Bloomberg Tax
Sept. 9, 2022, 8:45 AM

With Inflation Sky High, Taxpayers Reconsider Payment Options

Kelly Phillips Erb
Kelly Phillips Erb

Taxpayers often have questions about how to pay off their tax debts. But with inflation and interest rates creeping higher, those questions are becoming more frequent, and the standard answers don’t always apply.

To make a good decision, it’s important to understand how the IRS applies interest and penalties to tax bills.


Two common penalties for individual taxpayers are Failure to Pay (FTP) and Failure to File (FTF). The FTP penalty is 0.5% of the unpaid taxes for each month the tax remains unpaid. The FTF penalty is much higher—5% of the unpaid taxes for each month that the return is late—which is why you should file even if you can’t pay what you owe. In either case, the penalty won’t exceed 25% of your unpaid taxes.

One quick note: The IRS recently announced that they would automatically waive the FTF penalty for individual returns for the 2019 and 2020 tax years filed on or before September 30, 2022.

Importantly, the IRS charges interest on penalties.


For individuals who owe money to the IRS, the interest rate is calculated using the federal short-term rate plus 3 percentage points. The IRS sets and publishes current and prior years’ interest rates quarterly. You can check the current rates and rates for previous years on the IRS website.

Payment Considerations

That backdrop is essential for understanding your options—the math matters. But I also appreciate that convenience, long-term consequences, and the ability to rest easy at night are also important in your decision-making process. While paying up now is preferred, that’s not always realistic. Here are some general recommendations for handling outstanding tax bills when you can’t pay immediately—your mileage may vary.

Just Say No

Emptying retirement accounts. Draining your retirement accounts to pay an outstanding debt can be tempting, and the IRS does consider funds held in a retirement or profit-sharing plan to be available assets for collection purposes. But I still maintain that emptying retirement accounts should be avoided for most taxpayers.

Beyond the obvious—you’re giving up money you were relying on for your future—you’ll take an immediate hit. Withdrawals from most accounts will be taxable, so you’ll owe tax on the money you’re using to pay tax—and depending on your age and circumstances, may also be subject to an early withdrawal penalty of 10%. Some penalty exceptions may apply, including funds used to settle an IRS levy under Section 72(t)(2)(A)(vii), but there are much less stressful ways to avoid paying that penalty.

Payday loans. Payday loans are short-term loans that you generally repay by your next payday—hence the name. They are usually subject to very high interest rates and fees. Many states have tried to regulate payday loans, including capping rates and fees. Nonetheless, according to the Consumer Financial Protection Bureau, a $15 fee for every $100 borrowed—a typical fee structure—equates to an annual percentage rate of almost 400% for a two-week loan. In most cases, taking out payday loans to resolve your tax bill is simply piling on more debt.


Credit card payments. The IRS allows you to pay your tax bill by credit card through third-party payment processors. If you can pay off the amount you charge to the credit card quickly, this could be a good option. It may also be the case that the interest rate on your credit card is lower than continuing to pay the IRS interest and penalties, in which case the math is on your side.

However, the opposite may be true if you cannot pay off the charges quickly. As interest rates have gone up, so too have credit card interest rates. Last month, the average annual percentage rate offered with a new credit card was 21.40%, the highest in years. In some cases, the rates are creeping toward 30%.

In addition to paying those rates, putting a large tax bill on your card could mean that your limit is—well, limited—in case of an emergency. Before tapping or swiping, I would look at your other assets and available credit.

Refinancing. It used to be common for taxpayers to consider borrowing against the equity in their home to pay off a large bill, like a tax debt. This made sense for a few reasons: Interest rates on home mortgages tended to be low, the real estate market was stable, and mortgage interest was tax deductible.

Today, refinancing to pay a tax bill doesn’t always make sense. It could still be the case that you could lock in a low rate, making the math work in your favor. And, if you live in an area with relatively stable rates, you wouldn’t necessarily be over-borrowing compared to the actual value of your home. But that last piece—the tax deductibility— is no longer in your favor.

Under prior law, if you itemized your deductions, you could—with some restrictions—typically deduct qualifying mortgage interest and home equity debt, no matter how you used the debt.

Now, the law limits the amount of debt that qualifies for the deduction. Home equity loans may still be deductible, but only so long as they are used to buy, build, or substantially improve your home. If the home equity loan is used for any other purpose, including paying down your tax debt, it is no longer deductible.


IRS Agreements. If you can’t pay your tax debt in full but can manage regular payments, consider entering into an agreement to pay over time.

If you can pay what you owe in 180 days or less, you can apply for a short-term payment plan. There’s no setup fee, and you can apply online if you owe less than $100,000 in combined tax, penalties, and interest.

If you need more time to pay, you can apply for an installment agreement. Setup fees typically range from $31 to $130, and you can apply online if you owe $50,000 or less in combined tax, penalties, and interest.

No matter how long the agreement runs, penalties and interest will continue to accrue until you pay the entire balance if you’re on an installment agreement.

Temporary Collection Delay. If you absolutely can’t pay right now, don’t ignore the IRS—ask for a break. If you meet the criteria, the IRS can mark your tax debt as currently not collectible, or CNC. CNC doesn’t mean that the debt goes away, but it does mean that IRS will put the breaks on collection efforts for a bit. This can give you a breather, although penalties and interest will continue to accrue until you pay the balance. The IRS may also file a lien against you to protect their interests. For more information, contact the IRS at 1.800.829.1040—and you know the drill: Be prepared to wait.


You knew there were going to be caveats. I’m a lawyer, and we love them. But they also serve a real purpose. I’m not familiar with your financial or personal history, I don’t know how much you earn or spend every month, and I can’t see how much you owe the IRS or any other creditor. All of those things are important. I always recommend consulting with your tax or other professionals before making tax-related decisions.

This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at