Unpaid Taxes: Consequences & Resolutions to Owing Tax

When people don’t pay their taxes, the IRS & states notice. Even if you don’t file, the IRS’s computerized system is likely to see that fact—remember, employers, financial institutions, and others are sending financial information to the IRS, and thanks to the automated matching system, the IRS tends to notice if it’s missing a return.

If you haven’t heard anything from the IRS and/or your state, that doesn’t mean that the agency hasn’t noticed. It just means that the computers are taking a while to catch up. In either case, to minimize penalties and to avoid collection activity, it’s best to be proactive and work with the tax authorities sooner rather than later to limit penalties and severe collection actions.

Find Out How Much You Owe

The first step is to find out how much you owe. To find out how much you owe and you haven’t filed, you should file your back taxes. If you’ve already filed, you can use the IRS’s online tool to find out what you owe, or you can call the IRS at (800) 829-1040. Sometimes the online system is not available, in this case, you may want to request a transcript of your tax return.

Alternatively, if you have any notices from the IRS, they should show how much you owe. Usually, you owe more than the letter says because interest and fees are continually accruing on the account.

If you owe state taxes as well, you will likely have to call your state agency to get the details. Many states don’t offer an online portal to access this information like the IRS

Consequences Having Unpaid Taxes

The effects of owing taxes vary greatly depending upon the unique tax situation. The consequences the taxpayer faces will be determined by if tax returns are filed and the tax debt amount owed. The IRS has multiple types of penalties that are charged for unpaid taxes, and the two main ones are the failure to file tax penalty and the failure to pay tax penalty. The failure to file tax penalty is the penalty for owing taxes and not filing taxes. When taxes are filed, but not paid, the IRS charges the failure-to-pay penalty. The penalty for not filing and not paying taxes is about ten times greater than the penalty for filing and just not paying. Below is more information on the penalties and other collection actions that may be taken by the IRS.

Penalties for Unpaid & Unfiled/Late Filed IRS Taxes

Once the taxpayer (or the IRS) files the tax return(s), the IRS will assess a tax amount owed. The IRS assesses penalties from the date that the tax return was due. The sooner the taxes are filed, the lower the penalties and interest will be. If you fail to file a tax return at all and the IRS believes that you will owe taxes, they will file a substitute for return. When the IRS files a substitute return, they will file your taxes for you based on info the IRS has from other sources and won’t include any additional expenses or exemptions that you may be entitled to. For this reason, the tax amount the IRS will assess in these situations will be overstated and therefore make the penalties even higher as well.

If there is no fraud or negligence involved with failing to file and failing to pay taxes, then the failure to file tax penalty will be charged. This penalty is 5% per month that is calculated based on the total tax amount owed. The maximum for this penalty is 25% of the total tax amount owed. If the tax return is filed sixty or more days after the deadline, the minimum penalty is the smaller of $135 or 100% of the tax liability.

Penalties for Unpaid Taxes with a Tax Return Filed on Time

When the taxpayer files a tax return but does not make payments, the IRS will charge the failure to pay penalty. The failure to pay penalty is .5% (half of one percent). Like the failure to file penalty, the maximum penalty is 25% of the total tax amount owed. Since this is a much lower percentage, it will take a lot longer to accumulate the maximum amount.

Interest Charged on Unpaid Tax Amounts Owed

On top of the penalties, the IRS also charges interest on the tax amount owed. The interest compounds daily. The interest rate charged is equal to the Federal short-term rate, plus 3%. There is no cap on the interest amount like there is for penalties. When the taxpayer pays the balance in full, the interest will stop accruing.

Possible Tax Collection Consequences & Other Punishments

Having unpaid taxes generally will come with consequences other than penalties and interest if no action is taken to get back into compliance. The IRS and other state tax authorities realize there are times where people can’t pay their taxes, and they are willing to work out arrangements. If the taxpayer fails to work with them to make arrangements, they will use various tactics to force the taxpayer to work with them. Below are some of the most common consequences of ignoring requests to work with the tax authorities on an unpaid tax bill.

Tax Lien

A tax lien is a claim against your property which is used to protect the US Government’s or State Government’s interest in the tax that they are owed. Your creditors or potential creditors will see the lien recorded. The lien will make it very difficult to borrow money or get any credit. Both IRS and majority of states use this tactic for unpaid taxes. It will not be a surprise when the notice of tax lien arrives because it is likely that many attempts have been made before this via letters to resolve the taxes owed.

