What Happens if You Can’t Pay Taxes?

For every year of your employed adult life, you will be expected to file your taxes and pay them by a strict deadline. But, of course, life isn’t always perfect, and you may sometimes struggle to pay taxes on time.

Tax evasion – the act of intentionally avoiding the payment of tax – is a serious crime. Non-payment of taxes, especially on a repeated basis, can have severe consequences, including seizure of assets or jail time.

Fortunately, though, there is still hope for those of us who do intend to pay taxes but just can’t afford to do so at the moment.

Many Americans life yourself have appealed to the IRS for help during times of struggle. And, like a responsible governing body, the IRS has delivered.

In this article, we will go over the different penalties one can incur by avoiding tax payments and alternate pathways and tax support schemes for those of us who need some help with paying our taxes on time.

What Happens if You Don’t Pay Taxes?

If you’ve found yourself in a tight spot that’s left you without enough funds to pay your taxes, don’t worry. The IRS understands your troubles and is willing to offer you a range of alternate payment plans that would better suit your current condition.

Of course, every individual’s circumstances are unique, which is why there’s no one-size-fits-all penalty for tax non-payment. Depending on your circumstances and how you’ve chosen to handle the situation, you could experience any one of the following penalties following tax non-payment.

Note: Keep in mind that tax non-payment is not the same as failing to file your taxes.

Failure-To-File

Not filing your taxes by the deadline will earn you a “failure-to-file” penalty. This means that the IRS will expect you to pay an additional fee of 5% of your unpaid taxes per month delayed. So, for example, if you file for taxes 2 months after the deadline, you will incur an additional penalty fee of 10% of your total tax amount. This system will continue for up to 5 months until you reach a 25% penalty, after which the consequences will become direr…but more on that later.

Note: Failing to file within 60 days after the due date will obligate you to pay a legal minimum of either $135 or your complete tax amount, depending on which one costs less.

Failure-To-Pay

In the case that you have filed your tax documents but haven’t’ paid up by the due date, you will be subjected to a “failure-to-pay” penalty. The non-payment penalty is far lower than the penalty for not filing your papers on time. This is because most individuals who fail to pay but still made an effort to file are simply struggling to make ends meet and don’t have enough money on them to pay tax.

On the other hand, those who actively avoid filing their tax reports for months on end are hinting at a desire to evade their tax duties, which is a crime. Therefore, the penalty for non-filing is higher than that of non-payment.

The failure-to-pay penalty will get you a penalty charge of 0.5% (per month) of your total unpaid tax amount for all the months that you fail to pay. Similar to the rulings of the failure-to-file penalty, the maximum tolerance is 25%, after which you can be subjected to more severe forms of punishment.

Note: Your unpaid taxes are subject to interest payments. This amounts to the federal short-term interest rate with an additional penalty of 3%.

Additional Penalties

In case you fail to file or pay taxes in time, the IRS may file a property claim and eventually seize your property and additional assets. They may even seize your passport and bar you from traveling or file a legal suit against you for tax evasion. You could even face up to 5 years in jail time. Or, in the case that the IRS owes you a tax refund, but you have not filed for it, your refund will be canceled.

Interestingly, many people do not actually owe the IRS anything but instead can claim their tax refunds (tax returns). For example, those of us who are registered taxpayers may gain tax credits that can help us qualify for a tax refund. A child tax credit is an excellent example of this.

Failing to file for taxes, regardless of your intention to pay or not, can result in you losing the opportunity to claim this refund, as stated previously. The IRS annually reports roughly $1 billion in unclaimed tax returns – so be sure to file because some of that money might just end up being yours!

However, if you’re certain that you don’t qualify for tax refunds, but are in a sticky financial situation and can’t afford to pay your taxes by the deadline, don’t worry. The next section will introduce you to ways through which you can tackle this problem.

What to Do When You Can’t Afford to Pay Taxes?

