Taxpayers face a variety of taxes, and in addition to paying federal tax to the Internal Revenue Service (IRS), you may also need to file a state tax return. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have a state income tax, but if you live in one of the other states or the District of Columbia, you must file a state tax return. Taxpayers must pay income taxes to their state based on their income. That means filing a separate income tax with the state revenue agency, and although the details are similar to the information reported on a federal return, they vary slightly depending on the tax laws in the state. Many taxpayers also incur sales and property taxes from their city or county taxing authorities, and businesses may face additional state taxes. This guide focuses on the state level and what happens if you don’t pay state taxes or file a state tax return.
Penalties for Failing to File State Taxes
You can face a variety of repercussions if you don’t file state taxes. There are also consequences if you file your state return but don’t pay state taxes. Here are the most significant issues you’re likely to face:
Penalties for Not Filing
The penalties if you don’t file state taxes can be severe. Every state has a different penalty system, but they are typically modeled after the IRS’s system. The IRS assesses a failure-to-file penalty of 5% of your tax debt every month you are late, up to 25%. The federal penalty can be up to $2,500 if you file five months late on a $10,000 tax bill, for example. States apply penalties on top of this amount that may be similar, depending on your state.
Failure-to-Pay Penalties
There are also penalties if you don’t pay state taxes, but typically, failure-to-pay penalties are less than failure-to-file penalties. State penalties will vary, but most states follow the lead of the IRS, which charges a monthly penalty of 1% of your tax debt balance for every month you are late.
Consequences for Tax Fraud or Evasion
You can face penalties for tax fraud or evasion if your state taxing authority believes that you are willfully trying to evade your tax obligations. These penalties can be up to $250,000 and can potentially even include jail time, but they only come into play in severe cases.
These are the main consequences you’re likely to experience if you don’t pay state taxes, but the penalties can vary depending on the situation. The state may garnish your wages, seize your assets, or engage in other serious collection activities if you repeatedly ignore your state tax bill.
7 Tips for Avoiding Penalties for Not Paying Your State Tax Bill
There are several ways that you can avoid penalties for not paying your state tax bill. The exact approach varies based on your situation, but ideally, you should keep the following tips in mind:
1. Plan for State Taxes
Get on top of your state taxes before tax time. Make a plan throughout the year to budget for any amounts you owe. Make sure your employer is withholding state taxes from your paycheck, and if you work for yourself, set aside some money every month for this bill.
2. Complete Your Return Correctly
Your state tax return needs to be done correctly if you want to ensure that you’re paying the right amount. Make sure you account for your income and expenses accurately if you want to avoid having your tax return adjusted by the IRS or the state revenue agency.
3. Understand the Differences Between State and Federal Taxes
There are a few differences between how the federal government and state governments determine taxable income. You should be aware of the key differences if you want to understand your state tax obligations. Most states automatically conform to updates in the federal tax code. This isn’t always the case, however — for instance, while the federal government recently exempted some unemployment benefits from federal income tax for 2020, many states continued to tax this income.
4. File on Time
Always file both your state and federal tax returns on time. The penalties for not filing, as explained above, are always much more severe than the penalties for paying late.
5. Request an Extension
Request an extension if you cannot file on time. Some states give you an automatic extension if you request a federal extension, but others require you to submit a separate extension request. Extensions usually give you an extra six months to file, but your tax bill is still due on the original deadline.
6. Request Payment Plans
State revenue departments are willing to work with taxpayers who cannot pay their bills. Be as proactive as possible about requesting a payment plan. Don’t wait for the state to escalate collection activities.
7. Ask for a Penalty Abatement
You may be able to get penalties waived or reduced. Most states, as well as the IRS, are particularly willing to help taxpayers who have incurred penalties for the first time.
Make sure that you stay compliant with your tax filing and payment obligations. People who have payment arrangements with their states may lose them if they don’t file state taxes or if they don’t pay state taxes as required for another year.
Contact Silver Tax Group for Help
Dealing with multiple taxing authorities can be confusing and time-consuming, but Silver Tax Group makes this process as easy as possible for our clients. Our team of experienced tax attorneys knows how to help people who don’t pay state taxes or are worried that the state may garnish wages or start seizing assets. We help people who have penalties, interest, debt, or legal issues stemming from state or federal taxes. Contact us at our offices today to speak to a tax expert about state taxes.
