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Filed an Extension But Can't Pay the IRS? Your Options Before October 15

First: file the return anyway

Every October I talk to people who filed an extension in April because they could not pay, and who are now thinking about not filing at all for the same reason. That is the single most expensive decision on the tax calendar, and as an Enrolled Agent it is the one I most want to talk you out of.

The IRS charges two separate penalties. The late-payment penalty is 0.5 percent of the unpaid balance per month. The late-filing penalty is 5 percent per month, ten times larger, and it only starts when you miss a filing deadline. Filing the return, even with a zero payment attached, keeps the large penalty from ever starting. Owing money is the reason to file on time, not a reason to skip it.

Filing also unlocks everything that follows. The IRS will not set up a payment plan, grant hardship status, or consider an offer for someone who is not current on filing. Get the 2025 return in by October 15, then pick from the options below.

Sabih Shafi, EA — Enrolled Agent, All State Tax Resolution

What you are actually being charged right now

If you paid less than 90 percent of your 2025 tax by April 15, the late-payment penalty has been running since then at 0.5 percent per month, up to a cap of 25 percent. It drops to 0.25 percent per month while you are in an approved installment agreement (for returns filed on time), and it rises to 1 percent per month once the IRS has sent a final notice of intent to levy and ten days have passed.

Interest runs on top of that, on both the tax and the penalties, compounding daily at a rate the IRS resets quarterly. It has been in the 7 to 8 percent range in recent years. None of this is catastrophic on its own, but it means every month of waiting has a price, and the price goes up once collection notices start.

Option 1: Pay what you can now

This is the least glamorous option and the one that saves the most money. Every dollar you pay reduces the base that penalties and interest are calculated on. IRS Direct Pay lets you make a partial payment from a bank account in a few minutes with no fee, and you can do it as many times as you like. If you can cover half the balance today, do that before you do anything else.

Option 2: A short-term payment plan (up to 180 days)

If you can clear the balance within about six months, a short-term plan is the simplest arrangement. It is available online for individuals who owe less than $100,000 in combined tax, penalties, and interest, there is no setup fee, and it keeps the account out of active collection while you pay. Penalties and interest continue to accrue until the balance is paid, so treat it as breathing room, not relief.

Option 3: An installment agreement

For balances that need more than six months, an installment agreement spreads the payments over up to 72 months. If you owe $50,000 or less in combined tax, penalties, and interest, you generally qualify for a streamlined agreement: no financial statement, no detailed budget review, just a monthly amount that pays the balance within the term. Larger balances can still be arranged, but the IRS will want a financial statement (Form 433-F or 433-A) and will look at your income and expenses before agreeing to a number.

A setup fee applies, lower if you pay by direct debit and reduced or waived for lower-income taxpayers. Direct debit is worth choosing for a second reason: missed payments default the agreement, and a defaulted agreement puts you back at the front of the collection line. The agreement also requires you to stay current, which means making your 2026 estimated payments on schedule. The next one is due September 15, 2026.

Option 4: Currently Not Collectible (hardship status)

If paying the IRS anything would leave you unable to cover basic living expenses, you can ask to be placed in Currently Not Collectible status. The IRS reviews a financial statement, compares your income to its allowable living expense standards, and if there is nothing left over, it stops active collection: no levies, no garnishment, no demands for payment.

Two things to understand before you ask for it. First, it is a pause, not a cancellation; penalties and interest keep accruing, and the IRS revisits your finances periodically. Second, the financial statement has to be complete and honest. We prepare a full 433-A workbook with clients before anything is submitted, because an incomplete statement is the most common reason a hardship request is denied.

Option 5: An Offer in Compromise, with an honest caveat

An Offer in Compromise lets you settle for less than the full balance when the IRS concludes it cannot collect the full amount before the collection statute expires. It is real, it works, and I have filed successful ones. It is also the most over-advertised product in this industry, and most people who call about it do not qualify.

The IRS calculates what it calls reasonable collection potential from your equity in assets plus your monthly disposable income projected forward. If that number is higher than what you owe, the offer is rejected no matter how it is written. If you have equity in a home, a retirement account, or steady income above the allowable expense standards, an installment agreement is usually the realistic path. An Enrolled Agent can run the calculation before you spend the application fee and the 20 percent deposit that a lump-sum offer requires.

Penalty relief: First-Time Abatement and reasonable cause

Penalties that have already been charged may be removable, and this is worth asking about in every case. First-Time Abatement is an administrative waiver: if you had no penalties in the three prior tax years, have filed all required returns, and have paid or arranged to pay the tax, the IRS will remove the late-filing and late-payment penalties for one tax period on request. It is not publicized, and it is not applied automatically.

Reasonable-cause relief covers circumstances outside your control: a serious illness, a death in the immediate family, a natural disaster, records destroyed, or reliance on bad professional advice. It requires a written explanation and documentation, and it is decided case by case. Interest is generally not abated on its own, but when a penalty is removed, the interest that was charged on that penalty goes with it.

What to do this week

File the 2025 return, or get it on a preparer's calendar, before October 15. Pay whatever you can at the same time. Then pick the arrangement that matches your situation: short-term plan if you can clear it in six months, installment agreement if you need longer, hardship status if there is genuinely nothing left after living expenses, and an offer only after someone has run the numbers.

If you would rather not work through it alone, an Enrolled Agent can pull your IRS transcripts, confirm the exact balance and penalty breakdown, request any abatement you qualify for, and set up the arrangement under a power of attorney so the IRS talks to us instead of you. Real help without judgment or hidden agendas, for taxpayers in all fifty states.

Frequently Asked Questions

Will the IRS take my paycheck or bank account right away?

Not immediately. Collection follows a sequence of notices, typically a CP14 balance due, then reminder notices, then a CP504, then a final notice of intent to levy (LT11 or Letter 1058) that gives you 30 days to respond before a levy can be issued. Setting up a payment arrangement at any point in that sequence stops it.

Can I get a payment plan if I have not filed the return yet?

No. The IRS requires you to be current on all required returns before it will approve an installment agreement, hardship status, or an Offer in Compromise. Filing comes first, always.

Does a payment plan stop interest and penalties?

No. Interest continues until the balance is paid. The late-payment penalty continues too, but at a reduced 0.25 percent per month while an installment agreement is in effect for a return that was filed on time.

Should I pay the IRS with a credit card?

Sometimes. Card processors charge a fee of roughly 2 percent, and your card's interest rate likely exceeds the IRS rate, so it rarely beats a direct-debit installment agreement. It can make sense for a small balance you can pay off within a promotional period. There is no blanket answer; run the numbers for your situation.

Related Reading

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This article is general information, not individual tax advice. If you want to talk through your specific situation, book a free 15-minute review or call or text us directly.

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