Consequences of Not Paying Taxes: What You Should Know

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Shabbir Saloda
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Imagine opening your mailbox to find an IRS notice that leaves you with a flood of questions and a sense of unease.

  • How serious is this?
  • What happens if I don’t take action?

What happens if you dont pay taxes can go far beyond just owing money. It’s a looming issue that could disrupt your life in unexpected ways. Understanding what’s at stake is the first step to taking control and avoiding a situation that could escalate beyond your control.

Read along to know the consequences and how Hopkins CPA Firm can help you.

What Happens if You Don’t Pay Your Taxes?

If you ignore your tax obligations, the consequences can quickly spiral out of control. Understanding what happens when you don’t pay your taxes can help you take the right steps before things get worse.

You’ll Receive IRS Notices

The IRS will send you notices about your unpaid taxes, which serve as a warning and may escalate if ignored.

  • CP14 Notice: Initial notice informing you of the balance due.
  • CP501 and CP503 Notices: Reminders that you still owe money.
  • CP504 Notice: Final notice before the IRS takes enforcement actions, such as levying your bank account or wages.
  • Letter 1058 or LT11: The IRS intends to seize your assets (levy) if you do not pay or make arrangements.

Your Case Moves to Automated Collections

If you don’t respond to the notices, your case will be transferred to the IRS Automated Collection System (ACS), which can enforce collections.

  • Issuing a Federal Tax Lien: A legal claim against your property, affecting your credit score and making it harder to sell assets.
  • Levying Bank Accounts and Wages: The IRS can take money directly from your bank account or garnish your wages to collect the debt.

Your Future Refunds Could Be Taken

If you owe taxes and are due a refund in a future year, the IRS can keep that refund to offset your unpaid balance. This includes:

  • Federal Tax Refunds: The IRS will apply your refund to your existing tax debt, even if you have set up a payment plan.
  • State Tax Refunds: In some cases, your state tax refund may also be taken to cover your federal tax debt.

Interest Will Continue to Accumulate

The IRS ACS can enforce collections. Here’s a closer glimpse:

  • For Individual Underpayments: The interest rate is 8% annually. This means that your tax debt will grow by 8% each year, making it harder to pay off the longer you wait.
  • For Large Corporate Underpayments: If you’re a corporation with a large unpaid tax balance, the interest rate jumps to 10%. This higher rate is applied to significant underpayments, adding considerable costs to your overall debt.
  • For Overpayments: If you’re owed a refund, the IRS pays interest on the amount they owe you. For individuals, this rate is also 8%, while for corporations, it’s 7%. This can be beneficial if the IRS owes you a refund, as you’ll earn interest on your overpayment.
  • For Corporate Overpayments Over $10,000: If a corporation has overpaid taxes by more than $10,000, the interest rate on the excess amount is lower, at 5.5%. This reduced rate means that large refunds may not earn as much interest as smaller ones.

Penalties Will Be Added to Your Balance

Besides interest, the IRS charges penalties for not paying your taxes on time. These penalties can add up quickly:

  • Failure to File: 5% of unpaid taxes each month your return is late, up to 25% of your total tax owed.
  • Failure to Pay: 0.5% of unpaid taxes for each month not paid, up to 25% of the total amount due.
  • Failure to Deposit: Penalty for not depositing employment taxes (e.g., payroll taxes) accurately or on time.
  • Accuracy-Related Penalty: 20% of underpaid tax if you underreport due to negligence.
  • Erroneous Refund or Credit Claim: 20% penalty on excessive refund or credit claimed without a valid reason.
  • Information Return Penalty: Fines for not filing required forms (W-2s, 1099s) correctly or on time.
  • Dishonored Payment: Penalty for bounced checks or other failed payments due to insufficient funds.
  • Tax Preparer Penalties: Penalties for preparers who engage in misconduct or prepare incorrect returns.
  • Underpayment of Estimated Tax: Penalty for not paying enough estimated tax during the year, affecting both individuals and corporations.
  • International Information Reporting Penalty: Penalty for not reporting foreign financial assets or income correctly and on time.

The IRS Could File a Federal Tax Lien Against You

If you owe more than $10,000, the IRS can file a Notice of Federal Tax Lien, which:

  • Impacts Your Credit: A lien is a public record and can significantly affect your credit score, making it harder to get loans or credit.
  • Attaches to All Property: The lien attaches to all your assets, including property and future assets acquired while the lien is in place.
  • Complicates Property Sales: If you try to sell property, the lien will need to be satisfied before the sale can go through.

