3-1. I just completed my return and find that I owe the IRS money. What should I do?

You should file your return even if you can't pay all of the amount you owe. File by April 15, and pay as much as possible. By filing on time, you avoid the late filing penalty. By paying as much of the amount you owe as possible, you reduce the amount of interest and late payment penalty that you will owe. For more details on interest and penalties, see Topic 201, The Collection Process, or Publication 594, Understanding the Collection Process.

3-2. Can I ask to make installment payments on the amount I owe?

Yes. If you cannot pay the full amount due with your return, you may ask to make monthly installment payments. However, you will be charged interest and a late payment penalty on the tax not paid by April 15, even if your request to pay in installments is granted. Before requesting an installment agreement, you should consider less costly alternatives such as a bank loan. For more details on installment payments, refer to Tax Topic 202, What to do if You Can't Pay Your Tax, or Publication 594, Understanding the Collection Process.

3-3. What kind of penalties and interest will I be charged for paying and filing my taxes late?

Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months.

For current interest rates, go to News Releases and Fact Sheets and find the most recent Internal Revenue release entitled Quarterly Interest Rates.

In addition, if you filed on time but didn't pay on time, you'll generally have to pay a late payment penalty of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, up to 25 percent. The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.

Beginning January 1, 2000, if you filed a timely return and are paying your tax pursuant to an installment agreement, the penalty for late payment of an installment is one-quarter of one percent for each month, or part of a month, that the installment remains unpaid.

If you did not file on time and owe tax, the penalty is even higher. There is a combined penalty of 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%. After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid. Thus, the total penalty for failure to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the tax owed. Also, if your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $100 or 100% of the tax required to be shown on the return.

Also, see Tax Topic 653, IRS Notices and Bills/Penalty and Interest Charges.

3-4. Can my refund be used to pay other debts?

Under the law, state and Federal agencies refer to the IRS the names of taxpayers who are behind in their support payments, taxes, and loans. Your tax refund may not be refunded to you if you are delinquent in child support payments or you have a past due Federal debt (such as a student loan). Therefore, your refund may be used to pay other debts you owe. For additional information, refer to Tax Topic 203, Failure to Pay Child Support and Other Federal Obligations.

3-5. I am unable to pay my delinquent taxes. Will the IRS accept an Offer in Compromise?

You may qualify for an Offer in Compromise if you are unable to pay your taxes in full or if you are facing severe or unusual economic hardship. Refer to Tax Topic 204, Offers in Compromise, for additional information.

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