May 30, 2024

What Happens If You Don't Pay Your Taxes?

It’s normal to dread paying taxes — especially if you’re not confident about personal finance. But learning more about why filing your taxes matters can make the process easier than you think.

If you’re curious about how to pay taxes, or want to know what happens if you don’t pay your taxes on time, there’s no better time to start learning than now. Here’s everything you need to know about what happens if you pay taxes late — and what to do if you’re struggling to pay.

What happens if you don’t file your taxes?

First, there’s a difference between filing and paying taxes. Filing taxes is about filling out and submitting the proper forms that indicate what you owe. Paying is about giving the IRS that money.

That means there are two kinds of penalties: failure to file and pay, and failure to pay after you’ve filed.

The IRS penalty for not filing taxes is called Failure to File. Depending on when you fail to file, the fee can be as high as 5% of the unpaid taxes per month, up to a maximum of 25% of the total owed amount. The IRS charges 8% interest on unpaid taxes if you haven’t filed. And the longer you don’t pay, the more interest accrues. This means you might end up owing even more than the original balance over time.

If you don’t file for long enough, you could face criminal tax evasion charges. It also negatively impacts your credit score, making it more difficult to secure loans or credit in the future.

What happens if you don’t pay your taxes?

When you file taxes but don’t pay, you might experience fees, interest, and even passport restrictions. Here are some of the penalties for not paying taxes:

Immediate interests and penalties

One of the most immediate consequences of not paying taxes is interest charges and penalties. These IRS charges can quickly accumulate and significantly increase the total amount you owe.

The failure-to-pay penalty is typically 0.5% of the unpaid taxes per month, but it can rise to 1% if the IRS issues a notice of intent to levy. An intent to levy means the IRS could seize your assets if you don’t respond and come to an agreement about how to pay within 30 days.

Tax liens and collection calls

If you still don’t pay for an extended period, the IRS may place a tax lien on your property.

While the intent to levy is a threat to take your property to satisfy the debt, the tax lien claims your property. This could include real estate, vehicles, and financial accounts. When you pay what is owed, you get your assets back.

The only way to release the lien is to pay. Until then, you’ll experience collection notices or collection calls.

Levies and passport restrictions

In severe cases of non-payment, the IRS may resort to levying the individual's property or assets. A levy lets the IRS seize and sell your property to satisfy the outstanding tax debt. This can include seizing wages, bank accounts, and retirement accounts. The IRS can even revoke or limit your passport if you owe a seriously delinquent tax debt.

Legal action and criminal charges

Continued non-compliance can lead to severe consequences, including legal action, criminal charges, and even prison. A tax lien is also public record, which means anyone can see it. This can majorly affect your reputation.

What if I can't afford my taxes? 7 Options

It’s natural to feel overwhelmed when you have overdue taxes. But there are several ways to alleviate the burden and settle your tax debt:

1. Request an installment plan

The IRS offers installment plans, also known as payment plans, for people who can’t pay their taxes in full. Under an installment plan, you can make monthly payments towards your tax debt over an extended period — typically up to 72 months.

To request an installment plan, fill out Form 9465: Installment Agreement Request. You can submit it with your tax return or separately to the IRS. Keep in mind that penalties and interest will continue to accrue until you fully pay the tax debt.

2. Request a payment extension

You may be eligible to request a payment extension from the IRS, which gives you extra time to pay overdue taxes. It also prevents additional penalties and interest. You just have to prove financial hardship and be honest about your situation.

To request a payment extension, submit Form 1127: Application for Extension of Time for Payment of Tax Due to Undue Hardship. You also need supporting documentation demonstrating hardship.

3. Negotiate a settlement

The IRS may be willing to negotiate a settlement or offer in compromise (OIC) to resolve your overdue tax debt for less than the full amount.

An OIC lets you settle your tax liabilities for an amount less than the total debt if you meet the eligibility criteria. To qualify, you'll need to demonstrate significant financial hardship or exceptional circumstances that prevent you from paying taxes in full. If you believe you qualify for an OIC, submit Form 656, Offer in Compromise, along with supporting documentation.

4. Borrow money

If you can’t pay overdue taxes with your existing funds, one option is to borrow money from a reliable source. This could involve taking out a loan from a bank, credit union, or family or friends.

Before borrowing, consider the interest rates, repayment terms, and potential impact on your financial situation. Only take out a loan if its terms are better than what the IRS would offer. Otherwise, you could end up in more debt.

5. Explore personal loans

Another option is to apply for a personal loan from a financial institution or online lender. Personal loans typically offer fixed interest rates and repayment terms, making it easier to budget for monthly payments.

Before applying for a personal loan, compare offers from multiple lenders. That way, you can find the best terms and make sure you can comfortably afford the loan payments.

6. Consider a home equity loan or line of credit

If you own a home with significant equity, you may be able to get a home equity loan or line of credit (HELOC) to pay off your overdue taxes. Home equity loans and HELOCs typically offer lower interest rates compared to other borrowing options, making them an attractive choice if you’re eligible. But keep in mind that using your home as collateral puts it at risk of foreclosure if you can’t repay the loan.

7. Ask for a cash advance

If you have a credit card with an available cash advance feature, you could use it to get some money for taxes. But credit card companies typically charge high interest rates and fees for cash advances, so make sure it’s worth the risk first. The more you take out, the more you’ll have to pay later.

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Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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