What Are the Consequences for Not Paying Taxes?
It was all the way back in 1789 when our dearly departed Benjamin Franklin wrote a letter ending with the words:
...but in this world, nothing can be said to be certain, except death and taxes.” As dark and grim as it may seem, it’s true. Those are two things we can count on- and one of them comes about every single year.
Tax time in America is a time of deep frustration, anxiety, and cold sweats for many people. Questions like “How much will I owe?” “Will I get a refund?” and “Did I miss the deadline?” are on the minds of people constantly. It would be so much simpler if we did not have to pay taxes, right?
Regardless of your feelings about it, the truth is that we all have to pay taxes. Not doing so can cause a lot more trouble and stress than just confronting them and getting it over with. Like it or not, there are consequences for not paying taxes or filing them.
Consequences For Not Paying Taxes
Let’s start by being clear on the fact that not everyone will experience the exact same consequences. It really depends on how much you owe and other factors. For instance, if you just forgot to file one year, you can usually straighten it up pretty easily without a lot of fuss. However, people who have not filed or paid taxes for several years and owe a large amount can expect some serious issues. The following are the most common consequences to expect, starting with the easiest to manage.
First and foremost, you should start to receive notices from the IRS. They cannot simply jump into more serious consequences without informing you that there is a problem. As irritating as these notices may seem, do not ignore them. Once you have received them, you are responsible for fixing the situation.
If you ignore the notices and make no attempt to rectify the situation, the IRS will put your information into their ACS, or automated collection system. Once you are placed in this system, things can begin to go downhill. If you watch cop shows like me, being placed in the ACS is similar to being placed in AFIS. Once your fingerprints are recorded, they can pretty much always get a match.
With taxes and the ACS, your name- as opposed to your prints- dings. So the next time you file taxes and are expecting a refund or something similar, the ACS detects your name and the IRS can take your refund or other financial assets.
When it comes to tax debt, you can expect it to act a lot like credit card debt- they both charge interest. And if you fail to pay your balance, that interest continues to grow- usually around 5 percent per year. Next thing you know, you might owe tens of thousands of dollars on what should have been a much smaller tax bill.
Penalties, fines- it doesn’t matter what you call them. If you do not file or pay your taxes, you’ll owe them in addition to the interest you get charged. There are two basic penalties you can expect.
1. Failure to File
If you do not file your taxes on time, you will face a failure to file penalty, which is anywhere from 5 to 25 percent of your total taxes owed. That penalty is charged each month you are late.
It gets worse, though. If you are more than 60 days late filing, they also tack on a minimum of $135 extra or 100 percent of your taxes. That’s a lot of extra taxes to worry about.
Let me put this into perspective for you. A few years ago, I filed my taxes online- as I normally do- early in the year. For whatever reason, I was informed through the software that my state was not yet accepting returns, so I would have to come back later to file. So I filed my federal and made a note to complete the state taxes later.
Well, life happened. Four kids, work, and a two file neverending to-do list- yeah, it slipped my mind. I went on about my life until I received a notice the next year when I filed that my state refund would be covering penalties for not filing state the previous year. It took three years of state refunds to make up for the one teeny, tiny state tax bill. It was not fun, so do whatever is necessary to remember to file. Write it on your mirror, your forehead, or anything else you can think of to make sure you do not forget.
2. Failure to Pay
On the opposite end of failure to file is those that file taxes but do not pay what they owe. If this is you, you are looking at a failure to pay a fee of anywhere from 0.5 percent of your taxes owed up to 25 percent.
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Most of the time, the failure to pay penalty is much lower than the failure to file. Therefore, even if you feel you cannot make payments yet, go ahead and file anyway. It will likely cost you a lot less to pay late than it will to just not file.
Garnishments
Those who continue to avoid their tax debt can start losing money they earn every week or month. I mentioned above that the IRS can take your tax refunds- for as many years as it takes to clear the debt- but they don’t stop there. They can also garnish your regular wages, and that alone can be difficult to deal with if you live check to check.
Now, let’s go a step further. Imagine your grandmother passes and she left you an inheritance. Well, they can also take that, and pretty much any other money you have coming to you.
