Finalizing your tax return and realizing you owe money to the IRS can cause a shock to the system, especially if the number is larger than you expected. While the ideal scenario is to simply pay cash by the April 15 deadline, that’s not always an option for everyone.
Before you do anything else (including procrastinating on filing that tax return), read these five rules on how to handle tax debt. They could save you a lot of stress and maybe even a little bit of money.
Rule #1: File your tax return anyway
One of the biggest financial mistakes you can make is not filing your taxes on time. Even if you have a surprise tax bill, don’t be tempted to wait on filing. If you do, you’ll have to pay a hefty 5% failure to file penalty that accrues monthly on the amount you owe, up to 25% of your bill. So if you owe $5,000, you’ll have an additional $250 added to your bill each month until you file or hit that 25% maximum. That’s on top of interest charged by the IRS on any outstanding tax payments. For the first quarter of 2026, the interest is 7% per year, but that can fluctuate over time based on market rates.
The failure-to-file penalty is much higher than the failure-to-pay penalty, which is just 0.5% of your unpaid taxes for each month (or partial month) until you pay. In the $5,000 scenario, that adds just $25 per month to your bill, which is much more digestible.
If you need more time to file your tax return, consider filing an extension to avoid the 5% penalty. You’ll still need to pay your owed amount by April 15 to avoid the failure-to-pay penalty, but that buys you time while avoiding the larger fee.
Rule #2: Explore IRS payment options
If you can’t afford to pay your tax bill on time, consider applying for a payment plan from the IRS. Also called an installment agreement, it gives you a set timeline for paying your tax bill. The biggest benefit is that it reduces the failure to pay penalty from 0.5% to just 0.25%. However, daily interest still accrues on your balance until it’s fully paid.
You can apply for one of two types of IRS installment agreements:
- Short-term: Bill must be paid in 180 days or less; no setup fee required
- Long-term: Monthly payment plan; setup fees apply depending on how you apply
A short-term payment plan is ideal if you just need a few months to come up with the cash, whereas a longer plan lets you pay in regular intervals for as long as 10 years.
Rule #3: Check penalty relief eligibility
In some instances, you may be able to request penalty relief to help lower your IRS bill. There are three types you may qualify for:
- First time penalty abate and administrative waiver: You could qualify if you haven’t had any penalties in the previous three years.
- Reasonable cause: Eligibility depends on your ability to prove you had reasonable cause for failing to file your tax return. You also must demonstrate significant mitigating factors, like a good compliance history or economic hardship.
- Statutory exception: Example qualifying situations include getting incorrect written advice from the IRS or living in a federal disaster area.
Rule #4: Consider paying with a credit card or personal loan
Another option to pay your owed taxes is to use a credit card1 or personal loan*, especially if you don’t want to empty your savings to pay off your debt to the IRS. The benefit with this option is that you can quickly take care of your IRS debt and owe a lender rather than the federal government.
A 0% introductory APR credit card could help you save on interest. Just be realistic about whether or not you can really pay off your balance during the introductory period, otherwise you could accrue even more expensive interest charges. Also note that the IRS charges an additional 1.75% for payments made with a credit card.
A personal loan gives you fixed payments over a specific period of time, providing you with a clear debt payoff strategy and timeline. Interest rates are usually lower compared to a credit card. Depending on your credit score, you may even qualify for a comparable APR to the IRS rate, especially when factoring in the failure to pay penalty and credit card fees.
Rule #5: Future-proof next year’s taxes
Once you have a plan for this year’s outstanding IRS debt, start developing strong financial habits to avoid owing next year. It’s helpful to find out what contributed to your owed taxes this year. Did your income jump? Did you earn extra money from a side hustle? Did you have a large capital gains bill or change your filing status?
If it’s a permanent change and you’re an employee, alter your withholdings by submitting a new W-4 form to your workplace. If you’re self-employed or have a side hustle, make sure you pay quarterly estimated taxes.
You can avoid an underpayment penalty if you either owe less than $1,000 or pay the smaller of these two numbers:
- 90% of your current year’s tax bill
- 100% of last year’s tax
Turn tax debt into a better financial plan
Getting a surprise tax bill can be scary, but it doesn’t have to completely derail your finances. Create a plan to pay off your owed taxes as soon as possible and check for opportunities to get some of those penalties waived. Also remember that a personal loan can give you the flexibility to choose a repayment timeline that works for you while also relieving the pressure of owing money to the IRS.
* All personal loans made by WebBank.
1The Prosper® Card is an unsecured credit card issued by Coastal Community Bank, Member FDIC, pursuant to license by Mastercard® International.