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You’re almost done with your federal income tax return, and you’re already thinking of ways to spend your refund. Then, the unthinkable happens: Instead of a refund, you owe money but don’t have the cash. What do you do now?

Don’t panic, but don’t put your head in the sand either. The IRS won’t go away and the amount you owe will only grow larger if you put off dealing with the situation. You have several options, including:

Pay by installments.

An installment agreement is a monthly payment plan with the IRS and is the most widely used method for paying an IRS tax debt. The IRS commonly accepts tax payments in installments if the total tax bill (not counting interest, penalties and other additions) is $50,000 or less1 and if you meet a few other requirements.

To set up an installment agreement, contact the IRS by phone, mail, or through their website and explain that you’re unable to pay your tax bill in full. You may spread your tax payments over a period of up to 72 months and have them automatically withdrawn from your bank account or made through payroll deduction. You’ll typically be expected to pay the maximum installment amount you can afford. Although you won’t avoid interest and penalties with this payment method, you’ll avoid more severe collection action or other consequences.

Pay what you can afford when you file the return, then wait for a bill.

Perhaps you’re between paychecks, or maybe you just paid a substantial bill. Basically, you’re suffering from a short-term cash flow problem. You’ll eventually have the cash to pay your tax bill, but you just don’t have it right now. If that’s your situation, you may want to consider the following approach:

  • First, pay as much as you can when you file your tax return. This will help reduce your penalties and interest.
  • Next, wait for the IRS to send you a bill for the remaining balance, which should take roughly 45 days. By then you might have enough cash to pay the balance due.
  • If you still don’t have the cash to cover the remainder of your tax debt, call the number or write to the address on your bill, or visit the nearest IRS office to explain your situation.

With this approach, however, interest and penalties continue to accrue on the unpaid balance. So while you may buy yourself some time, you may end up paying a higher total bill than if you had paid it in full when it was due.

Borrow money or take out a loan to pay your bill.

One of the quickest ways to pay your tax bill may be to borrow the money from a relative or close friend. Borrow what you need to pay the full bill, and create a payment plan to reimburse the person who gave you the loan. By paying your total tax bill, you’ll be able to avoid IRS penalties and interest. Even better — you may not have to pay interest to your relative or friend. However, be careful if you borrow more than $10,000, as you may be subject to taxes on that loan the following year.

If you can’t borrow from a relative or friend, consider taking out a bank loan or tapping into a home equity line of credit. Although the interest rates on these loans may be higher than what a relative or friend may charge, it would probably be less than the interest and penalties you’d owe to the IRS on the unpaid tax.

Pay by credit card.

Another option is to pay your taxes by credit card. Similar to paying your taxes with a loan from friends or family, paying by credit card allows you to pay your tax bill on time, which keeps the IRS from charging you penalties and interest. Note, however, that the interest rate that your credit card company charges may be higher than what the IRS charges on installment payments or late payments, so be sure to look into this first.

If you choose this option, you’ll want to use the card with the lowest interest rate. And if you’re approaching your credit limit on a given card, you can split payments between two different credit cards.


Bankruptcy is a way to resolve your debts when you’re unable to pay them. Although many taxes can’t be avoided in bankruptcy, declaring bankruptcy will stop or slow down the IRS in their attempt to collect your tax bill. In some cases, interest and penalties will also stop growing. Finally, reducing your overall debt burden by eliminating certain types of debt (such as credit-card balances) through bankruptcy can leave more money to pay your IRS tax bill.

Facing an unexpected tax bill is unpleasant at any point and can feel like a crisis when you don’t have the cash to cover it. If this happens to you, keep in mind that you’re certainly not the first person to be in this position and that you have options. It’s important to make a plan and act on it quickly to avoid costly penalties.


1 Payment Plans, Installment Agreements. Internal Revenue Service. Retrieved March 10, 2017, from
Some information sourced from Broadridge Investor Communication Solutions, Inc.
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The information provided is general in nature, is for informational purposes only, and should not be construed as legal or tax advice. Financial Engines does not provide legal or tax advice. Financial Engines cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Financial Engines makes no warranties with regard to such information or results obtained by its use. Financial Engines disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.