Tax Levy

One of the harshest methods used by the taxation authorities is a tax levy. This is the actual seizure of assets owned by the taxpayer. A tax levy can come in various manners, below are the most common forms of a levy.

  • Wage Garnishment: This is the most common form of levy if you are a W-2 wage earner. The taxation authorities will contact your employer directly and require them to withhold a certain percentage of your pay to apply it towards the tax debt owed.
  • Bank Levy: This is when the taxation authorities contact your bank directly and require them to put a hold on the funds in the account. After a brief hold, the money will be seized and sent directly to the taxation authorities, and the amount they collect will be applied to the unpaid tax balance.
  • Asset Seizure: This is a less common tactic used, but does happen mostly when a bank levy or wage garnishment is not effective. The taxation authorities may seize certain assets and sell them to apply that value to the tax amount owed.
  • Social Security Levy: The IRS can garnish social security payments. This garnishment amount can be up to 15% of the social security payments you receive.
  • 1099 Tax Levy: In some instances, if you are an independent contractor, the IRS may demand that 1099 income owed to the contractor or business be sent directly to the IRS.

Criminal or Misdemeanor Charges

Every year the IRS sends a small number of taxpayers to jail for tax-related charges, this is rare though. In certain severe cases of blatant fraud or tax evasion, the IRS may file charges criminally. Most of the time, the IRS gives misdemeanor charges. The charges carry separate set tax penalties associated with them.

Resolving Your Unpaid IRS Taxes Owed

Once you have a total tax amount owed and you know you cannot pay in full, you need to decide how to resolve your tax debt. The IRS has a lot of different options, and the right choice depends on how much you owe and how much you can afford to pay. Here are some of the possibilities:

Apply for a Payment Plan

The IRS has a range of payment plans. As of 2017, if you owe less than $100,000, you can usually set up an installment plan. That lets you pay off the tax debt in monthly payments. You can take up to 72 months if you owe less than $50,000 or up to 84 months if you owe between $50,001 and $100,000.

Consider an Offer in Compromise

An offer in compromise is when you pay less than you owe on a debt. The IRS looks at your assets and income to determine how much you can pay. If you offer the largest payment you can afford and can show it is equal to or more than the IRS will likely ever collect from you, the IRS will probably accept it. If the IRS thinks your offer is too low, they will likely reject the offer. If your offer is rejected you can apply again or consider another type of resolution.

Uncollectible Status

If you can’t afford to pay anything, apply to get your account labeled as uncollectible. Uncollectible status is a temporary designation. The IRS reviews your situation every two years, and if you can afford to pay in the future, you have to do so.

Resolving State Unpaid Taxes

State taxes that not paid in full will have to be addressed separately from IRS taxes owed. Each state has their laws and their own set of resolutions. Most states do follow closely to what the IRS has, but they all require separate filings. To find which state tax resolutions are available, review the state guide to see what is available in your state.

Hire a Tax Professional

These are just some of the options. To find out about other alternatives, you may want to hire a tax professional. A specialist can help you find the best program that fits your unique tax situation. They can also help you apply for payment plans, offers in compromise, and other alternatives.

Unpaid Taxes Help & Relevant Articles

What to Do and Expect With Unpaid Back Taxes
Describes actions the IRS will take for Unpaid Back Taxes.

Failure to Pay Tax Penalty
The penalty for not paying taxes or underpaying taxes ranges from 1/4% to 1% . Understand what rate you will be charged and if you can remove the penalties.

IRS Underpayment Penalty and Interest Rates
Understand what IRS interest rates are for failing to pay or pay in full and what you can do to lessen penalties.

Delaying IRS Collections
If you need more time to pay back taxes, consider delaying the IRS. Some information the IRS would never tell you, but a very easy method to use to gain a few months of time to pay.

Unfiled Tax Returns
Not filing a tax return is far worse than filing a tax return and not paying. It is best to file before the IRS contacts you.

Protecting your Assets for Seizure
How to protect your assets from the IRS if you know they are planning on imposing a levy on your assets

IRS Payment Plans
Describes various payment plans available to pay back taxes if you cannot pay in full. However, you need to file your back taxes first before looking at any payment plan.