Owe Taxes This Year? Here’s How to Avoid Major Penalties on Tax Day 2025

With Tax Day 2025 fast approaching, many Americans are scrambling to file their returns. For those who owe taxes, the stress can be even more overwhelming. The good news is, if you find yourself unable to pay your tax bill in full by April 15, there are several options to help you manage the debt without facing serious penalties. Here’s what you need to know.

1. Pay in Full by Tax Day

If you can afford it, the best and easiest option is to pay your tax bill in full by April 15. This way, you can avoid any penalties or interest charges. You can pay directly from your bank account using the IRS’s Direct Pay system, or use a credit card, debit card, or check. While paying by card can be convenient, keep in mind that there may be processing fees.

2. Installment Plans for Those Who Need More Time

For taxpayers who can’t pay their full balance right away, the IRS offers payment plans. There are two types of plans:

• Short-Term Plan: If you owe less than $100,000 (including penalties and interest), you can set up a short-term plan to pay off your tax debt in 120 days or less.

• Long-Term Plan: If you owe more than $50,000, you can apply for a long-term plan to pay in monthly installments. Keep in mind that interest and penalties will still accumulate while you’re paying.

Setting up an installment plan with the IRS is straightforward, but the longer it takes to pay off the balance, the more you’ll owe in interest and penalties.

3. Temporarily Delay Payments with “Currently Not Collectible” Status

For people experiencing serious financial hardship, the IRS may grant “Currently Not Collectible” (CNC) status. This means the IRS will temporarily halt collection efforts, including garnishing wages or placing liens on your property. However, this option is not a permanent fix: the IRS will continue to charge interest and penalties, and your status will be reviewed every year to determine if you can start paying.

4. Settle Your Debt with an Offer in Compromise

An “Offer in Compromise” (OIC) allows you to settle your tax debt for less than what you owe, but it’s not easy to get approved. The IRS will consider your financial situation and ability to pay before agreeing to settle for a lower amount. If you’re struggling financially, this could be a good option, but it’s a lengthy process that requires a lot of documentation.

5. Using Tax Refunds or Offsets to Cover Your Bill

If you’re expecting a tax refund or have received stimulus payments in the past, these could be used to offset any tax debt. In some cases, the IRS may apply your refund to any unpaid taxes from previous years, which can reduce the total amount you owe.

Avoiding Penalties

It’s crucial to know that failing to file your tax return or pay your taxes by the deadline can lead to hefty penalties. The IRS charges a late filing penalty of 5% of the unpaid tax per month, up to 25%. The late payment penalty is 0.5% per month, and interest will accrue daily on the balance.

If you can’t file your taxes on time, you can apply for an extension, but remember, this only gives you extra time to file, not to pay. If you owe, it’s important to make at least a partial payment to minimize penalties.

Final Thoughts

If you owe taxes this year and can’t pay your full balance, don’t panic. The IRS provides several options to help you manage your debt. Whether it’s setting up a payment plan, applying for an Offer in Compromise, or temporarily delaying payments due to financial hardship, the important thing is to take action and communicate with the IRS. The sooner you address the issue, the better you’ll be able to minimize penalties and get back on track.