What Happens if You Owe the IRS Money and Don’t Pay?

If you owe the IRS money and you can’t pay, you may be worried about the consequences. Fortunately, you may have some options.

In this article, we’re taking a closer look at one of the most common questions we hear from people – what happens if you owe the IRS money and don’t pay?

What Happens if You Owe the IRS Money and Don’t Pay?

If you owe money to the IRS and don’t pay, the IRS will determine what you owe and charge you additional money in the form of failure-to-pay penalties, as well as accruing interest. If you can’t pay and decide not to file your taxes, the IRS will hit you with additional failure-to-file penalties.

This all adds up to significantly expand your debt over time, which allows the IRS to leverage increasingly stark collection actions to coerce payment. The IRS will send you a detailed bill explaining what you owe, plus the penalties and interest you’ve already accrued.

• If you fail to pay, the IRS will charge you an additional 0.5 percent of your unpaid taxes every month, until it adds up to a total of 25 percent of your debt.
• If you fail to file, the IRS will charge you an additional 5 percent of your unpaid taxes every month, until it adds up to 25 percent of your debt.
• The interest rate can change based on several factors, so it is always best to check the IRS website for the latest information. For the first quarter of 2021, the interest rate of the underpayment is the federal short-term rate plus three percentage points.

If you started with a debt of only a few hundred dollars, then accruing penalties and the going interest rate can pile up over months, significantly increasing your total debt.

So, what happens if you owe the IRS money and don’t pay?

The IRS Collection Process

The IRS collection process begins the moment the IRS sends you a notice of what you owe. This may be followed up by a federal tax lien, and levies if you fail to pay.

However, for smaller debts, the IRS will remind you of your obligation to file and pay and outline how you can fulfill that obligation, including staggered or long-term payment plans.

If you simply can’t afford to pay, the IRS will urge you to consider a payment plan. If you haven’t filed your tax return, the IRS and any tax professional will strongly urge you to do so, even if you can’t pay, to avoid further penalties.

Being up to date with all of your tax returns for at least the last three years is also a requirement for most payment plans with the IRS. Filing for an extension of the due date on a tax return can also help stave off penalties, for future reference.

If you haven’t had the opportunity to pay attention to your taxes in the past few years due to extenuating circumstances, making sure you’re up to date on your tax returns is a good place to start.

Note that if you fail to file a return, the IRS will usually file a surrogate return for you using the information provided by previous returns and financial institutions, albeit without taking advantage of any tax refunds or deductions that you might have been entitled to.

What if I Don’t Pay My Taxes?

If you owe money to the IRS and don’t pay, the IRS reserves the right to leverage certain collection actions against you. This begins with the filing of a federal tax lien. Liens are usually filed against taxpayers who owe more than $10,000, but the IRS may file a tax lien sooner, and as soon as ten days after giving you notice of your total debt.

A tax lien is not a direct action against your accounts and properties. Instead, it serves as the government’s legal claim on everything you owe, superseding that of other current and future creditors. This means you cannot use your property or assets to secure new loans, and while your credit score is unaffected by a lien, it may impact your ability to meet payment deadlines and seek financing.

Federal tax liens are not easy to get rid of. They largely remain in place even if you seek bankruptcy (although there are ways to resolve your tax debt during the bankruptcy process), and they even remain in place should you declare yourself uncollectable (i.e., no means to pay at all).

The only way to release a lien temporarily is by negotiating with the IRS for a lien subordination or lien discharge, both of which allow another creditor to take priority in order to lend you the money needed to cover your debt. The only way to release a lien completely is to pay your back taxes.

The next step in the collection process is the tax levy. If you fail to make any efforts to pay back what you owe, the IRS has the right to physically claim an asset or account or take a portion of your monthly wages through wage garnishment. The amount garnished depends on what you earn, where you live, and how many dependents you have.

Negotiating with the IRS When You Can’t Pay Your Back Taxes

The IRS collection process does not stop until you’ve covered your debt, or your debt meets its collection statute expiration date. The latter is very unlikely, as it takes ten years for a tax debt to expire, and multiple different events can greatly extend that time period (tolling), such as filing for bankruptcy, living abroad for an extended period of time, filing as non-collectible, or entering a payment plan with the IRS.

In most cases, a tax debt can be satisfied by entering a long-term payment plan. This way, your debt is divided into feasible monthly installments, either deducted automatically from a linked account or sent to the IRS before each payment deadline at your discretion.

If you’ve never missed a payment, are up to date with all returns, owe less than $25,000, and have made at least three consecutive payments, you can opt to ask the IRS to withdraw its federal tax lien, even if you haven’t paid everything you owe. Otherwise, the lien will be lifted automatically within 30 days after the last payment.

If you cannot pay within more than a year, you could consider an offer in compromise. Consider consulting with a tax debt professional on your options if you feel like this is your best choice. The IRS can be very picky about offers in compromise, and the process can be a long one, especially if you underestimate your reasonable collection potential.

If you can neither start up a payment plan nor an offer in compromise, your last option to delay collection actions is filing as currently not collectible. This will not lift a lien, but it will delay levies and other actions until your financial situation has changed.