Tax Refund


Tax season can feel like stepping into a labyrinth without a map. It’s totally natural to feel nervous about the consequences of not filing or paying taxes on time. After all, nobody wants to deal with unnecessary stress or penalties. But don’t worry, because you’re not alone.

We get how confusing taxes can be, and that’s why we’re here to help clear things up. In this guide, we’ll walk you through what might happen if you can’t meet the tax deadline on time. We want to empower you with the knowledge you need to handle your taxes like a pro. So, let’s jump in together and untangle the mystery around tax penalties and interest.

What happens if you don’t file and pay taxes?

Penalties

If you miss the deadline to file and pay your taxes, you’ll likely face tax penalties. The amount can vary based on how late you are and if you owe taxes. Now, it’s definitely important to get your taxes sorted out on time, but if you’ve just forgotten or couldn’t manage it, take a deep breath, it’s going to be okay. 

Usually, penalties are as bad as it gets. While the IRS has the power to take more serious actions, like seizing property or garnishing wages, they usually save that for extreme cases of non-compliance. So, if you find yourself in a pickle where you’ve missed the deadline, no need to panic–focus on addressing the issue and meeting your obligations quickly to minimize any potential penalties.

Interest

If you owe taxes as of the due date of your tax return (April 15th for 2023 Federal tax returns due in 2024), the iRS is mandated by law to charge interest on the outstanding balance. The interest rates are set by the IRS, are generally based on the federal short-term rate plus 3%, subject to change quarterly, and can be found here. In addition, you should note that interest compounds daily. That means that the longer your taxes remain unpaid, the more interest will accrue. 

Collection enforcement actions

The federal tax lien arises automatically when the IRS sends the first notice demanding payment of the tax debt assessed against you and you fail to pay the amount in full. The filing of a Notice of Federal Tax Lien may affect your ability to obtain credit, although it no longer appears on major credit reports.

Once a lien arises, the IRS generally can’t release the lien until the tax, penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax. Paying your tax debt in full is the best way to get rid of a federal tax lien. The IRS releases your lien within 30 days after you have paid your tax debt.

If you do not respond to IRS billing notices and work with the IRS to resolve your tax debt, the IRS may levy your property. Even if you think you do not owe the tax bill, you should contact the IRS. The IRS may levy (seize) assets such as wages, bank accounts, Social Security benefits, and retirement income. The IRS also may seize your property (including your car, boat, or real estate) and sell the property to satisfy the tax debt. In addition, any future federal tax refunds or state income tax refunds that you’re due may be seized and applied to your federal tax liability. 

What are the tax penalties if you can’t pay your tax bill?

There are generally two types of penalties you might face: failure to file and failure to pay.

Table showing the standard and maximum failure-to-file and failure-to-pay penalties.

Failure-to-file penalty

Don’t think you can escape penalties by not filing. If you don’t file, you’ll owe a 5% per month penalty for not filing. For any month that the failure-to-file penalty and the failure-to-pay penalty both apply, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty.

As of 2023, if you’re more than 60 days late in filing your tax return, you’re looking at a minimum penalty of either $48550 or 100% of the unpaid tax, whichever is less. For 2020, 2021, and 2022, the minimum penalty was $435.

It’s important to note that the failure-to-file penalty accumulates the longer you delay filing your return, maxing out at 25% of your unpaid taxes. That’s on top of any interest building up on what you haven’t paid yet.

Bottom line: file your tax return, even if you can’t foot the whole bill right away.

Failure-to-pay penalty

What happens if you don’t pay taxes on time? Not paying your taxes by the due date will garner you a failure-to-pay penalty of ½ of 1% of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty accumulates, month by month, and can grow to be as much as 25% of your unpaid taxes. If after five months you still haven’t paid, the failure-to-file penalty will max out, but the falure-to-pay penalty continues until the tax is paid, up to 25%. The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.

The failure-to-pay penalty is like a small monthly fee that keeps growing until you pay your taxes. So, for each month after the due date that your taxes are still unpaid, your failure-to-pay penalty is 0.5% of what you owe.

But, if you get a notice from the IRS and don’t pay your owed taxes within 10 days, the penalty increases to 1%.

Here’s an example of the failure-to-pay penalty: if you owe $1,000 in taxes and fail to pay by the due date, you would accrue a failure-to-pay penalty of $5 for each month (or part of a month) that the taxes remain unpaid. If you still haven’t paid after 5 months, the penalty would total $25, or 2.5% of the original $1,000 owed.

Graphic showing that the combined failure-to-file and failure-to-pay penalties should not equal more than five percent per month.

Filing extensions & negotiations

If you’re feeling a bit overwhelmed and need more time to sort out your taxes, filing for an extension can be a great option. It gives you some breathing room and allows you to avoid failure-to-file penalties. 

But remember, an extension to file is not an extension to pay. It can be beneficial to pay as much as you can by the original deadline to minimize penalties and interest.

If you can’t pay your tax bill in full, don’t panic. The IRS offers payment options like installment agreements and offers in compromise. These can help you solve your tax problems over time or settle your debt.

Communication is key. Be honest about your financial situation and explore all available options. Seeking assistance from a tax professional can help navigate the process and ensure you understand your options. If you’re proactive, you can avoid severe penalties and work towards fixing your tax issues.

