What Happens if a Taxpayer Owes Money to the IRS and Doesn’t Pay?
Owing money to the IRS can be a stressful situation, and ignoring the tax debt can lead to significant consequences. It's crucial to understand what happens when you don't pay your taxes and what steps you can take to manage the situation effectively. This blog post will outline the potential repercussions and offer guidance on handling unpaid tax debts.
Immediate Consequences of Unpaid Taxes
When a taxpayer owes money to the IRS and fails to pay by the deadline, the following immediate consequences typically occur:
Interest Charges:
The IRS charges interest on unpaid taxes from the due date of the return until the balance is paid in full. The interest rate is determined quarterly and is the federal short-term rate plus 3%.
Penalties:
Failure to Pay Penalty: This penalty is generally 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid, up to a maximum of 25% of the unpaid taxes.
Failure to File Penalty: If you haven't filed your tax return, the IRS can impose this penalty, which is typically 5% of the unpaid taxes for each month or part of a month that your return is late, up to a maximum of 25%.
Long-Term Consequences
Ignoring your tax debt can lead to more severe consequences over time:
Tax Liens:
The IRS may file a Notice of Federal Tax Lien to claim your property as security for the tax debt. A lien can affect your credit score and make it challenging to obtain loans or sell your property.
Tax Levies (Wages, Bank Accounts, Social Security, 401k, Retirement, and more):
A levy allows the IRS to seize your property to satisfy the tax debt. This can include garnishing your wages, seizing funds from your bank accounts, or taking other assets.
Seizure of Assets:
The IRS has the authority to seize and sell your property, such as real estate, vehicles, and other personal belongings, to collect the unpaid taxes.
Passport Revocation:
If you owe a significant amount of back taxes (typically $54,000 or more), the IRS can request the State Department to deny or revoke your passport.
Legal Action:
In extreme cases, the IRS may take legal action, which could result in criminal charges, especially if they suspect tax evasion or fraud.
Common Options for Resolving Unpaid Taxes
If you owe money to the IRS and cannot pay in full, there are several options available to manage your tax debt:
Installment Agreement:
You can request an installment agreement to pay your tax debt in monthly payments. This can help make the debt more manageable and avoid some of the more severe consequences.
Offer in Compromise:
An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. This option is available if you can demonstrate that paying the full amount would cause financial hardship.
Currently Not Collectible Status:
If you cannot pay any of your tax debt due to financial hardship, you can request that the IRS temporarily delay collection. During this period, the IRS will not attempt to collect the debt, but interest and penalties will continue to accrue.
Penalty Abatement:
In some cases, the IRS may waive penalties if you can show reasonable cause for failing to pay on time. This can include circumstances such as a serious illness or natural disaster.
Other options:
There are dozens of additional options to not only resolve tax debt but litigate the tax liability in the first place. Other examples include: Audit Reconsiderations, Innocent Spousal Relief, Partial Payment Installment Agreements, Formal Tax Protests, Appeals, OIC Doubt as to Liability, Audit Protests, and more! Every case is unqiue based on its own facts and circumstances. Through our Discovery and Complaince phase we figure out the best execution plan to best resolve your IRS tax problem.
PRP Tax Law Services to Avoid IRS Actions
Owing money to the IRS and not paying can lead to significant financial and legal consequences. However, understanding your options and taking proactive steps can help you manage your tax debt effectively. Whether through an installment agreement, an Offer in Compromise, or seeking professional assistance, addressing your tax debt promptly can prevent further complications and provide peace of mind.