Top 5 Consequences of Unpaid Tax Debt

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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.

Penalties unpaid taxes

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.

Penalties unpaid taxes

1. 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.

Penalties unpaid taxes

2. 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

Penalties unpaid taxes

3. 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.

Penalties unpaid taxes

4. 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. 

Penalties unpaid taxes

5. 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.

Penalties unpaid taxes

Handling Unpaid Taxes Can Seem Difficult

But it doesn’t have to be.

With the above information about unpaid taxes in mind, you’ll be well on your way to making sure you stay out of trouble and keep the IRS happy.

Want to learn more tax information that can help make your life easier? Make sure to check out the rest of our blog!

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