Tax season. Bothersome for most. Downright stressful for those who find themselves unable to fulfill their tax obligations. Many scenarios might lead to this predicament, from unexpected financial emergencies or inadequate tax withholdings to a drop in income. However, it’s important to understand that all may not be lost. The government provides several options to help taxpayers in these situations.
So, what happens if you can’t pay your federal income taxes? What steps can you take to mitigate any potential harm? We’ve got some of the basics covered here.
What to Expect if You Can’t Pay Your Federal Income Taxes in Full
1. You’ll Get a Bill from the IRS
The first thing that will likely happen when you fail to pay your taxes is that the Federal Internal Revenue Service (IRS) will send you a bill for the unpaid amount. This will potentially include the taxes you owe, along with interest and penalties. The bill might arrive in the form of a letter, often known as a “Notice of Tax Due and Demand for Payment.”
It’s crucial to not ignore this notice, as it marks the beginning of the IRS’s collection process. Some law offices offer tax relief services*. You might consider doing your research to see if this type of program could be a good fit for you.
2. Penalties and Interest Begin to Accrue
The day after your missed tax payment was due, the IRS will begin charging you interest on the unpaid balance. In addition, you’ll face a failure-to-pay penalty. As of September 2021, according to the IRS, the interest rate was set quarterly at the federal short-term rate plus 3 percent. The failure-to-pay penalty was typically 0.5 percent of your unpaid taxes for each month or part of a month after the due date, up to 25 percent.
3. A Federal Tax Lien May Be Filed Against You
If you continue to ignore your tax debt, the IRS might file a federal tax lien—a claim against your property, including property that you acquire after the lien is filed. This lien may not only impact your assets but also your credit score, making it harder for you to borrow money in the future.
4. The IRS May Seize Your Property
This is a worst-case scenario, known as a tax levy.
The IRS has the right to seize your property to cover the unpaid taxes. This could include money from your bank accounts, wages, or physical assets. However, the IRS often uses levies as a last resort and usually after providing several notices and opportunities to pay.
Your Potential Unpaid Tax Options
1. Offer in Compromise
The IRS might be willing to accept an Offer in Compromise (OIC), which could allow you to settle your tax debt for less than the full amount you owe.
Per the IRS, to be eligible for an OIC, you must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if you are a business owner with employees.
2. Payment Plans May Be Available
If you’re unable to pay your tax debt in full, the IRS may offer payment plans, also known as installment agreements.
You might qualify for a long-term payment plan, a short-term payment plan, or even a partial payment installment agreement, depending on the amount you owe and your current financial situation.
3. Temporary Delay Of Collection
If the IRS determines that you can’t pay any of your tax debt due to financial hardship, they may temporarily delay collection until your financial condition improves. During this time, the IRS will continue to add penalties and interest to your tax debt, and they may also file a federal tax lien.
4. Bankruptcy
While it may be a last resort, filing for bankruptcy might wipe out your tax debt. However, the rules are complex, and some tax debts can’t be discharged in bankruptcy. If you’re considering this option, consult with a qualified attorney or tax advisor.
It’s crucial to remember that even if you can’t pay your taxes in full by the due date, you should still file your tax return or at least file for an extension to avoid the failure-to-file penalty, which can be 10 times more than the failure-to-pay penalty.
In Conclusion
Failing to pay your taxes can lead to serious consequences, but you may have options. The most important thing is to take action as soon as possible—whether that means seeking professional advice, setting up a payment plan with the IRS, or exploring other avenues like an Offer in Compromise or temporary delay of collection.
Remember, the IRS is typically more willing to work with taxpayers who show they are trying to resolve their tax issues, rather than those who ignore them.
*Motto Mortgage, LLC does not endorse any tax services or legal entities. The information in this blog is solely educational.
Published on June 12, 2023
