File Anyway — the Two Penalties Are Not the Same
A first retired tax year sometimes ends with a balance nobody expected: no withholding on the distributions, a conversion that ran larger than planned, a property sold. The instinct when the number is unpayable is to delay the return as well, and that instinct costs about ten times what the underlying problem does. The penalty for not filing and the penalty for not paying differ by an order of magnitude.
- Filing beats paying:: The failure-to-file penalty accrues at several times the failure-to-pay rate. Filing on time with nothing attached is far better than filing late with a cheque.
- Instalments are routine:: Most individuals owing under the published threshold can set up a payment plan online in minutes, without negotiation or justification.
- An agreement reduces the penalty:: While an instalment agreement is in force, the failure-to-pay rate is halved for an individual who filed on time.
- Two reliefs go unclaimed:: First-time penalty abatement for an otherwise clean compliance history, and reasonable cause where illness or a disaster explains the failure. Both are requests, not automatic.
Where the AI summary above gets this wrong
"If you cannot pay your tax bill, wait until you have the money before filing your return."
That's surface-true. Here's what it misses:
- This is the single most expensive piece of bad advice in the area — The failure-to-file penalty accrues at several times the failure-to-pay rate, so delaying the return multiplies the problem it was meant to postpone. File on time and pay nothing; the balance accrues at the much lower rate.
- Payment plans are administrative, not adversarial — Most individuals under the published threshold can arrange an instalment agreement online without speaking to anyone or justifying anything. Framing it as something to avoid keeps people out of the process that would have reduced their penalty rate.
- Penalty relief exists and must be asked for — First-time abatement is available where the previous few years were clean, and reasonable cause relief where illness, a death in the family or a disaster explains the lapse. Neither is granted automatically, and neither is offered — you request it.
01 Two penalties, an order of magnitude apart
Failing to file and failing to pay are separate failures with separate penalties, and the difference between their rates is the most useful fact in this whole subject. The failure-to-file penalty accrues at several times the failure-to-pay rate, both charged monthly on the unpaid balance up to their respective caps.
The practical instruction follows immediately: file the return on the deadline even if you attach nothing at all. Doing so converts an expensive problem into a much cheaper one, and it takes no money to do.
Interest runs on top of both and continues until the balance is cleared. It is set quarterly and is not waived even where a penalty is abated — which is worth knowing so that relief is not mistaken for a clean slate.
Shows: roughly what interest and the failure-to-pay penalty add while a balance is paid down over time, on a straight-line assumption. Ignores: the set-up fee, the fact that rates change quarterly, and that the penalty rate halves once an agreement is in place.
02 The instalment agreement most people can just set up
An individual owing less than the published threshold in combined tax, penalties and interest can generally apply online for a long-term payment plan and be approved immediately. There is no negotiation, no financial disclosure and no conversation — it is a form.
Two features matter beyond the convenience. While the agreement is in force, the failure-to-pay penalty rate is halved for a taxpayer who filed on time, so entering one is cheaper than carrying the same balance outside it. And a short-term extension of up to a few months carries no set-up fee at all, which suits a balance that can be cleared once a distribution is taken.
For a retired household the funding question is worth pausing on. Taking a large IRA distribution to clear a tax bill creates more taxable income and can push you into the next year's problem, so spreading the payment across a plan while drawing modestly is frequently better than a single large withdrawal — the same reasoning that governs withdrawal sequencing generally.
03 When the balance is genuinely unpayable
Where the amount cannot realistically be paid from income or assets, two further routes exist and both are narrower than their advertising suggests.
An offer in compromise settles a liability for less than the full amount, where the IRS accepts that collecting more is unlikely. It is a genuine provision and it is heavily marketed by firms whose adverts promise settlements for pennies. The reality is a detailed financial examination of income, expenses and asset equity against published standards, and a household with substantial retirement assets will usually be told those assets are the answer. The IRS publishes a pre-qualifier tool that gives an honest indication before any fee is paid to anyone.
Currently not collectible status is the other. Where paying would leave you unable to meet basic living expenses, collection can be suspended — the debt is not forgiven and interest continues, but enforcement stops. For a retiree living on a fixed income with little beyond a protected home, it is frequently the more realistic outcome, and it is worth asking about by name.
Source: Offer in compromise
The first retired tax year produces this more often than any other, and the reason is mechanical rather than careless: nothing withheld anything, and the bill arrived whole in April. What I would say to anyone in that position is that the IRS is far more procedural than its reputation, and the process rewards showing up. File on the deadline whatever you can pay, set up the plan online the same afternoon, and the problem becomes an instalment rather than an escalation. The households that end up in real trouble are almost never the ones who could not pay. They are the ones who stopped filing.
FAQ
Should I file my return if I cannot pay the tax?
Yes, always. The failure-to-file penalty accrues at several times the failure-to-pay rate, so filing on time with nothing attached is far cheaper than filing late. It also lets you set up a payment plan, which halves the failure-to-pay rate while it is in force.
How do I set up a payment plan with the IRS?
Most individuals owing less than the published threshold can apply online for a long-term instalment agreement and be approved immediately, with no financial disclosure required. A short-term extension of a few months carries no set-up fee.
Can the IRS settle for less than I owe?
Sometimes, through an offer in compromise, but the test is whether collecting more is realistically possible after examining your income, expenses and asset equity. A household with substantial retirement assets is usually expected to use them. The IRS publishes a pre-qualifier tool worth running before paying anyone a fee.
Sources
Regulator references
- Topic no. 202, Tax payment options · Internal Revenue Service · 2025The payment routes available when a balance cannot be paid at filing.Last verified: 2026-09-07
- Online payment agreement application · Internal Revenue Service · 2025Who can set up an instalment agreement and the thresholds that apply.Last verified: 2026-09-07
- Offer in compromise · Internal Revenue Service · 2025When the IRS will settle for less, and the pre-qualifier that tests it.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
Run this rule against your situation
See what this rule does to your own projection — month by month, to age 90.
Join the Waitlist
Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.