As promised, below is a detailed list explaining what to do when you’re struggling to pay your taxes:

Sign Up for the IRS’ Short-Term Payment Plan

First, go over your digits. Then, if you feel like the numbers are adding up and you’ll be able to pay your pending taxes within 4-6 months, sign up for the IRS’ official Short-Term Payment Plan.

This plan will grant you an extra 120-180 days to pay up. Signing up is 100% free; the only condition is that your taxes should amount to no more than $100,000.

Remember, though, late payment (even with this plan) will subject you to add interest and penalty payments until your taxes are fully paid. However, signing up for this plan will let the IRS know that you’re not trying to escape your taxes, and you won’t be charged for tax evasion.

Register with the IRS for a Long-Term Payment Plan

The IRS offers two types of long-term payment schemes:

• Automatic Monthly Withdrawals, in which you will be liable to pay through Direct Debit (Direct Debit Installment Agreement, or DDIA), implying that automatic payments will be made from your checking account. This setup is mandatory for those who have a balance amounting to above $25,000. The setup fee for this scheme is $31, but low-income individuals can apply for a waiver.
• Non-Direct Debit Monthly Payments, in which you will pay the IRS through Direct Pay or through other banking means including check, pay order, or a debit/credit card. These payments will not be automated by the IRS or your checking or savings account. You will most likely have to manually make them yourself. The setup fee for this scheme is $149 (online) but can be reduced (not waived) for low-income individuals. Applying by phone, mail, or in-person costs $225.

Note: In both cases, you will be expected to make interest and penalty payments until your tax amount is fully repaid. To learn more, visit the IRS’ official website on tax payment extensions. Also, paying by debit card may incur additional charges ranging between $2 and $4. Paying through credit card costs an extra 2% of the overall payment roughly.

Apply for a Partial Payment Installment Agreement

This is a special type of long-term payment plan or Installment Agreement (IA) for individuals who can’t afford the minimum monthly payment decided by the IRS. However, you’ll need to file plenty of paperwork for this, but an additional perk is that the IRS will be obligated to forfeit any tax amount that isn’t paid by the extended deadline.

Not everyone can qualify for this payment plan, so be sure to look into the tax accounting details before you apply!

Apply for an Offer in Compromise

This is a special tax repayment scheme where you work with the IRS to reduce the amount of tax owed. This option is even trickier to qualify for than the Partial Payment Installment Agreement, and you may need to venture forward with a professional CPA (certified public accountant)’s help.

Borrow From Friends and Family

Of course, if you’re not keen on paying extra penalties and interest on your taxes, you can consider reaching out to family or friends for financial assistance. Of course, doing so isn’t always easy and, if it seems impossible or tricky, feel free to contact the IRS instead.

Conclusion

Paying your taxes on time isn’t always a smooth-flowing process, and we’re all bound to encounter some bumps along the road at least once during our lives. So, if you’re struggling to pay your taxes, take a deep breath and go over this article once more to gain a better perspective into your payment plan options.

As for extreme penalties like seizure of assets, paycheck deduction penalties, or jail time, the IRS tries its best to avoid these. So, as long as you sign up for a payment plan in time and file for your taxes by the deadline, you need not worry about such extreme retributions.

References:

https://www.policygenius.com/taxes/what-happens-if-you-dont-file-taxes/

https://www.irs.gov/newsroom/what-if-i-cant-pay-my-taxes

https://www.investopedia.com/financial-edge/0312/what-happens-when-you-cant-pay-your-taxes.aspx

https://www.cnbc.com/2018/04/13/heres-what-happens-if-you-dont-pay-your-taxes.html

https://taxcure.com/tax-problems/unpaid-taxes/cannot-pay

https://www.nerdwallet.com/article/taxes/how-to-set-up-irs-payment-plan

Final Thoughts

If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.

If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate. If you are interested, please feel free to email us at proposals@hallacctco.com and we will get you a free quote!

FUTURE IMPORTANT DEADLINES

4/18/22
Deadline to file individual tax returns for 2021
First-quarter estimated tax payments due for 2022
Deadline to contribute to HSA for 2021
Deadline to contribute to IRA for 2021