Owing money on your 2025 return is common, and it is fixable. The key is knowing what the balance costs each month, which notice you are holding, and which lawful payment options you may qualify for.
Tax Debt 2025: What to Do If You Owe the IRS on Your 2025 Return
By Damian Gerry on LinkedIn (opens in a new tab), Founder
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If your 2025 federal return showed a balance you could not pay, you still have lawful options, but the balance grows every month it stays open. The filing and payment deadline for most 2025 returns was April 15, 2026, and an extension to file did not extend the time to pay. This table shows what an unpaid 2025 balance costs.
| Charge | Rate | Limit |
|---|---|---|
| Failure-to-pay penalty | 0.5% of unpaid tax per month or partial month | 25% of unpaid tax |
| Failure-to-pay, during an approved payment plan (return filed on time) | 0.25% per month | 25% of unpaid tax |
| Failure-to-pay, 10 days after a notice of intent to levy | 1% per month | 25% of unpaid tax |
| Failure-to-file penalty | 5% of unpaid tax per month, reduced by that month's failure-to-pay penalty | 25%; minimum of $525 (or the full unpaid tax, if less) for returns due in 2026 filed more than 60 days late |
| Interest on underpayments | Federal short-term rate plus 3 points, compounded daily: 7% in the first quarter of 2026, 6% in the second, 7% in the third and fourth | Runs until paid in full |
Two points matter most. First, filing on time is worth doing even when you cannot pay, because the failure-to-file penalty is ten times the monthly failure-to-pay rate. Second, the IRS charges a full month of penalty for any part of a month, so paying what you can now still reduces what builds up.
Penalties stop growing at their 25% caps, but interest does not. It compounds daily until the balance reaches zero.
If this is your first penalty in a while, ask about First Time Abate relief before you pay the penalty portion. It can remove failure-to-file and failure-to-pay penalties when the same return type was filed on time for the prior three years and no penalties (other than the estimated tax penalty) were assessed in that period. Interest tied to an abated penalty is reduced automatically.
What the IRS sends next
Unpaid balances move through a predictable series of notices. Each one is a chance to respond before collection escalates.
The notice sequence, from first bill to final notice
| Notice | What it means | What to do |
|---|---|---|
| CP14 | The first bill: you owe money on unpaid taxes | Pay, or set up a payment plan |
| CP501 | A reminder that the balance is still unpaid | Respond before the next notice |
| CP503 | The IRS has not heard from you and the balance is still open | Contact the IRS now |
| CP504 | Notice of Intent to Levy under IRC section 6331(d); the IRS can also take your state tax refund | Pay or contact the IRS before the final notice |
| LT11 or Letter 1058 | Final Notice of Intent to Levy and Notice of Your Right to a Hearing | You have 30 days from receipt to request a Collection Due Process hearing with Form 12153 |
The 30-day hearing window after an LT11 or Letter 1058 is the one deadline in this chain you do not want to miss, because it is how you ask IRS Appeals to review the proposed levy and your options.
Your options for paying a 2025 balance
Which option fits depends on how much you owe, whether all required returns are filed, and what you can realistically pay each month after necessary living expenses.
| Option | Who it may fit | Cost to set up |
|---|---|---|
| Pay in full | Anyone who can; it stops penalties and interest soonest | None |
| Short-term plan (up to 180 days) | Under $100,000 in combined tax, penalties, and interest | $0 |
| Long-term plan (installment agreement) | $50,000 or less combined, with all required returns filed, for an online application | $29 online with direct debit; more by phone or mail (see below) |
| Currently Not Collectible | People the IRS agrees cannot pay right now | None, but the debt is not forgiven |
| Offer in Compromise | People whose income, expenses, and asset equity show they cannot pay the full balance | $205 application fee plus an initial payment, waived for low-income applicants |
"This new Tax Debt Help tool reflects the agency's commitment to making tax compliance clearer, more accessible, and less intimidating for taxpayers."
Frank J. Bisignano, Chief Executive Officer, IRS, in IR-2026-53 (April 16, 2026)
Most people with a 2025 balance start with a payment plan. The IRS says most taxpayers have up to 10 years to pay, but the longer the plan, the more interest and penalties add up. Penalties and interest continue until the balance is paid in full, although the monthly failure-to-pay rate drops to 0.25% during an approved plan if you filed on time.
Long-term payment plan setup fees (2026)
| How you pay | Apply online | Apply by phone, mail, or in person | Low income |
|---|---|---|---|
| Direct debit from a bank account | $29 | $107 | Waived |
| Other payment methods | $69 | $178 | $43, which may be reimbursed if certain conditions are met |
Changing an existing plan costs $6 online or $89 by phone, mail, or in person.
Offer in Compromise and hardship status
An Offer in Compromise may let an eligible taxpayer settle for less than the full balance. The IRS weighs your ability to pay, income, expenses, and asset equity, and you must have filed all required returns first. A lump-sum offer requires 20% of the offer amount up front.
Currently Not Collectible status temporarily suspends most collection. The debt is not forgiven, interest and penalties keep accruing, the IRS may file a Notice of Federal Tax Lien, and collection can resume if your finances improve.
In general, the IRS has 10 years from the date a tax is assessed to collect it, under IRC section 6502. That clock is one reason the choice between a plan, an offer, and hardship status deserves a careful look at your full situation. Our IRS tax debt and back taxes service starts with exactly that review.
California note
California's 2025 income tax payment was also due April 15, 2026, with an automatic extension to file until October 15, 2026 that does not extend the time to pay. The Franchise Tax Board runs its own payment plans: individuals who owe $25,000 or less, can pay within 60 months, and have filed all returns for the past 5 years can set one up for a $34 fee, which is added to the balance. FTB penalties and interest are separate from the IRS's.
Frequently Asked Questions
I filed an extension for my 2025 return. Does that give me more time to pay?
No. An extension gave you until October 15, 2026 to file, but the tax was still due April 15, 2026. Interest and the failure-to-pay penalty run from the original due date on any amount not paid by then.
Should I file my 2025 return even if I cannot pay?
Yes. The failure-to-file penalty is 5% of the unpaid tax per month, compared with 0.5% for failure to pay, so filing stops the larger penalty. Filing is also required for a long-term payment plan or an Offer in Compromise.
Do penalties and interest stop once I am on a payment plan?
No. Both continue until the balance is paid in full. If you filed on time, the failure-to-pay penalty drops from 0.5% to 0.25% per month while the plan is in effect, which lowers the total cost.
What happens if I ignore the IRS notices?
The notices escalate to a CP504 Notice of Intent to Levy and then an LT11 or Letter 1058, which starts a 30-day window to request a Collection Due Process hearing. After that, the IRS can levy wages, bank accounts, and state tax refunds, and the failure-to-pay penalty rises to 1% per month 10 days after a notice of intent to levy.
Can I get the penalties on my 2025 balance removed?
Possibly. First Time Abate relief can remove failure-to-file and failure-to-pay penalties if you filed the same return type on time for the prior three years and had no penalties in that period, other than the estimated tax penalty. You can request it by calling the number on your notice, in writing, or with Form 843.
About Owing the IRS
- IRS: Payment plans and installment agreements
- IRS: Offer in Compromise
- IRS: Understanding your CP504 notice
- IRS: Collection Due Process FAQs
- California FTB: Payment plans
Sources: IRS, When to file; IRS, Get an extension; IRS, Failure to file penalty; IRS, Failure to pay penalty; IRS, Quarterly interest rates; IR-2025-112; Rev. Rul. 2026-5; Rev. Rul. 2026-10; IR-2026-98; CP14; CP501; CP503; CP504; LT11 and Letter 1058; Collection Due Process FAQs; IRS, Payment plans; IRS Tax Tip 2026-31; IR-2026-53; IRS, Offer in Compromise; IRS, Temporarily delay the collection process; IRS, First Time Abate; 26 U.S.C. 6502; FTB, Due dates; FTB, Payment plans.
