Unpaid taxes continue to be a problem for millions of taxpayers. The IRS collects billions of dollars in unpaid tax assessments and delinquent returns each year. One of the most common questions taxpayers ask is, “what if I can’t pay my taxes?” The good news is that you probably won’t get charged with tax evasion. But you’ll still face penalties, and if you ignore the bill for too long, you can face other collection actions.

You want to do everything you can to pay and file taxes on time to avoid penalties and interest on taxes owed. However, if you’re dealing with a financial hardship or other issue that is getting in the way of compliance, the IRS does have relief options. The most important thing to remember is to be open and honest with the IRS about your situation. 

Find out the penalties you may face when you have unpaid taxes and other options when you’re unable to cover your tax bill.

Penalties for Not Paying Taxes

The IRS issues several types of penalties when you fail to comply with tax law. This could mean you didn’t file your annual tax return on time, you didn’t pay your tax liability, you provided inaccurate information, or you didn’t pay quarterly taxes when you were required to. 

Here are IRS penalties for not paying taxes:

• Failure to file penalty: This applies if you don’t file your return by the deadline (usually April 15). The penalty is 5% of your unpaid tax balance each month, not to exceed 25%.
• Failure to pay penalty: This applies if you fail to pay taxes by the deadline. This one is equal to 0.5% of your unpaid taxes each month, not to exceed 25%. If you have both the failure to file and the failure to pay penalty in the same month, the failure to file will be lowered by the failure to pay penalty.
• Information return penalty: You may get this penalty if you don’t file an information return by the due date. Here is a breakdown of this penalty amount for 2024:
  • Up to 30 days late: $60
  • 31 days late until August 1: $120
  • After August 1 or not filed: $310
  • If you showed “intentional disregard”: $630
• Accuracy-related penalty: This penalty may apply if you don’t pay the full tax you owe. This could happen if you don’t report all taxable income or you’ve claimed credits or deductions you’re not eligible to take. There are two types of accuracy-related audit penalties:
  • Negligence/disregard of rules and regulations: The IRS may determine that you didn’t make a “reasonable attempt” to comply with tax laws, which is negligence, or that you “carelessly, recklessly, or intentionally ignored the tax rules or regulations,” which is disregard. This penalty is 20% of the underpaid portion stemming from your negligence or disregard.
  • Substantial understatement of income: This applies if you understated your taxable income by 10% of the tax required to be on your tax return, or $5,000, whichever is more. This penalty is 20% of the portion stemming from the understated tax that led to underpayment.
• Erroneous claim penalty: Unless you can show reasonable cause, you’ll receive this penalty when you try to claim an excessive refund or credit. This penalty is 20% of the excessive amount you tried to claim.
• Underpayment of estimated tax penalties: These penalties can apply to individuals or businesses that don’t pay everything they owe for estimated taxes, or they pay it past the deadline. The amount will depend on how much was underpaid, the period the underpayment occurred, and the current interest rate for underpayments.

The IRS will send a notice about any of these penalties following your violation. Always read these notices fully and follow the instructions provided. You may face other penalties for not paying state and local taxes – for instance, there are specific penalties and consequences of not paying state sales tax.

If you’re not sure what to do when you’re hit with a penalty, talk to a tax professional for help. These can be significant, so it’s always better to have an expert by your side. Failing to pay Tennessee sales tax could lead to liens, levies, or even criminal charges.

The IRS Collections Process

Now that you know potential penalties you’ll face if you don’t pay your taxes, you also need to know other steps the IRS will take after a violation. Here is a step-by-step look at the IRS collections process:

1. Receiving a Notice and Bill

   The first step will be getting a notice in the mail that outlines your tax bill and includes any penalties and interest on that unpaid balance. Interest starts accruing following the missed deadline. 

   The first notice is usually Notice CP14. Eventually, if you don’t pay, you may receive the LT16 Notice. This notice outlines the balance due, notes that you may have unfiled returns, and threatens escalating collection actions. The IRS often sends different notices to businesses and individuals – for example, CP504goes to individuals, while the CP504B goes to businesses.

2. Requesting Relief or Making Arrangements on Your Tax Debt

   The IRS allows you to apply for a tax resolution option after you miss a deadline or don’t pay your full amount. When you receive a notice, immediately try to contact the IRS about one of these options, which are discussed in the next section.

3. Collections Begin

   The IRS states that if you don’t contact the agency after receiving a notice and make arrangements to pay the tax due, they may begin collection actions. 

4. Notice of Federal Tax Lien

   The IRS will file a Notice of Federal Tax Lien to begin collections. This document notifies your creditors that you have tax debt, and it makes a claim on your property that would cover the tax debt. This lien is automatic when the agency sends out the first notice that demands payment of the tax assessment and you don’t pay it in full. This lien isn’t released until you pay what you owe in full or the time frame that the IRS can collect has expired, which is 10 years from the date your tax was assessed (the Collection Statute Expiration Date).

