There’s no getting around it—taxes are a necessary part of life. Surprisingly, there are plenty of benefits to be had from filing, especially when it comes to the newly-announced stimulus checks.
Some people choose not to file, however, which often results in consequences down the road. So it’s important to know what happens if you don’t pay taxes before you consider not filing this year.
Not sure where to start? Don’t worry, we’ve got you covered.
Let’s take a look at everything you need to know.
So What Happens If You Don’t Pay Taxes?
Put simply, there’s nothing good that can come from failing to file taxes that you owe. The exact consequences, though, may vary depending on how much you’re obligated to pay and how long it’s been since you’ve owed that amount.
Let’s take a look at a few of the most noteworthy outcomes.
Fees and Interest
The most common outcome of failing to pay taxes that you owe is incurring fees and interest.
If the IRS finds that you didn’t file when you should have, you’ll have to deal with a 5% fee added to your unpaid taxes for each month your taxes are late. This fee is capped at 25% (five months), so it’s important to pay as soon as possible once you receive notice of this.
The interest you accrue is equivalent to the current federal short-term rate plus 3%.
It should also be noted that you still receive penalties for filing but failing to pay your taxes. This amount is far lower; however, people will find that only a 0.5% penalty of your unpaid taxes is added to the total.
Still, this penalty can cap at 25%, so don’t prolong paying them off.
Federal Tax Lien
If the IRS hasn’t received their payment from you, they may file a lien on your current and future property. For those unfamiliar with this term, it refers to the IRS claiming ownership of your property (such as a car or home) due to an unpaid tax bill.
The IRs even has the capability to garnish your wages, further adding to the difficulties a lien imposes.
In extreme cases, the IRS may even sell your property and use the money to pay off the debt that you owe them. This scenario has a high potential of placing you into economic hardship, which can make paying off any leftover taxes even more difficult.
Your Credit Could Take a Hit
Your credit score isn’t just an index of how reliable of a borrower you are; it’s used as a metric to determine how responsible you are in general. As such, it’s not uncommon for potential tenants to be turned away by landlords due to a low credit score.
Failure to pay a debt to the IRS is the same as failing to pay back a loan in accordance with the established terms. So you’ll likely see a significant drop in your credit score if the situation gets bad enough.
While there are forms of “good debt” that you can use to justify a poor credit score (such as a mortgage on an office building that you rent to entrepreneurs), there’s nothing good that can come from outstanding debt to the IRS.
While many people fear the thought of going to jail for tax evasion, this scenario is highly unlikely for the average person. The problem here, though, is when the government is under the impression that you’ve willfully circumvented your tax obligations.
To reiterate, though, the average person has no need to worry about this situation because any tax complications are often the result of an oversight or procrastination.
Those who conceal large amounts of money, continually underreport their income, etc. are the ones the IRS seeks out. But failing to properly file (especially for multiple years) can get the IRS’s attention if you owe hundreds of thousands of dollars.
Unfortunately, it’s not impossible to get into trouble with the IRS out of sheer negligence. New business owners, for example, often run into issues when filing for the first year their company is active.
If you’ve run into tax issues, a reputable tax attorney is the best resource to help you navigate them.
The IRS Can Pursue You for a Decade
The federal government mandates that the IRS is legally allowed to pursue and collect unpaid taxes for up to 10 years after the date they’re owed. This means that you’ll have a decade where the above issues can arise.
To put that into better perspective, you may get a letter from the IRS one day that says the taxes that you didn’t file seven years ago are owed immediately. From here, you’ll start experiencing fees, interest, etc.
Depending on your current financial situation (and how much you owed back then), it may be virtually impossible for you to fulfill this obligation. Or you may have to use the money you were planning to invest or put as a down payment on a home.
If nothing else, it’s worth properly filing for peace of mind.
Don’t Neglect Your Tax Obligations
Or you may find yourself paying more than the amount you saved.
With the above information about what happens if you don’t pay taxes in mind, you’ll be well on your way toward avoiding any problems in the future.
Want to learn more financial tips that can help you out in the future? Be sure to check out the rest of our blog.