Not paying your taxes can lead to penalties and other consequences. Aside from the penalties, making a late tax payment once in a while probably won’t land you in deep water with the IRS. However, if you fail to pay despite multiple collection actions, you’ll have to deal with building penalties, interest, and even asset seizure in some cases.
Americans owe billions in unpaid taxes to the IRS. It’s not uncommon for taxpayers to fall behind on their obligations, whether missing a filing deadline or delaying sending in their payment. What kind of penalties are associated with late tax payments?
This guide walks through what happens if you don’t pay taxes, from penalties to ongoing collections to legal consequences.
Types of Tax Penalties for Nonpayment
If you don’t pay your tax bill by the deadline, which is usually April 15 for annual filings, you’ll get a notice from the IRS detailing what you owe along with a penalty — the failure to pay penalty is 0.5% to 1% of the unpaid taxes per month, up to 25%.
If you also didn’t file your tax return on time, the failure to file penalty will also apply, which is 5% of the unpaid taxes per month, up to 25%. The IRS may charge you with both penalties, in which case the agency will reduce the failure-to-file penalty by the amount of the failure-to-pay penalty for the applicable month.
The IRS will also reduce your failure to pay penalty to 0.25% per month if you set up a payment plan to pay off your balance, so it pays off to take action sooner rather than later.
Filing Your Taxes When You Can’t Pay
An important note about tax return filing: do everything you can to file your tax return on time, even if you can’t pay your tax bill by that date. This helps you avoid the failure to file penalty and just focus on getting your tax bill paid off.
Many taxpayers think if they can’t pay, they need to wait to file their return. But filing on time can help you reduce your overall penalties and interest.
Ongoing Consequences of Nonpayment
So, the immediate consequences of not paying your taxes are penalties. What happens next?
The IRS will initiate the collections process to try to get you to pay what you owe. Here are the different stages of that process to know:
IRS Notices
Within a month or two, you’ll get a collection notice about the failure-to-pay penalty and your outstanding tax balance. At this stage, you could still apply for penalty abatement or show the IRS that you have reasonable cause for nonpayment, and the agency may agree to waive or reduce the penalty.
Tax Lien
If you don’t respond to IRS notices or take care of your debt, the IRS may take the next step and file a federal tax lien, which is a claim on your property. They won’t yet seize your assets with a lien, but they have a claim on them in case you don’t pay your debt. Tax liens are serious, as they may impact your ability to get approved for a loan.
Collections Agency
The IRS could also bring in a collections agency on your account. You will be notified if this happens so you can contact that third party.
IRS Levies
If you don’t do anything at this point, the IRS could levy your property to cover your tax bill. This means they could seize your financial accounts, property such as real estate, or Social Security income. They could also pursue wage garnishment — which is seizing your income — to pay for your debt.
Compounding Interest
Another long-term consequence is building interest. Interest builds not just on your original tax balance but on penalties and the interest you’ve accrued. This makes it a significant cost over time. The interest rate varies, but based on an 8% rate, your tax bill will double in nine years due to interest alone, and that’s not even considering penalties or the interest on the penalties.
Legal Consequences
If you don’t pay your taxes, and you continue to dodge the IRS’s attempts to collect, you may eventually face serious legal consequences. This may mean you have to deal with criminal charges for tax evasion or tax fraud.
There’s an important distinction between fraud and negligence when it comes to taxes. The IRS may charge you with tax fraud or evasion when you intentionally tried to deceive the IRS. Negligence usually only involves making a mistake or acting in a careless manner. Penalties are much more severe for tax fraud.
While most taxpayers never face prison for making a tax mistake, jail time is a potential consequence of committing tax crimes. When you’re worried about the legal consequences you may face, talk to a tax expert for guidance.
Tax Resolution Options When You Can’t Pay
Don’t just avoid your taxes if you can’t afford to pay what you owe. The IRS offers several options to help you get relief and stay in good standing. Here are those relief options:
Installment Agreement
Consider setting up a payment plan with the IRS to pay off what you owe over time. This is a great option if you just can’t make the lump payment now but can afford a monthly payment. The IRS won’t take any serious collection actions while you’re under an installment agreement as long as you stay compliant with that plan.
Offer in Compromise
This may be an option if you’re dealing with a financial hardship. You can send in an offer in compromise (OIC) to the IRS and show them that the offer is all you can reasonably afford to pay. The IRS may agree to settle your debt with you.
Currently Not Collectible Status
If you want to temporarily delay collections, show the IRS that you’re dealing with financial trouble. Currently not collectible (CNC) status means they will pause collections actions until your financial situation changes.
