The information in this article is up to date for tax year 2024 (returns filed in 2025).
What happens if you prepare your tax return and realize you can’t pay the amount you owe? While it may be tempting to ignore your tax bill, paying taxes on time is crucial to avoid severe consequences.
Having unpaid taxes can lead to consequences beyond the typical penalties and interest. The repercussions get more severe the longer your tax debt remains unsettled. The IRS has up to 10 years to attempt to collect your debt, and they have different strategies for getting their money.
Here’s what can happen if you don’t pay your taxes.
What Happens if You Don’t File a Tax Return?
Failing to file a tax return can lead to hefty penalties and interest on the unpaid taxes. The IRS imposes a failure-to-file penalty, which is a percentage of the unpaid taxes for each month or part of a month that the tax return is late, up to a maximum percentage of the unpaid taxes. Additionally, interest on the unpaid taxes accrues daily, further increasing the amount you owe. Even if you can’t pay your tax bill, it’s essential to file your tax return on time to minimize these penalties and interest. By filing, you can also explore options like payment plans to manage your tax debt more effectively.
Penalties for Failing to File and Pay Taxes on Time
Failing to file and pay your tax bill on time will teach you an expensive lesson, as overdue taxes can lead to significant penalties. There are two potential tax penalties: One for failing to file on time and one for failing to pay your taxes on time.
Failure to File
If you don’t file your taxes by the deadline, the penalty is five percent of your unpaid taxes up to a maximum of 25 percent. This is called a Failure to File penalty.
Once your tax return is more than 60 days late, the minimum penalty is $510 or 100 percent of the unpaid taxes, whichever is less.
Failure to Pay
The second penalty is for failing to pay your tax bill. This penalty is 0.5 percent of your unpaid taxes up to a maximum of 25 percent. That’s why it’s important to file your taxes on time, even if you won’t be able to pay on time. At ezTaxReturn, we can help you set up an IRS payment plan If you can’t afford the full amount you owe.
Does the IRS Charge Interest on Unpaid Taxes?
Yes, your unpaid balance will also accrue daily interest until your tax remains unpaid. The IRS interest rate is set every three months and is the federal short-term rate plus 3 percent.
Handling IRS Notices and Unpaid Taxes: Avoiding Further Penalties
Receiving an IRS notice can be stressful, but it’s crucial to respond promptly to avoid further penalties and interest. These notices will detail the amount of tax owed, including any accrued penalties and interest. Ignoring these notices can lead to more severe actions by the IRS, such as levies or liens. If you’re experiencing financial hardship, you may be able to negotiate a payment plan or request a temporary delay in collection. Understanding your rights and protections, as outlined in the Taxpayer Bill of Rights and Publication 1, Your Rights as a Taxpayer, can help you navigate the collection process more effectively.
Tax Liens on Your Property and Credit
When you refuse to pay your tax bill, the IRS may file tax liens against your property. This lets other creditors know that they have a right to your property, which includes your house, car, and financial assets. The tax lien is no longer directly reported to your credit bureau, but it is a public record, which can make it harder for you to get approved for new credit.
IRS Levies and Seizures
If you continue to ignore your tax debt, the IRS can levy your property. Ignoring your tax debt can lead to severe consequences, including accusations of tax evasion. Just so we’re clear, a tax lien only gives the IRS the right to your property. With a tax levy, they can actually start taking away your belongings.
Commonly, they’ll ask your employer to garnish your wages until your tax debt is satisfied. Alternatively, they may seize the money in your bank account. Once the tax levy is issued, the bank will hold on to your funds for 21 days and then turn it over to the IRS. This will give you time to try to resolve the issue.
Although your income and bank accounts are fair game, there are certain properties the IRS can’t touch. For instance, unemployment benefits, worker’s compensation, income for court-ordered child support, and certain public assistance payments.
IRS Summons: What Happens When Unpaid Taxes Go Unresolved
The IRS will only play the cat and mouse game for so long. If they’re having a hard time collecting your tax debt or confirming how much you owe, you may receive a summons. This legal document will force you or a third party to meet with an IRS officer to provide information, paperwork and/or testimony. The third party can be your financial institution, record keeper, or anyone with firsthand knowledge of your situation. If you are unable to pay your tax bill in full, you may be able to negotiate an installment agreement with the IRS.
How Unpaid Taxes Can Impact Your Passport and Travel
Billions of Americans travel for business and leisure purposes. However, you can kiss your U.S. passport goodbye if you have a seriously delinquent tax debt. Once you owe the IRS more than $64,000, including penalties and interest, your State Department will be notified. As a result, you’ll be denied when you try to apply for a new passport. Current passport holders can have their privileges revoked. If it happens while you’re overseas, you may be granted a limited passport to return home. Other than that, you won’t be able to use your passport again until you resolve your tax problems.
Please remember, the IRS will not go away if you have an unpaid tax bill. The only way to get them off your back is to pay all your taxes. To avoid such severe consequences, consider making estimated tax payments throughout the year to manage your tax obligations.
Payment Options for Unpaid Taxes
If you find yourself unable to pay your tax bill in full, don’t panic. The IRS provides several payment options to help you manage your tax debt effectively. These options can ease the process of paying your taxes over time and lessen the impact of penalties and interest.
Short-term Payment Plans
Designed for taxpayers who can settle their tax debt in full within 180 days, these plans allow you to make manageable payments over a short period, helping you avoid more severe penalties and interest.
Long-term Payment Plans (Installment Agreements)
For those needing more time, long-term payment plans enable you to pay your tax debt in monthly installments over several years. To qualify, you must be current on all filing and payment requirements.
Offer in Compromise
This program allows you to settle your tax debt for less than the total amount owed if you can demonstrate that paying the full amount would create significant financial hardship. It requires a thorough review of your financial situation.
Currently Not Collectible Status
If you’re experiencing severe financial difficulties, you can request that the IRS temporarily delay collection until your financial situation improves. During this time, penalties and interest will continue to accrue.
Penalty Abatement
In certain circumstances, the IRS may waive penalties if you can show reasonable cause for failing to pay or file on time. However, this option does not eliminate interest charges.
Exploring these options can provide additional pathways to manage your tax debt and minimize financial strain.
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
