Have you ever wondered what happens if you don't pay your taxes by the deadline? Chances are, you are probably not alone. While not paying on time is a situation best avoided, it is important to understand the seriousness of the consequences and how quickly the IRS will act.
Although the time frame varies for each case (things can happen faster or slower depending on the situation).
Below are the possible ways things often play out when you can't pay your taxes on time.
Immediately: Interest and fines begin
If you don't pay the tax in full by April 15, the IRS will charge interest on any unpaid amount. The annual interest rate is usually around 5% or 6%. The IRS can also impose late fees of 0.5% per month, with a maximum fine of 25%.
1-3 months: Notices start coming in
You will receive a letter notifying you that there is an outstanding balance you need to pay. You can get more than one letter, and the tone will get progressively harsher.
2 to 6 months: Tax Liens and Collections Calls May Happen
A tax lien is a lawsuit against financial assets and assets you own or receive. This is not a confiscation of your property but a claim on it. If you sell the business, the government may be entitled to some or all of the revenue. The IRS can only charge you a few days after the tax assessment, but it could also take several months.
Liens are generally public documents. This means that even if they don't show up on your credit report, it can affect your ability to get a loan, get a job or hold a security clearance. Filing for bankruptcy does not necessarily eliminate the payment of fees or taxes.
The IRS may send the bill to a private collection agency. The IRS will notify if this happens and provide contact information for the collection agency.
In some cases, accounts will be sent to a tax agent, which is someone who goes out into the field and collects the taxes. It's more likely for people who owe tens of thousands of dollars or more.
More than three months: IRS levies and passport restrictions
A levy is the effective confiscation of your property: assets, bank accounts, social security payment, or even your salary. Levies can come quickly, although, in practice, it takes a while to reach that stage.
The IRS can confiscate your car, auction it off, turn it into cash, and apply it to the unpaid tax debt. They can also go after IRAs and your properties and 401(k) assets that a lot of other creditors can't go after. If the IRS decides to collect, none of your own assets will necessarily be protected.
Additionally, the State Department may not issue or renew your passport and may even revoke it.
How to prevent this from happening
The obvious answer is to pay on time. If you can't pay your tax bill, the IRS offers payment plans that can help. Signing up for one shows you're making an effort while helping to avoid levies.
To prevent this from happening again next year, you can be sure that you have withheld enough tax from your paycheck during the year to cover your expected tax bill.
And above all, don't play with fire. Eventually, the Internal Revenue Service catches up to you, and you might end up paying a little more. The longer people wait to resolve these issues with the IRS, the harder it is for them to do so.
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