Owing money is something we all try to avoid. The stress of facing the repercussions can be overwhelming. Creditors often employ techniques such appearing at your workplace/home, taking money out of your weekly salary and even your bank account.
Of all the creditors, the IRS is the toughest. IRS penalties for those who fail at paying their taxes can be extremely severe. They require you to pay taxes every year, regardless of your financial situation.
So what can the IRS do to you if you don’t pay your taxes after receiving your tax bill?
One way or another, you will pay your taxes. The IRS has numerous methods of getting their money back, and none of them is pleasant.
In this article, I’ll go through the things that the IRS could do if you don’t pay your taxes. If you’re already in trouble, you should get our Tax Debt Relief toolkit, which provides tips on how to get the IRS off your back.
1. Charge you Interest
Like any debt, you will incur interest on your tax bill if you do not pay by the due date. Interest is charged using the following formula:
Interest Rate = Federal Short-Term Rate + 3%
In the first quarter of 2017, the interest rate is a whopping 4% yearly.
2. Charge you Penalties
On top of interest, the IRS makes you pay a penalty for each month that you fail to pay.
This is where it really hurts to not pay your tax bill.
Penalties are charged at a monthly rate of:
- 5% of the tax owed after the due date;
- Goes up to 1% after the IRS issues you a notice of intent to levy or seize property; and
- Is reduced to 0.25% if you get on an installment agreement.
The best way to reduce interest and penalties is to pay what you can, and work out a payment plan with the IRS quickly. Sometimes, a tax relief company can help expedite the process.
Read: How to set up a payment plan with the IRS to reduce penalties
3. Pay you a visit
It’s never pleasant to receive unwelcome guests. However, if you continually ignore the IRS’ attempts to contact you, collection agents could show up at your home or place of work to leave their calling cards.
While the collection agents aren’t out to hurt you, it can be extremely embarrassing and unpleasant to receive a visit.
IRS reps are the least of your concerns though. The IRS is planning to transfer severely overdue accounts to private collection agencies as early as the spring of 2017, and you know how dealing with debt collectors can be.
4. File a Federal Tax Lien on your Property
The IRS loves doing this. They often do this early on when they begin to collect.
Why? Placing a lien on your property means that the IRS has a claim to your property when it is sold. Furthermore, the IRS can file a federal tax lien without your consent, making it an easy way to secure the government’s interest in your unpaid taxes.
Having a federal tax lien on your home doesn’t mean that the IRS can possess it (early on anyway.) However, the lien can make it hell for you to apply for credit in the future.
A federal tax lien appears on your credit report. This alerts other lenders to the fact that the IRS will be paid first when your home is liquidated. This can make it difficult for you to refinance your home or use your house as collateral.
Even after you pay off your tax debt and have the federal tax lien released, it can remain as black mark on your credit report for seven (7) years more.
The best thing is to avoid a federal tax lien altogether. However, if you are already facing one, it is essential that you get it removed ASAP, or risk having your credit marred for many years to come.
Read my article on how to remove a federal tax lien from your credit report.
5. Garnish your wages
This is where the IRS can force your employer to pay them part of your wages every month. They take their share to pay your tax bill, leaving you to live on the scraps.
Horrible I know, but remember that the IRS is the government. It wields even more power than other creditors when it comes to garnishing wages.
Having your wages garnished can cripple your ability to pay off your other debts and maintain your current standard of living.
It is difficult, but not impossible to stop wage garnishments. A solid option would be to negotiate for an installment agreement. In this instance, a tax professional could help you work out a lower monthly payment.
Read my article on how to stop the IRS from garnishing your wages.
6. Levy your bank account
Thought your funds in the bank were safe? Imagine the sinking feeling of seeing money taken out of your bank account.
The IRS can levy your bank account, meaning that they will demand that your bank puts a hold on your funds. The IRS will then seize the funds to repay your tax bill.
This is extremely worrying because funds you had intended to pay other bills, debts or medical costs could be stripped from you suddenly.
Read my article on how to stop an IRS bank levy.
7. Summon you to appear before the IRS
To garnish your wages or levy your bank account, the IRS requires information on you.
If you refuse to cooperate with the IRS, they can serve summons to you to compel you to produce any documents that may help their investigation into your financial situation.
In addition, they may issue summons on third parties, like financial institutions to release information on you. This can make you feel very vulnerable and embarrassed.
8. Force you to appear before a district court or magistrate judge
If you refuse to comply with the summons, the IRS could force you to appear in court. This is where things get serious, because you’ll be issued with a court order.
The court order basically requires you to comply with the summons, otherwise you’ll face punishment.
9. Throw you in jail
Usually, only a willful failure to pay taxes will land you in jail. Willful means that you voluntarily and deliberately violated the law. This can include extreme non-cooperation with the IRS.
If I can prove that I didn’t know when I was supposed to pay my taxes, I’m off the hook right?
Not necessarily. Willfulness also includes a failure to learn of filing and reporting requirements, which the IRS considers easy to learn.
Actions that can be construed as trying to hide taxable income, or repeated ‘negligence’ can give the IRS reason to deem your failure to pay as willful.
The best way to avoid jail time is to cooperate with IRS collection agents as best as possible. Cooperation involves things like providing the necessary financial information, responding to their calling cards, speaking to them in a non-confrontational manner etc.
It is highly unlikely for well-intentioned folk to be thrown in a cell for not paying their taxes. Still, being absolutely sure of where IRS draws the line can help you avoid getting arrested for not paying your taxes.
How Can I Pay If I Don’t Have the Money?
The IRS can be ‘very persuasive’ in their collections efforts. However, they are always motivated to work with a willing person to recover their tax owing.
Therefore, the IRS offers you several options if you cannot pay your taxes. They will accept a series of installments and may even forgive part of the debt. The key is to present your case and negotiate with the IRS in a professional friendly manner.
Yes I agree, it is very overwhelming to deal with the IRS. You have to navigate your various options, provide all the necessary documents, and negotiate with the IRS to undo the damage of unpaid taxes one by one.
However, it is absolutely necessary to take action as ignoring your tax bill can result in the serious consequences above.
Thankfully, there are firms that are dedicated to managing your tax debt problems. These firms employ professionals with deep experience in tax relief. Such firms can represent you when dealing with the IRS, saving you time, money and sleepless nights.
If you get professional help early, you can avoid having collection agents showing up at your home and intervene in the IRS siezing your hard-earned wages and assets. You can read my article on how tax professionals can help you deal with the IRS.
An honest tax relief specialist that I recommend is Community Tax Relief. They offer a free consultation and have helped to protect thousands of clients from the IRS.