You may be wondering what could happen if you don’t file your tax returns by the April deadline. For many, filing taxes is a straightforward process. But it can get more complicated if you have side gigs or you’re self-employed.
Regardless of your financial situation, there are significant repercussions if you don’t file or pay taxes. Keep reading to find out what happens — and discover expert-backed strategies that can help you stay on track.
Here are likely outcomes if you don’t pay your taxes:
— You’ll owe a debt that will keep growing.
— The government could put a lien on your property.
— Your financial life may get uncomfortable.
— You’ll spend extra time and money cleaning up your mess.
You’ll Owe a Debt That Will Keep Growing
If you’ve decided you aren’t going to file this year because you’re tired of doing it, you may want to rethink that plan. In that scenario, you would have to pay interest — and penalties, which include “failure to file,” “failure to pay” and “failure to pay proper estimated tax.”
Basically, the penalty for the failure to file is a 5% charge of the unpaid tax required to be reported. You’ll have to pay that penalty each month — or part of a month — the return is late, for up to five months. How the IRS levies penalties can get complicated, so if you get confused, visit the website for more information.
Don’t make a payment with a check you know won’t clear. If you do, the IRS will charge a 2% penalty of the payment if it’s for $1,250 or more; if it’s less than $1,250, the penalty is the amount of the payment or $25, whichever is less.
The Government Could Put a Lien on Your Property
If you compile enough unpaid back taxes — like owing the IRS $10,000 or more — the federal government could put a lien on your property, most likely your house. You might also get hit with a state or county tax lien. The IRS files these documents with the county government, so if you sell your home the government will take what you owe before you see any profits. Plus, you may also have trouble refinancing your home if you have a lien on it.
Your Financial Life May Get Uncomfortable
“To bury your head in the sand and not pay is not a good option at all,” Julie Reyes, chief financial officer and chief compliance officer at Reyes Financial Architecture, says. Eventually the government will contact you about your back taxes, and if refuse to work with them, she says, they may levy your bank accounts and garnish your wages.
“They also have the power to take away your passport and driver’s license and make your life very uncomfortable. The government is relentless if you don’t reach out to them, so do not think just because you haven’t heard from them yet, they will forget. They will not,” Reyes says.
You’ll Spend Extra Time and Money Cleaning Up Your Mess
At some point, you’ll likely need to hire a tax professional to help you fix your situation. According to the National Society of Accountants, the average fee in 2021 for preparing Form 1040 with Schedule A (to itemize personal deductions), along with a state income tax return, was $323. The average fee for Form 1040 with the standard deduction, plus a state income tax return, was $220. That may not sound bad, but if you have several years of tax filings to catch up on, it adds up.
What if You Can’t Pay Your Taxes?
Even if you can’t afford to pay your taxes, you should still file. You can hire a local tax preparer if you’re overwhelmed by filing late. You can also find a number of places that will help you do your taxes for free, though most organizations offer services to those who don’t make a lot of money or are elderly. For example, Volunteer Income Tax Assistance programs help those who generally make $54,000 or less per year, disabled people and elderly taxpayers with limited English-speaking skills.
Once you’ve filed, if you can’t pay, the best option is to call the IRS and work something out, Reyes says. “They are typically very friendly and open to payment plans, but you must ensure you can stick to your payment plan and not fall behind, so make sure you set realistic expectations,” she says.
In other words, don’t agree to pay $400 a month in an installment plan if you can only afford $100. If your back taxes are a burden on your financial health, bankruptcy may be an option but that can get tricky.
For instance, you can’t eliminate taxes from a bankruptcy until at least three years after they were due. You also can’t have back taxes discharged until your filing is at least 2 years old. So, if you have back taxes from 2018 that you haven’t paid or filed for yet, you would want to file them in 2022 — and in 2024 you may be able to get them discharged in a bankruptcy.
Consider an Offer in Compromise
You also might want to try an offer in compromise, Brian Thompson, certified public accountant and Chicago business attorney, says. “An offer in compromise application is a request by the taxpayer to pay less than the full amount of taxes due,” he says. “The taxpayer must submit a comprehensive financial statement in support of an offer in compromise request as evidence of the taxpayer’s inability to pay all the taxes due.”
Even so, try to pay the IRS as much as possible in the interim. “It often takes the IRS 12 months or more to rule on an offer in compromise request,” Thompson says.
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Update 01/24/23: This story was published at an earlier date and has been updated with new information.