IRS payment plan options

If you can’t pay all the taxes you owe, file your tax return on time and pay as much as you can, then explore other payment options. Believe it or not, the IRS is willing to work with you to devise alternate payment options. Here are a few:

Installment payment plans

If you owe $50,000 or less, you can request a payment plan when you are preparing your taxes with TurboTax, request a payment plan at the IRS website, or call 800-829-1040. 

If you owe, the IRS will also send you a bill with your payment options which include instructions for requesting an installment agreement. If you owe more than $50,000, you will generally need to complete a financial statement to determine the monthly payment amount for an installment plan. You may be able to request a short-term installment agreement (180 days or less) online without a financial statement if you owe less than $100,000 in combined tax, penalties and interest.

Hardship cases

If you will become destitute if you have to pay the taxes, you can fill out Form 911, Request for Taxpayer Advocate Service Assistance, to ask the IRS to delay tax collection. The Form 911 is a request for taxpayer assistance for taxpayers who have been unable to resolve their tax issues through normal channels and are facing undue hardship as a result of the IRS actions or inactions. This may not be your best option except in a true emergency, since you’ll still be racking up penalties and interest, and the IRS can still file a lien against you.

Offer in compromise (OIC)

If none of these options work for you, you can make an offer to settle with the IRS for something less than is due. You’ll have to fill out Form 656 and show that you are unable to pay, for example, because the amount owed is higher than your total assets and income.

What if I can’t afford my taxes?

What happens if you can’t pay your taxes? If you find yourself unable to afford your taxes at the moment, you have options. Let’s explore each of these potential solutions in more detail and see what might work best for you.

Stressed couple looking at their debt.

Borrowing options for tax debt

It’s crucial to really think through your options and weigh the pros and cons of each. One route you could take is tapping into your home’s equity through a Home Equity Line of Credit (HELOC). This option offers lower interest rates and potential tax deductibility, but there is a big risk involved: if you can’t pay it back, your home might be on the line. In addition, you won’t be able to deduct the interest on the equity line of credit if you don’t use the funds to improve your home.

Another option is tapping into retirement accounts, like a 401(k) or IRA. While borrowing from retirement accounts may provide quick access to funds, there are major downsides. Taking money out of these accounts can causeyou to be hit with additional taxes and penalties, as well as leave you with reduced retirement savings. You might want to wait to try this route until you’ve exhausted all other options and really have no other choice.

Using savings 

When you’re dealing with tax debt, one option to consider is using your emergency fund. Now, ideally, you’d want to keep that fund for true emergencies, but in a pinch, it could help you handle your taxes pronto.

Your emergency stash is usually there for unexpected circumstances or major money crises, and while taxes might not scream “emergency,” sorting out your tax bill can save you from getting hit with extra fees and interest.

Paying with a credit card

If you’re in a pinch and need to pay your tax bill, one option is to use a credit card, assuming you have enough available credit on it to cover what you owe. It can be a quick fix to get your tax debt sorted and dodge those pesky penalties and interest charges for being late.

Approach this option with caution; credit card debt often has high interest rates, which can pile up quickly if you don’t pay off your balance in a timely manner. Plus, some credit card companies may charge extra fees for using your card to pay taxes.

So before you commit, take a good look at your finances and think about whether you can pay off that balance quickly. If you choose the credit card route, make it a priority to pay off the balance as soon as you can to avoid financial strain in the future.

Woman paying online with credit card.

What is the statute of limitations for tax debt

Usually, the IRS has about ten years from the date they assess your tax debt to collect payment. Theis assessment date is usually when you filed your tax return or the due date of the return, whichever is later. 

Once the statute of limitations expires, the IRS can’t legally chase you down for those unpaid taxes anymore–they’re considered “time-barred.” That said, there are still a few things to keep in mind. Some actions, such as filing for bankruptcy or entering into an installment agreement with the IRS, can hit the pause button on the statute of limitations period.

You should note that the ten-year statute of limitations applies only to the collection of taxes. The IRS generally has three years from the date your return was filed to assess additional taxes from an audit, unless there is a substantial omission of income or fraud, plus time for processing and additional time by agreement. 

It’s essential to understand your rights and responsibilities with tax debt. If you still have concerns about your situation, you should contact a tax professional who can help guide you on a plan.

How to avoid penalties in the future

To avoid penalties in the future, it’s crucial to plan ahead and stay proactive with your tax obligations. Familiarize yourself with tax dates and requirements to make sure you have ample time to file your tax return. 

Tools like this tax calculator can help you estimate your bill so you can start setting aside money for payments.

Try setting up a system to keep track of your income and expenses all year round. It’ll make tax time less stressful when you’ve got everything organized and ready to go. Plus, you’ll be less likely to make mistakes and can make sure you’re claiming all eligible deductions and credits you’re entitled to.

Don’t forget to regularly review your tax situation and adjust your withholding or estimated tax payments as needed to avoid underpayment penalties. If you think you’ll owe taxes, consider making quarterly estimated payments to spread out the financial burden and avoid a big bill at the end of the year.

Now that you know what happens if you fail to pay your annual taxes, don’t hesitate to seek guidance from a tax professional if you have questions or concerns about your tax situation. They can give you personalized advice and help you come up with a game plan to stay on top of things and steer clear of penalties. Taking a proactive approach to tax planning can make the whole filing process a breeze and save you from headaches down the road.

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