Falling behind on your taxes can be scary, and it’s easy to feel like you’re losing control of the situation. But listen to me: ignoring the problem won’t make it go away.
The IRS has a process they follow when taxes go unpaid, mostly predictable, and understanding what to expect can really help to rein in the anxiety. Let’s break it down.
Before we begin, keep in mind that the following description is what happen after you FILE your tax return, but you don’t pay the tax. This post assumes you have FILED the tax return.
Step 1-A: You’ll Get Notices in the Mail
The IRS will start by sending you official letters, IRS Love Letters. These notices will explain:
- How much you owe (including interest and penalties).
- All of the various ways the IRS will accept payment.
- Deadlines for taking action.
Don’t ignore these letters! Read them and be sure you understand what they are saying to avoid bigger problems later on.
Step 1-B: Penalties and Interest Start Adding Up
At the same time you begin seeing the IRS Love Letters, know that your account is already racking up penalties and interest. Here’s what that looks like:
- Failure-to-File Penalty: If you miss the filing deadline, you’ll owe 5% of your unpaid taxes for each month you’re late, up to 25%. (This one stops once you file your return)
- Failure-to-Pay Penalty: This one’s smaller at 0.5% per month but still adds up over time, also capped at 25%.
- Interest: On top of the penalties, you’ll pay daily compounded interest based on the federal short-term rate plus 3%.
Step 2: The IRS Takes Action
If you don’t pay or respond, the IRS will move on to enforcement. The real question is when and which one. Here are the enforcement tools in the IRS’ toolbox:
A. Tax Liens
A lien is basically the IRS staking a claim on your property. They’ll file a Notice of Federal Tax Lien to let creditors know they’re first in line after any existing mortgages, liens, etc. This can:
- Hurt your credit score.
- Make it harder to sell or refinance property.
- The IRS will be paid any proceeds from the sale of your property, up to the total amount owed before you get a dollar.
B. Tax Levies
A levy is when the IRS starts taking your stuff to cover the debt. This could mean:
- Garnishing your paycheck, and/or retirement payments-including Social Security benefits.
- Taking money directly from your bank accounts and your retirement (mainly IRA) accounts.
- Seizing property like your car or house. This is rare.
C. Passport Trouble
If you owe more than $59,000 (adjusted yearly for inflation), the IRS may let the State Department know. This will result in the revocation of your passport.
D. Legal Action
In extreme cases, the IRS could take legal action, like filing lawsuits or even pursuing criminal charges for tax evasion. I’ve seen it happen.
How to Handle Unpaid Taxes
If you’re struggling to pay your taxes, you do have options:
- Set Up a Payment Plan The IRS offers several installment payment plans. If you owe less than $50,000 (including penalties and interest), you can usually apply for an installment agreement online.
- Offer in Compromise (OIC) This program lets you settle your tax bill for less than what you owe if you meet certain qualifications. The IRS looks at your income, expenses, and net assets.
- Ask for a Temporary Delay If you’re going through financial hardship, the IRS might pause collection efforts until you’re in a better position to pay. The name for this is Currently Not Collectable.
- Get Professional Help A tax professional (like me!) can guide you through your options and negotiate with the IRS on your behalf.
Keep Future Problems at Bay
If you’re thinking, “how can I avoid this in the future???”
- Always file your return on time, even if you can’t pay the full amount.
- Pay as much as you can, even if it is less than you owe, to minimize penalties and interest.
- Review your tax withholdings or estimated payments to make sure you’re not underpaying. The BEGINNING of the year is the best time to check your withholding and make sure you’re covered.
Final Thoughts
Owing taxes can feel overwhelming, and even a little scary. But ignoring the problem won’t help. Let the IRS work with you to figure out a way through this. By understanding how the process works and exploring your options, you can get back on track and avoid the truly ugly side of the IRS.
“Who’s Doing Your Taxes?” – Tax Rescue CPA
