What happens if you can’t pay your taxes?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If tax season comes around and you’re worried you might not be able to pay your taxes, it’s okay—you have some options. So, exactly what happens if you can’t pay your taxes? There are a few possible outcomes, depending on the actions you take. The government won’t just forget you owe taxes, and there can be serious consequences if you don’t take the proper steps. Luckily, there are different approaches you can consider to help you get out of this situation. Most importantly, communicate with the IRS and don’t ignore the problem.

What can you do if you can’t pay your taxes?

Here are your main options if you can’t pay your taxes.

Always file your taxes and pay what you can

The first thing to know is that it’s vital you file your taxes, even if you can’t pay them. There’s a separate penalty for failure to file versus failure to pay. The penalty for not filing your taxes is five percent per month of the unpaid tax required to be reported until it hits a maximum of 25 percent. In comparison, the failure to pay is only 0.5 percent per month. So, not filing means that you incur an additional, even more expensive, penalty. 

You can ask for an extension to file if necessary, but note that it isn’t an extension to pay. Tax extension requests are typically due in mid-April, and if the extension is approved, you’ll have to file by an October deadline. Make sure to do your research into the dates for this year, as they can update annually. 

Even if you can’t pay all you owe, paying whatever amount you can up front will be beneficial. And you don’t have to wait for the final bill from the IRS to make this payment. Start contributing monthly payments that you can afford immediately. If you end up working with an IRS agent down the line regarding your outstanding payment, they’ll be much more favorable to you when they see you’ve been at least contributing something every month. 

Temporarily delay the collection process

The next option is to delay the collection process temporarily. You can ask the IRS to mark your tax payment status as “currently not collectible” (CNC) if you can prove hardship. When applying for (CNC) status, the IRS will review your financial situation and confirm that you can’t pay due to financial hardship. If this is deemed accurate, the IRS will continue to monitor your financial situation annually until it improves. When your situation improves, the IRS will expect payments to be made immediately. 

There’s another situation where CNC status applies. Certain undue hardships like natural disasters can earn you a short extension on filing and making payments. 

However, note that this status doesn’t save you from penalties and interest, so your amount owed will continue to grow while you don’t make payments. Additionally, the IRS will automatically apply all future tax refunds to your amount owed. And lastly, if your debt is deemed CNC for an amount above $10,000, the IRS can file a tax lien on your record. 

Get on a payment plan

A payment plan may be an appealing option for you. The IRS offers two types of payment plans: 

• Short-term payment plan: If you owe less than $100,000 (in combined taxes, interest and penalties), you can opt for a short payment plan of 120 days or less. This option costs $0 to apply online, by mail, by phone or in person.
• Long-term payment plan: If you owe less than $50,000 (in combined taxes, interest and penalties), you may opt for the long-term payment plan, which is 120 days or longer, paid in monthly payments. The long-term payment plan costs $31 or $131 for a setup fee if you apply online—the difference in cost depending on how you choose to pay (debit versus other payment formats). Or, individuals pay a setup fee of $107 or $225 if applying by phone, mail or person (once again, the difference in cost is if you choose payments via debit versus another method).

With the payment plans, you can generally choose how much you pay each month. However, with the long-term payment plan, your payment amount must be enough that everything owed is paid off within 72 months. 

Request an offer in compromise (OIC)

You may be eligible to apply for an offer in compromise (OIC), which would allow you to settle your outstanding tax bill for less than you owe. Typically, those who qualify for an OIC:

• Hold little to no assets
• Have difficulties paying their minimum living expenses
• Can show financial hardship

What happens if you pay your taxes late or you don’t pay at all?

There are several negative consequences you should be aware of for paying your taxes late—or not at all. 

Penalties and interest

The failure-to-pay penalty is 0.5 percent of your outstanding tax balance, charged every month that the debt remains unpaid (up to a maximum of 25 percent). This amount can add up quickly.

If you haven’t filed your taxes and have failed to pay, you could be charged two penalties monthly. The maximum penalty for both fines is 47.5 percent of your total outstanding bill—22.5 percent for the late or missed filing and 25 percent for the late payment. 

Liens

If you leave your taxes unpaid without communication or a plan with the IRS, you could eventually be subject to liens on your property. This will make it difficult to sell your property until you’ve settled your debt with the IRS. 

While tax liens no longer show up on credit reports, there’s still potential for the liens to indirectly impact your credit.

Wage garnishment and levies

The IRS can pursue wage garnishment or take a bank levy against your bank account. If this is approved, your wages will continue to be garnished until the amount owed is fully paid or you work with the IRS to make some other agreement for payment. 

Criminal charges

In extreme cases, tax evasion is a crime that can earn you jail time. The maximum penalty for tax evasion is up to five years in prison. However, most people likely don’t need to worry about this. The IRS typically only pursues criminal charges against individuals who owe substantial sums of money. 

Will unpaid taxes affect your credit?

No, unpaid taxes won’t show up on your credit reports. But your credit could be indirectly affected if you miss other payments because you have to put more money toward your tax payments. 

For example, forced wage garnishment could put you in a position where you can’t make your other outstanding debt payments. Now you’re incurring missed and late payments on your credit report every month. Payment history makes up 35 percent of your credit score, so every missed payment has the potential to show up on your credit report and drag your credit score down. 

Decide how you want to move forward with payments

Now that you understand the full potential impact of not paying your taxes, it’s time to decide how to move forward. You could consult a professional, but keep in mind it might not be worth the cost—especially when you’re already in debt. 

Ultimately, your outstanding taxes shouldn’t be forgotten for too long, as the consequences are too significant. You’ll have to decide how you want to pay—using a debit card, using a credit card, taking out a personal loan or borrowing from your HELOC. Make sure you weigh things like interest rates, collateral and withdrawal penalties for each of your options. 

If your unpaid taxes have already impacted your credit or will do so going forward, know that there are things you can do to help the situation. Having strong credit is essential for a solid financial future. Credit repair consultants from Lexington Law Firm can help you review your credit, file any necessary disputes and teach you essential credit education to set yourself up for success. 

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