If you owe money to the Internal Revenue Service, you’re not alone. In fact, it happens to a lot of Americans. In the most recent data available, the IRS estimated that Americans owed at least $668 billion in back taxes, penalties and interest in 2021.
You may have a genuine problem of not having the money to pay your taxes, but if you don’t try to solve it, a bad problem will just get worse.
Here’s a walkthrough of what’s likely to happen if you don’t pay your taxes.
[SEE: Every Tax Deadline You Need to Know.]
What Happens When You Don’t File Your Taxes?
Some people file their taxes but don’t pay. Others don’t pay, and they don’t even file.
Morris Armstrong, an enrolled agent in Cheshire, Connecticut, who specializes in representing taxpayers before the IRS and is a fellow of the National Tax Practice Institute, says you face the biggest penalty if you don’t file your tax return at all.
“Not filing a tax return can create a penalty of 5% per month, up to 25%. This is based on the tax due,” Armstrong says. “The penalty for not paying or paying late is one-tenth of the penalty of not filing.”
Not filing only makes your financial mess far worse and far more expensive.
What Happens if You File But Don’t Pay What You Owe?
If you file your tax return but don’t pay what you owe, you’ll likely receive a letter from the IRS detailing how much you owe and asking you to pay.
“One of the immediate consequences of not paying your taxes on time is the accumulation of interest and penalties. The IRS will typically impose interest charges and late payment penalties on the amount owed,” says Justin Stivers, a financial advisor and founding attorney at Stivers Law in Coral Gables, Florida.
That interest adds up — and so do the penalties. In fact, there are several penalties you could contend with, which include failure to file, failure to pay and failure to pay proper estimated tax. Here’s how much they will cost you:
— The failure-to-file penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to 25% of your unpaid tax
— The failure-to-pay penalty is also 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to 25% of your unpaid tax. The IRS says that if you get both a failure-to-pay and a failure-to-file penalty in the same month, the failure-to-file penalty will be reduced by the amount of the failure-to-pay penalty applied in that month. Confusing? Yes. All the more reason to try to file and pay taxes on time.
— The failure-to-pay proper estimated tax penalty varies, depending on how much you underpaid, the time of the year when you underpaid and the interest rate. If you paid 90% or more of the tax that you owed, or 100% of the prior year’s tax, you’ll avoid being penalized. If your tax return shows that you owed less than $1,000, you’ll also avoid the penalty.
Also important to note: Don’t make a payment with a check you fear might not clear. If you do, the IRS will charge a 2% penalty of the payment if it’s for $1,250 or more; if it’s less than $1,250, the penalty will likely be up to $25.
All of the interest and penalties can make for a stressful situation. Stivers recalls one client who owed back taxes and “was constantly concerned about selling their business because they were nervous the IRS would take the proceeds from them. They were extremely stressed, and this was for years.”
Ultimately, Stivers says, it all worked out. Still, it’s a cautionary tale for those who have fallen behind on filing or paying taxes. Ignoring the problem just compounds the stress and anxiety.
You Could Get a Lien on Your Property
If your unpaid back taxes start to pile up — generally once you owe the IRS $10,000 or more — and if you own or are paying down a mortgage on property, the federal government could put a lien on your property.
“A tax lien is a legal claim against your assets, including real estate, personal property, and ?nancial assets, to secure the payment of your tax debt,” Stivers says.
You also could get hit with a state or county tax lien. The IRS files these documents with the county government.
The good news is that none of this means the IRS is about to take your home. But, Stivers says, when you go to sell your home, “the IRS gets paid back first. Sort of like if you have a mortgage on the property, the lender gets paid what they’re owed.”
Of course, you might decide you want to refinance your home to lower your mortgage payments, so you can have more money left over to pay the IRS. But it can be very difficult to refinance your home if you have a lien on it.
Your Financial Life May Get More Uncomfortable
If you don’t pay taxes and the amount you owe just keeps piling up, it’s very possible that “the IRS will prepare to enforce collections against you,” says Stephen Weisberg, founder and principal attorney at The W Tax Group, a nationwide tax debt resolution company.
Weisberg says that along with a property lien, you could face a bank levy, a legal maneuver that would allow the IRS to take funds from your bank account. You might have your wages garnished (the IRS would take a portion of your paycheck), and it could even seize your property.
What Weisberg doesn’t mention is jail. If you owe the IRS what feels like a small fortune, you’ll be happy to know that it’s extremely rare to go to jail for evading taxes, and pretty much unheard of to go to jail because you can’t afford to pay.
But going to jail for tax evasion does happen. Actor Wesley Snipes went to prison for tax evasion from 2010 to 2013. And reality TV stars Todd and Julie Chrisley are currently behind bars for federal tax evasion (as well as bank fraud).
What if You Can’t Pay Your Taxes?
Even if you can’t afford to pay your taxes, you should still file a tax return. That way, you’ll avoid the failure-to-file penalty, and it shows the IRS you’re making an effort. Once you’ve filed your taxes, here are four strategies for getting back on track:
[READ: What to Know About ITINs and the Form W-7.]
1. Set up an Installment Plan
If you can’t pay in full immediately but feel you could catch up on your back taxes pretty easily, the best option is to call the IRS and work out a payment plan.
Depending on how much you owe, an installment plan agreement can last up to and sometimes beyond 84 months, Armstrong says. With any luck, that’s more than enough time to get caught up.
2. See if You’re Eligible for the Currently Not Collectible Status
If you’re granted CNC status, the IRS agrees that you can’t afford to live your life and also pay your taxes. But a CNC status doesn’t mean you’ll never pay those taxes. It just means you won’t have to pay them immediately, but interest and penalties will still accrue.
3. See if You’re Eligible for an Offer in Compromise
And offer in compromise means “you make a lump sum offer and promise to pay your tax debts moving forward to incentivize the IRS to write off the remaining debt,” Weisberg says. “The offer in compromise is the holy grail of tax resolutions but it is a formal process and not everyone qualifies.”
[IRS Offer in Compromise: Everything You Need to Know]
But you can also do an offer in compromise in which you pay less than you owe by making a deposit and installment payments.
They are also hard to do for a lot of people, however, according to Armstrong. “Old bad habits are hard to overcome,” Armstrong says.
But some, especially self-employed individuals, run into trouble because they’re making monthly payments of back taxes and trying to make sure they pay their taxes for the current year. If your cash flow is an issue, and other debts are weighing you down, catching up on back taxes while staying current can be a tall order.
4. Fix What Went Wrong Originally
You need to figure out why you’re falling behind on your taxes or the problem is just going to get worse.
If you have an employer, you may be claiming too many exemptions on your W-4 form. You fill out this form when you get hired, and it helps determine how much of your paycheck will go to federal taxes. You may need to update your W-4; this means you’ll have less money in your paycheck but you probably won’t wind up owing the IRS every year.
If you’re self-employed, you’ll want to make sure you’re making estimated tax payments throughout the year. If you’re struggling to make those payments, you may want to hire an accountant and perhaps discuss starting a limited liability company, or an LLC, which can be more tax-friendly than being a sole proprietor.
More from U.S. News
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What Happens if You Don’t Pay Your Taxes? originally appeared on usnews.com
Update 03/18/24: This story was published at an earlier date and has been updated with new information.
