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 arrives and you’re worried you might be unable to pay your taxes, don’t panic—you have options. But what if this isn’t the first time you’ve struggled with repaying a tax debt? If you’re wondering what to do if you haven’t filed taxes in a few years, take a deep breath. Depending on the actions you take, there are several possible outcomes.

What If I Haven’t Filed My Taxes in a Few Years?

Paying your taxes late—or not at all—can have several consequences. This is true regardless of whether you file a return or not. However, failure to file a return may result in additional penalties.

Here are some potential consequences you can face when filing late or failing to file your federal return.

Penalties and Interest

The failure-to-pay penalty is 0.5% of your outstanding tax balance. This penalty gets charged every month that the debt remains unpaid, up to a maximum of 25%. 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% of your total outstanding bill. This breaks down to 22.5% for the late or missed filing and 25% for the late payment. 

For more information about how you could be financially liable, visit the IRS website.

Liens

Ignoring tax debts may result in personal property liens. Personal property includes boats, vehicles and homes. Liens make it difficult to sell your property until you’ve settled your debt with the IRS. Simply put, the IRS interferes with your property ownership by filing a legal claim.

Tax liens no longer show up on credit reports. However, there’s still potential for the liens to impact your credit. Tax liens appear in public records, so businesses and individuals can still find them. This may make it difficult to find a new rental home or get a job, if it comes up during a general background check.

Wage Garnishment and Levies

You may have heard about frozen bank accounts or debts being taken from paychecks. This is known as filing a levy or having your wages garnished.

The IRS can pursue wage garnishment or take a bank levy against your bank account if you don’t pay your taxes. When this happens, your wages will continue to be garnished until the amount owed is fully paid. You may also get the option to negotiate a different payment method with the IRS.

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 5 years in prison. Fortunately, most people don’t need to worry about this outcome. The IRS typically only pursues criminal charges against individuals who owe substantial sums of money. 

Will Unpaid Taxes Affect Your Credit?

Unpaid taxes won’t show up on your credit reports. However, your credit could be indirectly affected if you miss other payments. This could happen if you have to put money toward your tax payments instead of paying other debts. 

For example, forced wage garnishment could make it difficult to pay your monthly bills. Now you’re incurring missed and late payments on your credit report every month. Payment history makes up 35% of your credit score. Every missed payment has the potential to show up on your credit report and drag your credit score down. 

What Can You Do If You Can’t Pay Your Taxes?

Your choices may be the same whether you haven’t paid taxes in years or fear you won’t make this year’s payment on time. Here are your main options if you can’t pay your taxes.

Always File Your Taxes and Pay What You Can

You must file your taxes, even if you can’t pay them yet, as there’s a separate penalty for failure to file versus failure to pay. The penalty for not filing your taxes is 5% per month of the unpaid tax required to be reported. This penalty continues until it hits a maximum of 25%.

Failure to pay your tax debt on time only costs an extra 0.5% of your monthly balance. As with the nonfiling penalty, this continues until you pay off your balance.

You can ask for an extension to file your return if necessary, but that it isn’t an extension to pay. Tax extension requests are typically due in mid-April. If the extension gets approved, you must file a return by the October deadline provided by the IRS. Deadlines can change and are updated annually, so keep that in mind if you’ve had a previous extension.

Even if you can’t pay your full balance, paying whatever you can afford may be beneficial. You don’t have to wait for the final bill from the IRS to make your first payment. Begin making monthly payments immediately. This can help when you contact the IRS about overdue taxes later.

Delay the Collection Process

When full payment isn’t possible, ask the IRS if you can delay the collection process. Keep in mind that this is a temporary pause. You must still pay your tax debt eventually.

You can ask the IRS to mark your tax payment status as “currently not collectible”, also known as CNC, if you can prove hardship. When applying for CNC status, the IRS will review your financial situation. It’s looking to confirm that you can’t pay due to a financial hardship.

If the IRS finds an eligible hardship, the agency will continue monitoring your financial situation. Reviews are generally done on an annual basis. When your financial situation improves, the IRS expects you to make payments 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. 

Note that CNC status doesn’t save you from penalties and interest. Your amount owed will continue to grow while you aren’t making payments. Additionally, the IRS will automatically apply all future tax refunds to your amount owed. Also, if your debt is deemed CNC for an amount above $10,000, the IRS may file a tax lien.

Ask for 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 180 days or less. This option costs nothing. You can apply online, by mail, 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 a long-term payment plan that requires monthly payments. If you apply online and set up automatic monthly payments, the setup fee for a long-term payment plan costs $22. The setup fee is $107 if you apply by phone, mail or in person. Additional fees apply if you do not set up automatic payments, but discounts for qualifying low-income taxpayers are available.

With IRS payment plans for tax debts, you can generally choose how much you pay each month. However, you must pay off long-term payment plans within 72 months.

Request an Offer in Compromise

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

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

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 consider consulting with a professional.

Having strong credit is essential for a solid financial future. If your unpaid taxes have already impacted your credit or will soon, there are things you can do to help your situation. 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. 

The government won’t forget you have unpaid taxes and there can be serious consequences if you ignore your past-due balance. You must communicate with the IRS as soon as possible. Ask the IRS if you can delay the collection process, have a payment plan or apply for an offer in compromise. Whatever you do, always make sure to file your taxes.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.