Owe Taxes or Haven’t Filed? What to Do Next

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Jessica Gonzalez, CPA | Published March 27, 2026 | Updated October 4, 2026

If you owe taxes or haven’t filed, the most important step is to file the return, even if you can’t pay the full balance yet. The penalty for not filing is 5% of the unpaid tax for each month the return is late. The penalty for not paying is 0.5% a month. Filing alone stops the larger penalty from growing.

After you file, pay what you can and look at an IRS payment plan for the rest. If you have older unfiled years, start with the most recent ones and work back. If IRS letters have arrived, read them and note the response date. Most situations are fixable when you act early.

I help people across North San Antonio, Stone Oak and Sonterra, and Bulverde get caught up. Here is how I walk through it.

Why filing matters more than paying when you owe taxes

The IRS charges two separate penalties, and they are not the same size.

• Failure to file: 5% of the unpaid tax for each month or part of a month the return is late, up to 25%, per the IRS. If a return is more than 60 days late, there is a minimum penalty. For returns due after December 31, 2025, it is $525 or 100% of the tax owed, whichever is less. That amount is adjusted for inflation.
• Failure to pay: 0.5% of the unpaid tax for each month or part of a month, up to 25%, per the IRS.

When both apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty, so the combined charge is 5% a month. After five months the filing penalty maxes out, but the payment penalty keeps going.

Here is a hypothetical example. You owe $4,000 and file three months late without paying. The filing penalty is about $540 (4.5% × 3 months) and the payment penalty is about $60 (0.5% × 3 months), for roughly $600. If you had filed on time and paid three months late, the penalty would be about $60. Interest applies in both cases.

How IRS interest adds up

Interest is separate from penalties. It starts on the original due date and runs until the balance is paid in full. It compounds daily and applies to penalties too. For individuals, the rate is the federal short-term rate plus 3 percentage points, reset each quarter. For example, it was 7% a year for the fourth quarter of 2026. Interest is reduced when a related penalty is removed, and in limited cases of unreasonable IRS error or delay. Otherwise, paying down the balance is the main way to stop it.

Extensions give you time to file, not time to pay

An extension moves your filing deadline to October 15. It does not move your payment deadline. Any tax you owe is still due by the original April date, and interest and the payment penalty run from there. If you expect to owe, pay an estimate with the extension. You can request the extension by making an electronic payment and marking it as an extension payment.

If you haven’t filed for several years

The IRS says to file all returns that are due, whether or not you can pay in full. A few points matter here.

How far back to go

IRS policy generally limits enforcement of unfiled returns to six years, according to the Internal Revenue Manual (Policy Statement 5-133). The IRS can ask for more based on the facts, but six years is the usual starting point. If you have received a letter about a specific year, start there.

Refunds expire

Not everyone with unfiled years owes. Some people are owed money. To claim a refund, you generally must file within 3 years of the return’s due date. After that, the money is gone. If you are self-employed and don’t file, you also don’t get credit toward Social Security retirement or disability benefits for those earnings.

The IRS may file for you

If you don’t file, the IRS may prepare a substitute for return (SFR) using the income reported to it. An SFR usually leaves out deductions and credits you may be entitled to, so the bill is often higher than your real tax. You will typically get a notice (CP3219N) giving you 90 days to file your own return or petition the Tax Court. Filing your own return is still allowed and is usually the better path.

Rebuild your records

You can request your wage and income transcripts from the IRS to see what was reported under your Social Security number. If you run a business, you will also need your income and expenses for each year. Catching up the books first makes the returns faster and more accurate.

Payment plans when you can’t pay in full

The IRS offers several payment plans:

• Short-term plan: up to 180 days to pay, for balances under $100,000. No setup fee.
• Long-term plan (installment agreement): monthly payments for individuals who owe $50,000 or less in combined tax, penalties, and interest when you apply online. Setup fees apply, with lower fees online and for direct debit. Fees are waived or reimbursed for some lower-income taxpayers.

Two things to know. First, you must have filed all required returns to qualify. Second, interest and some penalties keep running until the balance is paid. If you filed on time, the payment penalty drops to 0.25% a month while an approved plan is in place. My post on the CP14 notice covers how a first balance-due letter connects to these options.

