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News alert: On Aug. 24, the IRS announced that it is providing automatic penalty relief to people and businesses who incurred failure-to-file penalties for filing late tax returns or international information returns for tax years 2019 and 2020. The agency will be refunding or crediting over $1.2 billion dollars in penalties to an estimated 1.6 million taxpayers by the end of September. To qualify for relief, taxpayers must file any outstanding 2019 or 2020 returns by Sept. 30. Taxpayers who have accepted an offer in compromise from the agency will not be eligible for this penalty relief. For more information, access a summary on the IRS website or review IRS Notice 2022-36.
Have you ever wondered what happens if you don't pay your taxes by the tax-filing deadline? Chances are you're not alone. Although not paying on time is a situation best avoided, it's important to understand how dire the consequences are — and how quickly the IRS will act.
Though the timeline varies for each individual case (things can happen faster or slower, depending on the situation), here’s how tax pros say things often play out.
Immediately: Interest and penalties start
If you don’t pay your tax bill in full by April 15, the IRS will charge interest on whatever amount is outstanding. The annual interest rate is usually about 5% or 6%. The IRS may also sock you with a late-payment penalty of 0.5% per month, with a maximum penalty of 25%.
1-3 months: Notices start to arrive
“You'll get a letter noting that there's a balance due,” says Sal Curcuru, a CPA in Farmington Hills, Michigan. You may get more than one letter, and the tone will gradually get more severe, he says.
2-6 months: Tax liens and collections calls may happen
A tax lien is a legal claim against property and financial assets you own or may have coming to you. It’s not a seizure of your assets, but it is a claim on them. If you sell the asset, the government could be entitled to some or all of the proceeds. Curcuru says the IRS can slap you with a lien just days after the tax is assessed, but he’s also seen it take several months.
Liens are often public records, says Brian Harris, a tax attorney at Akerman LLP in Tampa, Florida. That means that even if they're not on your credit report, liens could affect your ability to get loans, get a job or keep a security clearance, he says. Filing for bankruptcy may not necessarily get rid of the lien or your tax bill.
The IRS may send your account to a private collection agency. The IRS will send you a notice should that happen, and it will give you the collection agency’s contact information.
“In some cases, [accounts] will be escalated to a revenue officer, which is a person that goes out in the field and collects taxes,” Harris says. That’s more likely for people who owe tens of thousands of dollars or more, he says.
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3+ months: IRS levies and passport restrictions
A levy is the actual seizure of your assets — property, bank accounts, Social Security payments or even your paycheck. Levies can happen quickly, though in practice it often takes a little while to get to this stage, Harris says.
“They can take your car and they can sell it at auction, and they can turn that into cash and apply that to your unpaid tax liability,” he says. “They can go after IRAs, and your homestead here in Florida, and 401(k)s — assets that a lot of other creditors can't. So, down the road if they do decide to collect, none of the property that you have is necessarily shielded.”
On top of all that, the State Department may not issue or renew your passport, and it might even revoke it.
How to keep all this from happening
The obvious answer is to pay on time. If you can’t afford your tax bill, the IRS offers payment plans that could help. Enrolling in one shows you’re making an effort, plus it can help ward off levies, Curcuru says.
To keep the problem from happening again next year, you can make sure you’re having enough tax withheld from your paychecks during the year to cover your expected tax bill. (Learn more about how to fix that.)
And above all, don’t play with fire. “The IRS does catch up to you in the end, and you may end up paying quite a bit more,” Harris says. “The longer people wait to resolve this sort of thing, the harder it is on them to do it.”
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