The Consequences of Owing Back Taxes (State and IRS)

Although both the IRS and the state will work with you to pay back your taxes, there are consequences if you simply do not pay or reach out for an alternative solution. The IRS and most states will approach a standard collection process, by which penalties, and potentially other consequences like liens and levies, will be enforced. The collection process begins once you receive a letter in the mail demanding payment and can continue for as long as you fail to work the tax authorities to find a solution; read below to know what may follow and avoid damaging – yet avoidable – penalties.

Tax Penalties

If you file your taxes on time but the amount due remains unpaid, the penalty is called failure-to- pay at a rate of ½ to 1% of the tax liability each month that the taxes remain unpaid, with a maximum amount of 25% of the unpaid taxes. This only applies if you did not apply for an extension, and 90% of the taxes are paid by the original due date. These penalties can build until tax authorities take other actions, as outlined below.

Liens and Levies

The most commonly known and often resorted to after several demands for taxes, liens and levies can come in swiftly, freezing and/or taking any money you have that can be paid towards the amount owed. A tax lien involves the IRS or state taking hold of property, and claiming it over any other creditors. This often happens when you owe over $10,000. Even worse, the federal government will issue a lien, and then your state or county will file a separate one, compounding the consequences. A bank levy is when the IRS or state contacts your bank and holds, then seizes funds as payment. Both of these actions can come quickly and especially damage your financial situation, causing a rupture in your ability pay for other bills and debts.

A Hit to Your Credit

Tax liens will appear on your credit report as unpaid debts, and while this may not prevent you from getting a loan, you surely won’t be able to receive any with a low interest rate. Keep your credit score in good standing by coming to terms with the tax authorities before this takes effect.

Other consequences

The IRS and state can take other measures to ensure your debt is paid. Wage garnishment occurs when the IRS or state contacts your employer and has them hold a certain percent of your income to pay for taxes. They do not have to go to court for this, and can demand up to 70% of your income; your employer is obligated to comply. Tax authorities can also seizes assets such as property in the form of a car, house, or boat, and sell it, to apply the proceeds towards your penalty. Finally, jail time is a possibility, although fairly unlikely. If other circumstances call for it, the IRS or state can have you arrested.

Consequences are bound to arrive manifold when taxes remain unpaid, and in addition the above, not to mention the stress these situations cause, the government is threatening to take away passports, to go into effect January 2016. Whatever you do, make sure you at least file your taxes. Unfiled and unpaid taxes creates a much worse situation than owing taxes alone. Always work the IRS or state in order to set up an installment plan, and avoid these sticky situations that can harm not only your financial situation, but all aspects of your life, including the ability to recover your debt and circumstances. There’s always a resolution.


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