Interest

• If you are late paying your federal taxes due, the IRS charges interest and penalties. It is important to file taxes, however, even if you cannot pay the amount owed. The interest rate on late federal income tax payments is determined each quarter. It is equal to the federal short-term interest rate plus 3 percent. Interest is compounded daily.
  
  

Penalty

• If you file, but don't pay on time, you can expect to pay a penalty. Typically, the penalty is one-half of 1 percent of the overdue tax for each month or fraction thereof that the tax is late, up to a maximum of 25 percent penalty. This penalty doubles once the IRS sends you a formal notice that it intends to levy your assets.
  
  

Payment Plans

• If you are in trouble with the IRS, it is important to stay in touch with them. It is possible to arrange a payment plan with the IRS. The IRS will often approve payment plans that result in a full payment of taxes owed before the expiration of the statute of limitations for collection.
  
  

Offers in Compromise

• In some circumstances, the IRS will accept an offer in compromise. This is a settlement for some amount less than the full amount of tax the IRS calculates you owe. The IRS will consider offers in compromise if there is doubt about whether the tax is actually legally owed, if there is doubt about whether the full amount of tax can ever be collected, or "to promote effective tax administration," which is a catchall phrase that may cover hardship cases and cases where the cost of collection would be more than the amount of money at stake.
  
  

Bankruptcy

• One alternative is to declare bankruptcy. Use extreme caution when considering this option. Bankruptcy has significant near- and long-term consequences for the filer. In addition, recent IRS debt is not generally dischargeable in bankruptcy. You could declare bankruptcy and still owe money to the IRS.