The IRS Can Seize Your Assets

The IRS has the authority to take your money or property to satisfy your tax debt. This includes:

  • Bank Levies: The IRS can take money directly from your bank account, up to the amount you owe.
  • Wage Garnishments: A portion of your paycheck can be taken each pay period until the debt is paid.
  • Accounts Receivable Levies: For businesses, the IRS can take funds from payments owed to you by customers or clients.

A Revenue Officer Might Visit You in Person

If you owe a large amount or have multiple years of unpaid taxes, an IRS revenue officer may be assigned to your case. They can:

  • Visit Your Home or Business: Revenue officers have the authority to visit your property to discuss your tax debt and demand payment.
  • Enforce Collection Actions: They can file liens, issue levies, and take other actions to collect the debt quickly if you don’t cooperate.

Your Passport Could Be Restricted

If you owe more than $51,000 and haven’t arranged to pay, the IRS can label you as “seriously delinquent,” resulting in:

  • Passport Application Denied: If you apply for a new passport, your application may be denied.
  • Passport Revoked or Not Renewed: If you already have a passport, you won’t be able to renew it, and the State Department may even revoke it.

Your Debt Could Be Turned Over to a Collection Agency

If the IRS cannot collect your debt after several years, they may turn your case over to a private collection agency. This means:

  • Contact from Debt Collectors: You’ll receive calls and letters from third-party collectors instead of the IRS.
  • Increased Pressure to Pay: These agencies may use more aggressive tactics to collect the debt, adding more stress to your situation.

Now that it’s clear what happens if you dont pay taxes, let’s see how Hopkins CPA Firm can help you get through these consequences and provide options to find relief.

How Can Hopkins CPA Firm Help You with Tax Issues?

Find out how to tackle tax challenges effectively and explore solutions that can ease your financial burden and resolve issues smoothly.

  1. Received a letter from the IRS? We’ll help you figure out what it means and guide you on the best way to respond so you don’t end up in a worse situation.
  2. Struggling to pay your full tax bill at once? We’ll work with you to create a monthly Installment Agreement payment plan that fits your budget, helping you avoid further penalties and manage your debt step-by-step.
  3. Facing extra penalties on your taxes? We’ll explore options like First-Time Penalty Abatement or Reasonable Cause Relief to potentially reduce or remove these fees, so you can focus on clearing your debt without the added financial burden.
  4. If you’re unable to pay your full tax debt due to financial difficulties, we can help negotiate a reduced amount that you can pay. This could be a significant relief, allowing you to resolve your debt without paying the entire balance with the help of an Offer in Compromise with IRS.
  5. If the IRS has placed a lien on your property or is taking money from your accounts, we’ll work to get these lifted by requesting a Lien Withdrawal or Levy Release, so you can regain control of your assets and financial situation.
  6. Is the IRS taking a portion of your paycheck? We can help stop or lower these deductions by securing a Wage Levy Release, making sure your income is protected while you manage your tax debt.
  7. Made a mistake on your tax return? We’ll help you correct it with an Amended Return, ensuring that any errors are resolved quickly and you avoid unnecessary penalties or complications.
  8. To prevent future issues, we’ll help you stay on top of all filing and payment requirements, including reporting foreign assets under FBAR and managing estimated tax payments if needed.

With Hopkins CPA Firm, experienced professionals work to resolve your tax issues and help you move forward with confidence. We find the best solution for your unique situation.

In addition to guiding you through what happens if you dont pay taxes, we offer comprehensive tax preparation services in Texas and across the country, ensuring your filings are accurate and timely. We also provide unfiled tax returns help to catch up and avoid potential penalties and complications.

Final Thoughts!

Addressing tax problems early can make a huge difference in reducing stress and protecting your financial well-being. Being proactive rather than waiting for things to escalate allows you to take control of your situation and avoid costly consequences down the line.

Consider setting up a reminder system to keep track of important tax deadlines. Regularly updating your financial records and seeking advice before making major financial decisions can also help prevent unexpected tax issues. If you’re self-employed, setting aside money for taxes each month ensures you won’t be caught off guard during tax season.

Being prepared and informed is key, but professional guidance from the Hopkins CPA Firm can provide the clarity and support you need if things feel overwhelming.

If further questions arise about what happens if you don t pay your taxes, then we have experts who can help. For example, if you received IRS letter or notice, our team can guide you on the best way to respond and resolve the issue. Either way, whatever your issue, we’re just one consultation away. Book yours today!

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To tackle your IRS Notice smartly.
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Joe has 25+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases. 

At Hopkins CPA Firm, we adhere to a stringent editorial policy emphasizing factual accuracy, impartiality and relevance. Our content, curated by experienced industry professionals. A team of experienced editors reviews this content to ensure it meets the highest standards in reporting and publishing.

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Author

Joe has 25+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases.