Tax Extension Penalties & Payment Plans: What If You Can’t Pay on Time?

When April hits, the tax deadline can feel like a ticking time bomb. If you can’t pay your full federal tax bill, you’re probably asking: Will I face tax extension penalties and interest? Does a tax extension buy me more time to pay?

Spoiler: it doesn’t.

Let’s break it down so you can file smarter, avoid surprises, and know your options if you owe tax when the deadline hits.

IRS Tax Penalties: What Happens If You Miss the Deadline

A common myth: filing a tax extension buys you extra time to pay. It doesn’t. It only buys you extra time to file. The truth? An extension only gives you more time to file your tax return, not more time to pay your balance.

Here’s how the IRS stacks penalties and interest if you miss the deadline.

• Failure-to-File Penalty: 5% of taxes owed per month (up to 25%). Also called the late filing penalty.
• Failure-to-Pay Penalty: 0.5% of the unpaid balance per month (up to 25%). Reduced if on a payment plan.
• Underpayment of Estimated Tax Penalty: Charged if you didn’t pay enough during the year, even if you file on time.
• Interest Charges: Compounded daily at the federal short-term rate + 3%.

Types of Penalties and Interest

Note:

When both failure-to-file and failure-to-pay penalties apply in the same month, the late-filing penalty is reduced by the amount of the late-payment penalty — but tax penalties can still snowball quickly.

The Internal Revenue Service starts charging interest on the due date of the amount you owe, whether taxes or penalties. You will continue to accrue interest until you pay the balance in full.

Failure-to-Pay vs. Underpayment Penalties: What’s the Difference?

The failure-to-pay penalty and the underpayment penalty are both IRS penalties for unpaid taxes, but they apply in different situations. Here's a breakdown:

1. Failure-to-Pay Penalty

This penalty applies when you fail to pay the taxes you owe by the tax filing deadline, typically April 15 (or the next business day if it falls on a weekend or holiday). It applies when you file your tax return but do not pay the full amount owed by the April deadline.

2. Underpayment Penalty

This penalty applies when you fail to pay enough of your taxes throughout the year via estimated tax payments or withholding.

The IRS safe harbor rule on estimated tax states that you can avoid the underpayment penalty if:

• You paid at least 90% of your unpaid tax for the year, or 100% for the previous year's tax return, or
• You owed less than $1,000 in unpaid taxes.

Note that there's a special rule for taxpayers with AGI of more than $150,000 ($75,000 if married filing separately). If you fall under that category, you must pay 110% of the tax on your previous year's tax return.

Can You Face Both Penalties?

Yes, you can face both penalties simultaneously:

• If you underpay taxes during the year (underpayment penalty), and
• You still have unpaid taxes after the April due date and have failed to pay in full (failure-to-pay penalty).

For example:

• You underpaid taxes during the year. Then, you'll face an underpayment penalty.
• Then, after filing your federal tax return, you don't pay the remaining balance by the deadline, triggering a failure-to-pay penalty as well.

Sources:

• IRS, Internal Revenue Bulletin 2024-40
• IRS, Failure to File Penalty
• IRS, Failure to Pay Penalty
• IRS, Quarterly Interest Rates
• IRS, Underpayment of Estimated Tax by Individuals Penalty
• IRS, Topic No. 306

Do Tax Extensions Stop IRS Penalties?

So, what happens if you file an extension? The IRS doesn’t penalize you for simply requesting more time. Filing Form 4868 gives you more time to file, which avoids the 5% monthly failure-to-file penalty. But interest and late payment penalties still apply if you don’t pay by April 15. In short: more time to file, not more time to pay.

Example: Let’s say you owe $5,000 in taxes. If you file on time but only pay $3,000, the remaining $2,000 will accrue interest and the late payment penalty until it is paid off. But if you do not file at all, you will also get hit with the 5 percent failure-to-file penalty, which is a much more costly mistake. The IRS will also charge an underpayment of tax penalty at a rate of 7%.

IRS Payment Plans: Options If You Can’t Pay Your Tax Bill

If you cannot pay the full balance by the deadline, don’t panic—you have options. The IRS provides several ways to settle your balance without drowning in tax penalties.

1. Make a Partial Payment

Can’t pay it all? Send what you can. Even a partial payment chips away at penalties and interest—and it’s a whole lot better than nothing. If you can’t pay in full, at least send what you can by the April deadline.

2. IRS Installment Agreement (Payment Plan)

A popular solution is applying for an installment agreement, also known as a payment plan. With this option, you agree to pay your balance in monthly installments until it is fully cleared.

There are two main types of IRS payment plans:

• Short-Term Payment Plan: For balances under $100,000 in combined tax, penalties, and interest. You have up to 180 days to pay in full. No setup fee, but interest and penalties continue until the balance is paid.
  Payment options include: Direct Pay, debit or credit card, money order, or Electronic Federal Tax Payment System (EFTPS).
• Long-Term Payment Plan (Installment Agreement): For balances under $50,000 in combined tax, penalties, and interest. This allows monthly payments spread out over more than 180 days (often up to six years). A setup fee applies unless you qualify for a low-income waiver.
  You have two options. The first is to pay via Direct Debit, which automatically deducts monthly payments from your checking account.
  The second option is to make monthly payments via Direct Pay, credit or debit card, money order, or the IRS EFTPS.

Additional details:

• Fees: A setup fee applies (varies based on payment method). However, it’s generally worth it compared to letting penalties and interest pile up.
• IRS Records: Your payment history and agreement status are maintained in IRS records, and defaulting could result in more severe collection efforts.

Note:

The IRS is phasing out paper check payments, beginning with the fourth-quarter estimated tax payments. Most taxpayers will be required to use electronic payment methods instead.

Source: IRS, Additional Information on Payment Plan

3. Offer in Compromise (OIC)

In rare cases, the IRS may accept less than the full amount owed through an Offer in Compromise. This usually applies only if you prove that paying in full would create financial hardship.

Here’s how it works:

• Eligibility: To qualify, you must show that you cannot pay the full balance through income or assets. The IRS examines your income, expenses, ability to pay, and asset equity.
• Application Process: Taxpayers submit Form 656 and a financial statement (Form 433-A(OIC) for individuals or 433-B(OIC)) for businesses, along with a nonrefundable application fee. You must also make an initial payment while your offer is under review.
• Types of Offers:
• • Lump Sum Cash Offer: You pay the offered amount in five or fewer payments, generally within two years.
  • Periodic Payment Offer: You pay the offered amount in monthly installments over a longer period, while staying current with future tax obligations.
• Review: The IRS reviews your finances and may negotiate before making a decision. If accepted, your balance will be reduced to the agreed-upon settlement amount. If rejected, you can appeal within 30 days.
• Cautions: Submitting an OIC does not guarantee approval. While the application is pending, penalties and interest continue to accrue. You must stay compliant with future filings and payments for at least five years after acceptance, or the IRS can reinstate the original debt.

Source: IRS, Offer In Compromise

How to Reduce IRS Penalties and Interest Charges

Even if you can’t pay everything by the due date, you can still limit the cost:

• File on time: Submit your return (or extension) by the tax deadline to avoid the 5% failure-to-file penalty.
• Pay as much as possible: Even partial payments cut down the balance that accrues interest.
• Apply for an installment agreement quickly: Don’t wait—request a plan as soon as you know you cannot pay.
• Penalty Abatement: You may qualify for penalty relief if it is your first time missing a payment. A request for first-time penalty abatement can be made once every three years as long as the IRS considers you to be in good standing. You will use IRS Form 843 to make the request.
• Work with a tax professional: A tax return preparer can help review your options, request an installment agreement, and ensure your IRS records stay in good standing.

The Bottom Line

Missing the tax deadline isn’t the end of the world. Yes, you’ll rack up penalties and interest if you owe, but filing on time, paying what you can, and setting up an IRS payment plan keeps things under control. Filing late or skipping payments only makes things worse. File on time, pay what you can, and set up a plan—the sooner you act, the less it costs.

Don’t kick the can down the road until October, or worse, ghost the IRS. The sooner you act, the less it will cost you in penalties and interest. And remember, the smartest move is to avoid racking up tax extension penalties in the first place.

Ready to dodge tax penalties the smart way? File your extension with FileTax.com today and get peace of mind before the deadline.