If you owe money to the Internal Revenue Service, you’re not alone. In fact, it happens to a lot of Americans. In the most recent data available, the IRS has estimated that Americans owed at least $114 billion in back taxes, penalties and interest in 2020.
So what happens if you’re one of those Americans, and what happens if you don’t pay taxes? As you can imagine, nothing good happens. You may have a problem of not being able to pay your taxes, but if you don’t try to solve it, a bad problem will just get worse..
Here’s a walkthrough of what’s likely to happen if you do not pay your taxes.
[READ: Every 2023 Tax Deadline You Need to Know]
What Happens When You Don’t File Your Taxes?
Let’s tackle this first. Some people file their taxes but don’t pay. Others don’t file — or pay.
Morris Armstrong, an enrolled agent in Cheshire, Connecticut, who specializes in representing taxpayers before the IRS and a fellow of the National Tax Practice Institute says that the biggest penalty is if you don’t file your tax return at all.
“Not filing a tax return can create a penalty of 5% per month, up to 25%. This is based on the tax due,” Armstrong says. “The penalty for not paying or paying late is 1/10 the penalty of not filing.”
So you definitely want to file. Not filing only makes your financial mess far worse and far more expensive.
So what happens if you have filed — but you do not pay your taxes?
Very Little Will Happen — at First
Assuming you filed your taxes but simply didn’t pay, you’ll likely receive a stern letter in the mail from the IRS, detailing how much you owe and asking you to pay your taxes.
“First, take a deep breath. It will be OK,” says Catherine Kauffelt, head of tax compliance at Collective, an online tax, accounting and bookkeeping service for solopreneurs.
But don’t dawdle. “The longer you wait to pay the worse it is going to be. Interest accrues daily with the IRS. So now is the time to tackle your tax liability,” Kauffelt says.
As for the penalties, they add up. There are several penalties you could contend with, which include “failure to file,” “failure to pay” and “failure to pay proper estimated tax.”
The Failure to Pay Penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty won’t exceed 25% of your unpaid taxes.
The Failure to Pay Proper Estimated Tax Penalty varies, depending on how much you underpaid, the time of the year when you underpaid and the interest rate. If you paid 90% or more of the tax that you owed, you’ll avoid being penalized. If your tax return shows that you owed less than $1,000, you’ll also avoid it.
Also important to note: Don’t make a payment with a check you fear might not 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.
[READ:New Income Tax Brackets for 2023 May Save You Money]
You Could Get a Lien On Your Property
If your unpaid back taxes start to pile up — generally once you owe the IRS $10,000 or more — and if you own or are paying down a mortgage on property, the federal government could put a lien on your property. You also could 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 would take what you owe before you see any profits.
Of course, you might decide to refinance your home, to lower your mortgage payments and have more money left over to pay the IRS. But unfortunately, it can be difficult to refinance your home if you have a lien on it.
[READ: Is It Better to File Taxes Jointly or Separately?]
Your Financial Life May Get More Uncomfortable
There is no timeline on when your life will get uncomfortable, if you don’t pay your taxes. But eventually, if you don’t pay taxes, “the IRS will prepare to enforce collections against you,” says Stephen Weisberg, founder and principal attorney at The W Tax Group, a nationwide tax debt resolution company.
Weisberg says that along with a property lien, you could have a bank levy — which is a legal maneuver that would allow the IRS to take funds from your bank account. You might have your wages garnished (the IRS would take a portion of your paycheck), and the IRS could even seize your property.
What Weisberg doesn’t mention is jail. It’s extremely rare to go to jail for evading taxes, tax experts say, and even less so — and pretty much unheard of — to go to jail because you can’t afford to pay your taxes.
If you’re a millionaire and not paying your taxes because you don’t feel like it, then, yes, jail is more than theoretically possible. But if you’re broke and struggling to pay what you owe, things will be OK. You may need the help of a tax accountant and it may be expensive to catch up on those back taxes, but the chances of your winding up in some debtor’s prison because you can’t afford to pay your taxes is likely nonexistent.
What if You Can’t Pay Your Taxes?
Even if you can’t afford to pay your taxes, as noted earlier, you should still file. Once you’ve filed, there are several strategies you may want to try to get back on track if you owe taxes.
Set up an installment plan. If you can’t pay in full immediately, but feel you could catch up on your back taxes pretty easily, the best option is to call the IRS and work something out. They will happily work with you to put a payment plan for you — after you give them an accounting of your monthly budget.
Generally, these agreements last up to 84 months, Armstrong says. With any luck, that’s more than enough time to get caught up.
See if you’re eligible for the Currently Not Collectible status. If you’re granted CNC status, the IRS agrees that you simply can’t afford to live your life and pay your taxes. You have to call the IRS, and it doesn’t mean you will never pay those taxes. If you’re currently not collectible, it would stop the IRS from trying to collect the tax — but interest and penalties would still accrue.
See if you’re eligible for an Offer in Compromise. That’s where “you make a lump sum offer and promise to pay your tax debts moving forward to incentivize the IRS to write off the remaining debt,” Weisberg says. “The offer in compromise is the holy grail of tax resolutions but it is a formal process and not everyone qualifies.”
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What Happens if You Don’t Pay Your Taxes? originally appeared on usnews.com
Update 03/03/23: This story was published at an earlier date and has been updated with new information.