IRS notices: read them, note the date, respond

Most IRS letters ask for one specific thing by one specific date. As a former IRS Revenue Agent, I can tell you that a timely, organized response usually gives you more options than silence. Unpaid balances move through a series of letters. The first is often a CP14. If it goes unpaid, later notices follow, including the CP504 notice of intent to levy. If you don’t pay within 10 days of a notice of intent to levy, the payment penalty rises to 1% a month.

If you aren’t sure what a letter means or what it is asking for, my IRS notice review is a flat $250, completed in 3 to 5 business days.

Penalty relief: first-time abatement and the new automatic exemption

If you have a clean history, you may qualify for penalty relief. Under First Time Abate, the IRS may remove failure-to-file and failure-to-pay penalties if you filed the same type of return on time for the prior three years and had no penalties in that period (other than estimated tax penalties). You generally have to ask for it, by phone or in writing.

Starting in summer 2026, the IRS is moving to an Automatic Exemption from Penalty for 2025 tax year returns and later. If you file or pay late this year but filed and paid on time for the three prior years, the relief is applied automatically, and you get a letter. First Time Abate still applies to earlier years. When a penalty is removed, the interest on that penalty is reduced too.

Other relief, such as reasonable cause, depends on the facts. No outcome is guaranteed.

Use the IRS online tools

• IRS Individual Online Account: see your balance, payment history, and notices, and manage a payment plan.
• IRS Direct Pay: pay from a checking or savings account with no fee.
• IRS Document Upload Tool: send documents electronically when your notice gives you that option.
• Where’s My Refund: check the status of a refund once your return is filed.

E-file, or get proof of mailing

If you file close to a deadline, e-file when you can. The U.S. Postal Service issued a rule effective December 24, 2025 that says a postmark does not necessarily show the first day USPS had your envelope. Machine postmarks are often applied later at a processing facility. If you must mail, ask the retail counter for a manual (local) postmark, which is free, or use Certified Mail or a Certificate of Mailing so you have a dated receipt.

When to get help with back taxes

You can handle a simple balance on your own with the tools above. It may be worth getting help if:

• you have two or more unfiled years,
• you ran a business or side gig and your records are incomplete,
• the IRS has filed a substitute return for you,
• you have received a CP504 or another collection letter, or
• you aren’t sure whether you owe or are owed a refund.

Owe Taxes or Haven’t Filed FAQ

Should I file my tax return if I can’t pay?

Yes. Filing stops the failure-to-file penalty, which is ten times larger per month than the failure-to-pay penalty. Pay what you can and set up a payment plan for the rest.

How many years of unfiled returns do I need to file?

IRS policy generally focuses on the last six years. The IRS can ask for more in some cases, so if you have a letter about a specific year, start there.

Does an extension give me more time to pay?

No. An extension gives you until October 15 to file. Tax is still due by the original April deadline, and interest runs from that date.

Can I still get a refund for an old year?

Generally only if you file within 3 years of that return’s due date. After that, the refund is lost.

Can IRS penalties be removed?

Sometimes. First Time Abate, the new Automatic Exemption from Penalty, and reasonable cause relief can remove some penalties. Interest on a removed penalty is reduced too.

Get caught up with a fixed fee

I’m a Texas-licensed CPA and former IRS Revenue Agent. I prepare individual returns starting at $500 and returns with a Schedule C starting at $1,200, with a fixed fee in writing before work begins. I work in English and Spanish, military families are welcome, and everything happens securely online.

To talk through where you stand, book a complimentary 15-minute fit call or call (210) 441-1293. Please don’t email tax returns, Social Security numbers, or IRS notices; I’ll send a secure SmartVault link.

Sources

• IRS: Failure to File Penalty
• IRS: Failure to Pay Penalty
• IRS: Interest
• IRS: Interest rates remain the same for the fourth quarter of 2026 (IR-2026-98)
• IRS: Get an extension to file your tax return
• IRS: Filing past due tax returns
• Internal Revenue Manual 4.12.1, Nonfiled Returns
• IRS: Payment plans; installment agreements
• IRS: Administrative penalty relief (First Time Abate and Automatic Exemption from Penalty)
• IRS: Your Online Account
• IRS: Direct Pay
• IRS: Document Upload Tool
• Federal Register: U.S. Postal Service, Postmarks and Postal Possession (final rule, November 24, 2025)

Related: IRS Notice Help · IRS CP14 Notice · IRS CP504 Notice