Nobody likes tax season. In fact, this time of year is a major source of anxiety for thousands of people.
But, it’s a necessary evil that you’ll have to face if you want to stay out of trouble. One of the worst things you can do is assume there aren’t consequences for not paying the IRS.
Not sure where to start? Don’t worry, we got you covered.
Let’s take a look at everything you need to know about unpaid taxes and what happens if you choose not to pay.
Before We Begin…
It’s important to understand that unpaid taxes will always result in a penalty against you by the IRS.
Some people may believe that if they’re not making hundreds of thousands of dollars per year that they might be able to slip under the radar. But, the truth is that anyone who doesn’t pay the amount they’re obligated to will be at risk.
And, the penalties might not even occur the same year. You could be notified years down the road that you still owe money to the IRS.
Listed below are the consequences you can expect to encounter.
Failure-to-File Penalty
If you choose to forego filing your taxes entirely, you’ll be in some hot water when the IRS catches on.
To kick things off, you’ll be charged an extra 5 percent on the taxes you owe for every month that you don’t pay the amount due. As you can tell, this can easily become financially crippling if you owe a large amount of money.
When the penalty reaches 25 percent (after five months have passed), it will stagnate and you won’t owe an amount greater than you already do.
It’s highly recommended to avoid this scenario, as even owing $10,000 in unpaid taxes could eventually reach a total of $12,500.
Failure-to-Pay Penalty
Filing your taxes isn’t enough on its own to avoid punishment from the IRS. If you file your taxes and fail to pay them, you’re going to encounter further issues as time goes on.
Luckily, however, the penalty is much more manageable.
Instead of having your penalty jump by 5 percent per month, you’ll be hit with a much lighter rate of 0.5 percent per month. This amount will eventually cap out at 25 percent, but there’s no feasible way that much time should pass before you pay the taxes you owe.
It’s important to note, though, that you’ll get charged interest on this amount. You can find out more about the interest rates here.
Passport Revocation
If you haven’t satisfied the IRS’s tax requirements for months on end, you might be stuck in the United States until you can get things settled.
Unpaid taxes will hinder your ability to get a new passport if you don’t have one already and may interfere with the renewal process.
In cases where the IRS deems that you’re at risk of leaving the country to avoid an amount that you owe, they may even revoke your passport to make international travel impossible.
Refund Forfeiture
This shouldn’t come as a surprise. You can’t exactly expect the IRS to hand you a check if you owe them money.
In the event that you’ve accrued unpaid taxes, the IRS may seize your tax refund and put it toward the debt that you owe. Since most people rely on their tax refunds for savings or larger purchases, this is never a good scenario.
Past years of unpaid taxes could come back to haunt you, too. If you managed to get away with failing to pay your taxes a few years back, you may find your current tax refund in the hands of the government.
And, this is true for both federal and state taxes, so keep that in mind when making your payment.
IRS Collection Actions
The IRS has powerful collection tools beyond penalties. They can garnish up to 25% of your paycheck directly from your employer. They can levy your bank accounts, taking every dollar except a small exempt amount. They’ll file a federal tax lien that shows up on your credit report and attaches to all your property. This lien makes it nearly impossible to sell your home or get a loan. The IRS can also seize physical assets like vehicles, investment accounts, and even your home in extreme cases. These actions typically start 30 days after you receive a Final Notice of Intent to Levy.
Timeline of IRS Escalation
Day 1-30: First notice arrives requesting payment
Day 31-60: Second notice with increased urgency
Day 61-90: Final Notice of Intent to Levy (CP504)
Day 90+: IRS can begin garnishing wages and levying accounts
Month 6-12: Federal tax lien likely filed
Year 2+: More aggressive collection, possible property seizure The IRS moves faster when you ignore them completely versus when you communicate, even if you can’t pay immediately.
Tax Evasion Charges
It’s one thing to not file your taxes or to avoid paying the IRS money that you owe them.
It’s an entirely different situation, however, when you use illegal methods to keep extra money in your pocket.
Tax evasion could result in felony criminal charges being filed against you. It doesn’t take a rocket scientist to understand that this is far worse than owing extra cash on IRS payments.
Common practices that are used for tax evasion include:
- Intentionally accepting the majority of payments in cash
- Using additional bank accounts to disperse income
- Falsifying tax deductions in order to save money
- Claiming tax credits that you do not meet the criteria for
While some of the above could be construed as negligence, the IRS will already have reasonable suspicion that you’re up to no good. If you’re charged and found guilty within a court of law, you could end up having to deal with:
- A felony conviction on your criminal record
- Up to 5 years in prison
- Fines of up to $100,000. These fines could be as high as $500,000 for corporations.
For the average taxpayer, there shouldn’t much worry about getting charged with tax evasion. But, for those who intentionally deceive the IRS in order to avoid some or all of their taxes, the consequences could be serious and life-changing.
Real-World Example With Unpaid Taxes
Our Cincinnati tax attorneys recently helped a restaurant owner from Over-the-Rhine who ran three locations between Vine Street and Findlay Market. He’d been paying his employees in cash for two years to avoid payroll taxes during renovation costs at his newest location. The IRS caught on when a former employee reported him. By the time he contacted us, he owed $127,000 in back payroll taxes plus penalties that had grown to $41,000. The IRS had already frozen his business checking account at Fifth Third Bank and sent notices to his suppliers.
We negotiated with the Cincinnati IRS office on Fourth Street and arranged an Offer in Compromise. We documented his legitimate business expenses, proved the cash payments weren’t fraudulent (just poorly managed), and showed his current financial hardship. The IRS accepted a settlement of $68,000 paid over 24 months. He avoided criminal prosecution and kept his restaurants open. He now uses ADP for payroll and meets quarterly with his CPA near Hyde Park Square. Without legal representation, he would have faced felony charges and lost everything he’d built in the restaurant district.
Options for Resolution
You have several paths to resolve tax debt:
- Installment Agreement: Pay over time in monthly payments
- Offer in Compromise: Settle for less than you owe if you qualify
- Currently Not Collectible: Temporary hold on collections if you’re experiencing hardship
- Penalty Abatement: Remove penalties for first-time offenders or reasonable cause
- Innocent Spouse Relief: Protection if your spouse created the tax problem
Each option has specific requirements. The key is acting quickly before the IRS takes enforcement action.
Stop Waiting for the IRS to Make the First Move
Ignoring tax debt guarantees financial pain. Every day you wait costs money in penalties and interest. The IRS has ten years to collect most debts and they use every tool available. They’ll take your paycheck, empty your bank account, and ruin your credit without a court order.
Most people who try handling IRS problems alone pay thousands more than necessary. A tax professional knows which programs apply to your situation and can often reduce what you owe by 30-50%. They know when to push back and when to negotiate. One phone call today could prevent wage garnishment next month.
The IRS processed 271 million returns last year and collected $4.9 trillion. Your case is just a number to them. Get someone on your side who understands their system and speaks their language. Contact our tax attorneys this week before enforcement actions begin.
