You might not enjoy paying taxes, but if you don’t send the Internal Revenue Service the money owed by the deadline, you’ll like its response even less. The IRS can cause your bill to rise rapidly with interest payments and late fees, and ultimately can garnish wages or place liens on your property to get the money you owe. If the agency decides you’ve tried to hide a large tax obligation, you may face criminal charges as well.
Pay As Much As Possible
If you can’t pay your entire tax bill by the April 15 deadline, the IRS asks you to pay what you can. It calculates failure-to-pay penalties and interest based on the balance you owe, not the year’s total tax bill, so every dollar you can pay reduces those charges. If you've filed your return but failed to pay your entire bill, the interest rate on what remains is the current short-term federal interest rate plus 3 percent as of publication. You’re also eligible to request an installment agreement that lets you pay your bill over time, or call the IRS at 1-800-829-1040 to discuss your options. In addition to an installment agreement, the agency might be willing to provide a short-term extension to pay or an offer-in-compromise. With an offer-in-compromise, the IRS lets you settle your tax debt for less than the full amount you owe.
Failure to File
Should you elect not to file a return at all, expect to get a notice from the IRS within 30 days. It will attempt to contact you by mail for approximately six months, and then likely escalate to phone calls. At that point, you’ll owe the IRS even more money. As of publication, failure to file carries a maximum penalty of 5 percent of the tax owed for each month or part of the month that the return is late, up to five months. Once you get beyond 60 days, the minimum penalty is $135 or 100 percent of the tax owed, whichever is smaller.
Eventually, the IRS starts to get more serious, at which point the situation becomes even more of a headache. The IRS will send you a CP504B notice declaring its intent to levy property, or rights to property, and apply those assets towards your balance. Assets at risk include wages, real estate commissions and other income; bank accounts; business assets; personal assets such as your car and your home; and even Social Security benefits. If you don’t pay your bill immediately, you may receive a note advising you of a right to a hearing before the IRS Office of Appeals. The IRS can then seize assets, garnish wages, intercept benefits, or place a tax lien on your property indicating rights to the asset.
Tax liens have historically been an effective way for the IRS to secure its money owed. A taxpayer without liquid assets to seize might have property, and if the IRS places a tax lien on your home you probably won’t be able to borrow against it or sell it until the lien is satisfied. Moreover, the lien shows up on your credit report and has a negative effect on your ability to borrow money or open new accounts. The IRS won’t issue a tax lien for debts under $10,000. Also, the lien can be withdrawn if you agree to pay the balance in installments via direct debit.
If the IRS can’t easily determine your tax liability, it might issue you a summons to meet with an IRS officer. That summons also might require you to bring requested financial records and documents, or to testify as to why you haven’t paid your balance. If a third party prepared your return, or has information that may be relevant to your tax situation, that person may be summoned as well.
The IRS also can bring criminal action against those who willfully fail to file a tax return, or who knowingly falsify the information on their forms. Typically, the IRS will only file charges if it’s an extended pattern of behavior and if there’s a lot of income being hidden. Possible charges include tax evasion, tax fraud, or failure to file a return. You might not know you're being investigated for criminal penalties until you are formally charged. While most won't experience criminal prosecution, you're more at risk for penalties if found guilty of civil tax fraud. These penalties can equal 75 percent of the taxes due, with interest added to that as well.
Insult to Injury
In addition to the penalties the IRS assesses, failure to pay your taxes might bring collateral penalties as well, depending on where you live. You might have your medical or law license suspended, be denied a hunting or fishing license, have your driver’s license suspended and be denied housing assistance as the result of an unpaid tax obligation.
- IRS.gov: Can’t Pay the Tax You Owe?
- IRS.gov: Understanding Your CP504B Notice
- The New York Times: What Happens If You Don’t Pay Your Taxes
- Time: What Happens If You Don’t Pay Your Taxes?
- Business Insider: 12 Terrible Things That Could Happen if You Don’t Do Your Taxes
- USA TODAY: IRS Loosens Triggers on Tax Liens, but Avoiding Them is Best
- Tax Attorney Daily: Fraud and Tax Crimes -- Do You Really Have to Worry?