensive decisions.

7. How Much Time Do You Actually Have?
The IRS doesn’t jump straight to levies.
There is a sequence:
1.   Notice of balance due.
2.   Reminder notices.
3.   Demand for payment.
4.   Intent to levy.
5.   Collection enforcement.
But once you reach the enforcement stage, your options narrow.
Acting early keeps you in control. Waiting shifts control to them.

8. If You Truly Cannot Pay Anything

If your financial situation is severe, you may qualify for:
Currently Not Collectible (CNC) Status
This temporarily pauses collection activity.
•   No levies.
•   No garnishments.
•   Interest continues accruing.
•   Status is periodically reviewed.
This is not forgiveness. It’s protection while you stabilize financially.

9. Fix the Root Problem
Once this year is handled, prevent a repeat.
Ask:
•   Is your withholding accurate?
•   Are you self-employed and underpaying quarterly estimates?
•   Are you mixing business and personal finances?
•   Did you have unexpected income?
Most tax debt is not caused by high tax rates. It’s caused by poor withholding or inconsistent planning.
Fix the system. Not just the symptom.

10. The Right Way to Think About Owing

Owing taxes does not mean you failed.
It means your cash flow didn’t align with your tax obligation.
That’s solvable.
The IRS prefers structured payments over silence. The earlier you act, the more options you have.
Waiting increases stress and cost. Action reduces both.