Penalty Abatement
Do you have a good tax compliance history? You may qualify for first-time penalty abatement. The IRS will see if you’ve filed the same type of return as your current return over the last three years and that you didn’t get any penalties in that time. If granted, penalty abatement waives or reduces your penalty amount.
Tips to Stay in Tax Compliance
Being proactive is always an advantage when it comes to your taxes. Your goal should be to avoid paying more than necessary, and that means staying in good standing to avoid additional charges.
So, what steps can you take to avoid these steep tax penalties and interest from building? Start with these strategies:
Apply for Tax Relief
Even if you can’t pay your tax bill in full, you can apply for the other forms of relief mentioned above to stay in good standing. The IRS will work with you if you’re honest about your situation and take active steps to pay off what you owe.
Pay as Much as You Can by the Deadline
Because tax penalties are a percentage of your tax balance, you can reduce your penalty amount by paying as much as you can by the due date. Put everything you can toward your bill to lower your penalties.
File Your Return on Time
You will also lower your penalty and interest bill by filing your tax return on time instead of also incurring the failure to file penalty. If you can’t file by the deadline, ask for an extension, which gives you an additional six months to file.
Don’t Forget Estimated Tax Payments
If you earn self-employment income, you likely need to pay estimated taxes each quarter of the year. This requirement exists because you don’t have an employer taking out taxes for this income all year as regular W-2 employees do.
The deadlines for filing and paying estimated taxes are usually April 15, June 15, September 15, and January 15. The self-employment tax is 15.3%, on top of your income bracket percentage, so save accordingly so you can pay each quarter.
Withhold Taxes Properly
If you run a business with employees, you could face a tax penalty if you don’t remit the withheld taxes by the deadline. Make sure you have the right practices in place to withhold employment taxes properly so you always save enough to pay the full amount owed.
Work with a Tax Professional
As soon as you realize you can’t afford your tax bill, talk to a talk expert about your options. It’s much better to act right away than to put off filing your tax return or ignore your tax obligations. Tax experts can advise you based on your unique financial and tax situation.
When to Seek Help with Unpaid Taxes
Paying taxes is not fun for anyone, but it’s an important obligation to follow to avoid the consequences. You’ll face the failure-to-pay penalty right away, in addition to the failure-to-file penalty if you don’t file, which can add up quickly, especially with compounding interest. The IRS will then pursue collections actions if you don’t pay, such as filing a federal tax lien and seizing your property to cover the debt.
You want to avoid allowing your situation to ever get this far. Work with a tax professional who can help you take the right steps and stay in good standing.
At Damiens Law, our team is committed to getting you the best outcome for your tax problem. We can help you apply for tax relief programs, negotiate with the IRS, manage employment taxes, take care of unfiled tax returns, and much more.
To get help now, reach out to Damiens Law today to find out more about how we help with unpaid taxes and all the related IRS penalties.
FAQs about Unpaid Tax Penalties
Will I get a penalty if I don’t pay my taxes?
The IRS will send you a notice with your tax balance and the failure to pay penalty if you don’t pay by the deadline, which is usually April 15 for annual filings. If you don’t file your return by the deadline either, you’ll have to pay the failure to file penalty.
Can I get an extension on paying taxes?
You can request a tax filing extension if you need more time to file your tax return. The extension gives you another six months. However, you still must pay by the original deadline. If you can’t pay what you owe, apply for an installment agreement, which allows you to pay it off monthly and avoid penalties.
Does interest build on tax penalties?
Yes, the IRS charges interest on tax penalties, including the failure to pay and failure to file penalties. Interest builds until your tax balance is paid off. It also compounds, so you start to earn interest on the interest already built up.
Will the IRS seize my property if I don’t pay taxes?
The IRS has a collections process that starts with issuing notices and penalties for nonpayment. If you ignore these actions and continue to avoid paying taxes, the IRS may then file a federal tax lien to put a claim on your property, which could lead to the seizure of your property, including real estate, bank accounts, or wages.
What if I have unpaid taxes due to an audit?
If an audit shows that you owe additional tax, the IRS will generally apply penalties to the unpaid tax. At a minimum, you should expect to see a late payment (failure to pay) penalty, but you may also incur accuracy or negligence penalties.
Is jail time a penalty for not paying taxes?
Most people don’t face jail time if they don’t pay their taxes. However, if the IRS charges you with tax evasion or tax fraud, prison could be a potential outcome. This requires showing that you acted intentionally to evade taxes.
How do I avoid additional penalties and interest?
If you get the failure-to-pay penalty, avoid additional penalties and interest from building up by paying your tax balance in full, setting up an installment agreement to pay over time, or showing the IRS you are dealing with a financial hardship and need CNC status or an offer in compromise. These options help you avoid more penalties.