As a side note, if you owe back taxes when you pass away, your loved ones should not have to repay the debt out of pocket. However, if you plan to leave an inheritance or estate behind to them, the IRS can take their money out of that before your loved ones get their share. So, in a way, they still have to pay for it.
Loss of Privileges and Assets
Here’s a question for you: Do you travel out of the country? Sadly, one of the consequences of not paying taxes is that you can lose your passport privileges. Granted, you typically have to owe more than $51,000 to lose your passport, but still.
This loss may not affect some people, but for others, it can be life-altering. Even if you don’t travel, though, you can lose things that are important to you. Your house and car are just two examples. The IRS can lay claim to any assets you have.
In-Person visits
If you thought those mail notices were irritating, just wait until the IRS is literally knocking on your door. This typically only occurs when you owe very large amounts of back taxes, so you can imagine how sweat-inducing these visits can be.
If that’s not bad enough, though, understand that things can start moving rather quickly once these people show up. These enforcement officers have the authority and the inclination to enforce actions to take place quickly. So, while you may have had time before to remedy the situation, once an enforcement officer shows up, be prepared to fix it immediately.
Debt Collection
Another of the various consequences for not paying back taxes is dealing with debt collection. Sometimes, the IRS will send your debt off to a debt collection agency, and then you get to deal with all of those lovely phone calls and bills.
Whether it is the IRS themselves filing a lien against you or a debt collection agency, this can cause you additional problems. Liens are public records, and debt collection agencies report to the credit bureaus. Therefore, both can impact your ability to gain credit in the future.
Prosecution
Unfortunately, the last on this list of consequences for not paying taxes is the worst- prison time. Yes, you can go to prison for failing to pay taxes. To be fair, though, this is an extreme consequence, not typically something you have to worry about initially. It is more so for people who go for very long periods without paying, who owe a whole lot of money, or who intentionally and consistently avoid paying taxes. Still, it’s best not to take chances.
How to Prevent Consequences for Not Paying Taxes
There are plenty of things you can do to prevent dealing with these consequences. The first is, of course, filing and paying all of your taxes on time. Keep up with all deadlines and due dates in whatever way you need- paper calendar, digital planner, whatever you have to help.
Having said all of that, I’ll be the first to say that stuff happens. Sometimes, no matter how hard you try, things can slip right by you. All it takes is a sick kid or family member, or some other unexpected issue to arise, and you can find yourself way off track with everything.
So, let’s say life was not perfect, and you are now late filing or paying your taxes. Good news:
There is still plenty you can do to fix it quickly.
Calculate What You Owe
First and foremost, figure out what you owe. This means that if you have not yet filed your taxes, do it now. You cannot make a plan or arrangement until you know what you owe.
While you are doing this, make sure you have not forgotten or overlooked any other years. The last thing you want is to finally think you’ve got it all straightened out only to learn that you owe more.
Contact the Tax Professional
After filing and gathering any documentation about what you owe, contact the IRS or your tax professional immediately. Get in front of it- don’t wait for it to catch up with you. Being proactive will always get you better results.
The IRS often offers different payment plans and arrangements. Let’s be honest: They want their money. They would much rather work with you to get it than to have to chase you down for it. If you call and talk to them about your situation, they will do what they can to work it out with you.
Consider a Payment Plan or a Loan
Consider getting help with IRS debt. As stated earlier, you can always make a payment plan, but you have to understand that a payment arrangement does not mean avoiding interest and fees.
Before settling on a payment plan, consider getting an installment loan for paying back taxes. You might be able to find one with a lower interest rate, meaning you will owe less over time.
Don’t just jump into anything- tax settlement or installment loan. Take the time to do research and calculations. Determine which is the best option for you- what you can afford without going hungry or further destroying your credit. Please choose the best option and get to work on it immediately.
Conclusion
One of several reasons people end up in difficult financial situations is that they face trouble and feel they have no control over it. As such, they let the chips fall where they may and hope for the best.
The good news is, though, that you are never, ever helpless with anything- and that certainly includes tax debt. With a little work and commitment, you can avoid all of these unpleasant consequences for not paying taxes.