5. The IRS Levies Your Property

   Then, the IRS may levy your property to cover your tax debt. This property could be your income, financial accounts, or physical property. They could also seize your future tax refunds.

6. Criminal Charges

   Both tax evasion and tax fraud are criminal charges, though they are not very common for the average taxpayer. If the IRS determines that you willfully evaded taxes or engaged in fraudulent activities, you may face these charges, especially in instances of patterns of criminal or fraudulent tax behavior.

   Going through collections actions could have negative impacts on you, including hindering your ability to get credit approval, losing even more money, or facing legal trouble. These are serious implications that you can avoid by paying your tax liability or contacting the IRS to set up an arrangement.

Resolution Options if You Can’t Pay Your Taxes

The IRS does recognize that many people struggle to pay their tax liability. The best thing you can do if you can’t pay your taxes is to contact the agency about a relief or delay option. Consider these tax resolution options:

Short-Term Extension

You may qualify to receive an extra 180 days to pay your tax balance in full if you can’t pay it all right away. Note that any penalties and interest keep accruing until the balance is paid off.

Offer in Compromise 

Another option is an offer in compromise. This may be best when you can pay a portion of your tax bill but are going through a hardship that means you’re unable to pay it in full. You may send an offer, which is the amount you can pay, to the IRS, and they’ll review your financial situation to determine whether that is all they can reasonably expect to collect from you. 

Currently Not Collectible

If a hardship is getting in the way of you paying what you owe for taxes, you can let the IRS know, and they may agree to change your account status to currently not collectible. This means they will temporarily delay collections, giving you time to come up with funds and get back on your feet. However, remember that the delay is only temporary and you will eventually have to pay what you owe, plus any interest and penalties.

Installment Agreements

A very common option for taxpayers is the installment agreement or payment plan. When you have a tax bill you can’t pay in full, you can apply for a payment plan, either short-term or long-term, that allows you to pay off your tax debt in monthly installments. The easiest way to set up a payment plan is using the IRS Online Payment Agreement (for balances under 50K and balances paid under 72 months)A partial payment installment agreement (PPIA) is a type of payment plan where you pay monthly payments, but you also may be allowed to have some of your tax debt forgiven if the IRS agrees. A direct debit installment agreement (DDIA) is a plan where you make payments through automatic withdrawals each month, which can help you avoid default.

Whatever option you choose to pursue for tax resolution, a tax expert can help you understand all implications and which avenue is best for your unique situation. Make sure you always respond to the IRS immediately when they send you a notice, and be transparent and honest.

FAQs about Unpaid Taxes

Still have questions? We have answers. Here are a few commonly asked questions that will help you understand unpaid taxes in simple terms.

What happens if I can’t pay my taxes?

If you don’t pay your tax bill by the deadline (April 15), the IRS will send you a notice that includes your unpaid tax bill, penalties, and interest. The agency will begin collections if your balance isn’t paid in full and if you haven’t reached out to them to come up with another arrangement to pay off your debt.

Can the IRS levy my property?

Yes. The IRS will first issue a lien on your property during the collections process. If the debt continues to go unpaid, they may levy assets such as income, real estate, and accounts to cover what you owe.

Can I settle my tax debt for less?

The IRS does offer a few options for tax resolution, including settlements in certain cases. Pursuing an offer in compromise or a partial payment installment agreement may allow you to pay less than what you owe if you are facing a hardship.

How do I find out how much I owe the IRS?

To find out how much you owe the IRS in unpaid taxes, review notices you’ve received that include your overdue tax bill information. You can also view your account on their website at https://www.irs.gov/payments/your-online-account to view your tax records, make payments, view your balance, and research resolution options.

Should I still file my taxes if I owe money?

Yes. There is a penalty for failing to file your tax return in addition to failing to pay. Even if you can’t pay your full tax bill, file your tax return by the deadline, and communicate with the IRS about your situation.

What if I can’t pay in full when taxes are due?

You may qualify for a form of tax relief with the IRS. You can apply for an installment agreement to pay off your debt over time, an offer in compromise where you can settle your debt for the amount you can afford to pay, or a temporary delay in payment.

What is the interest charged for unpaid taxes?

Interest will accrue on your unpaid tax balance beginning on when the tax was due. The interest rate changes regularly, but it is equal to the federal short-term interest rate with an additional 3% added.

Getting Help When You Can’t Pay Taxes

Even though the IRS takes missed deadlines and underpayments very seriously, you fortunately have a few tax relief options to try to avoid steep penalties when you can’t pay your taxes. Tax laws always seem to be changing, and you never want to make a mistake in filing your tax return or negotiating with the IRS. 

This is why it’s always best to talk to a tax expert. An experienced tax attorney at Damien’s Law can walk you through all the regulations you need to know to stay in compliance with the IRS. We can help if you have unpaid 2024 taxes or tax liabilities from any other year. We will also help you navigate tax resolution and tax debt management. Contact our team today to learn more about our tax services.