Taxpayer’s Guide to Unpaid IRS and State Taxes

If you don’t pay your taxes, the IRS or your state revenue agency will add interest and penalties to your balance. Even worse, the agency can come after you to collect unpaid taxes using wage garnishments, bank account seizures, or property levies.

The good news is that there are options — although the IRS has significant power to collect unpaid taxes, the agency is also willing to work with people who can’t afford to pay in full. Wondering what happens if you don’t pay? Curious about your options? This guide explains what to expect and has links to resources with more information.

Ready to get help now, then reach out to us today. At Seattle Legal Services, PLLC, we are committed to giving all of our clients the personalized help and guidance they need to deal with their unpaid taxes. Sadly, the tax debt resolution industry is full of big companies that mislead clients by making promises they can’t keep. At our firm, we never make promises we can’t keep. Instead, we work closely with our clients to ensure that we direct them toward the best IRS relief programs for their unique needs.

Being in tax debt can be extremely stressful, but it’s a lot easier when you have a skilled local professional in your corner. To get help now, contact us for a free consultation.

Reasons for Unpaid Taxes

People get behind on their taxes for all kinds of different reasons. Their employers may not have withheld enough tax from their paychecks or stock compensation, such as restricted stock units. They may have worked as freelancers and been unaware of how 1099 income generally leads to a tax bill. Or they may have run a business and simply forgot to budget for taxes. They could have won money gambling, but failed to set aside money for taxes. In other cases, they may have faced medical or family emergencies that got them behind on their taxes and other financial issues.

While the exact reasons for getting behind vary, here are the main reasons that people have unpaid taxes:

● The taxpayer filed a tax return with a balance owed, and they didn’t pay the bill.

● The IRS adjusted their return which lead to a tax liability, which the taxpayer didn’t pay.

● The IRS audited their return, and the audit determination lead to a tax liability.

If you file a tax return, the taxes are due on the return’s due date. Even if you request an extension, the taxes are still due on the original due date. With IRS adjustments and audit determinations, the agency generally notifies you about proposed changes and gives you a chance to dispute. If you don’t respond, the IRS formally assesses the taxes and generally sets a due date 21 days after assessment.

What If I Don’t Pay My Taxes? Consequences of Unpaid Taxes

If you ignore your tax bill, interest and penalties will accrue on your account, and the IRS can try to forcibly collect the bill by garnishing your wages, taking the money in your bank account, or seizing and auctioning off your assets. The IRS might also restrict or revoke your passport. Generally, the more you owe, the worse the situation will be, but the IRS has the right to go after even the smallest tax debt. Here are more details about the consequences.

Failure-to-Pay Penalty

The IRS assesses a late payment penalty the very first day that you are late. This penalty is 0.5% of your unpaid taxes. It applies monthly, and it can get up to 25% of your balance.

If you don’t pay within 10 days of receiving a final notice of intent to levy your assets, this penalty jumps to 1% per month. Unfortunately, even if you set up a payment plan, the IRS will still add this monthly penalty to your account, but it drops to .25% while the payment plan is active.

Note that the penalty for not paying taxes is significantly lower than the penalty for not filing taxes. Whenever possible, you should always file your tax return, even if you can’t afford to pay.

Interest on Taxes Owed

The IRS also assesses interest on unpaid taxes. The agency adjusts the rate quarterly, based on the short-term rate plus three points. As of the third quarter of 2023, the interest rate on unpaid taxes is 7% per year, compounded daily. The IRS adds this interest if you don’t pay your taxes, but on the flip side, if you overpay and the IRS issues you a refund, the agency will also add interest to your payment.

Corporations, however, have higher rates for underpayments and lower rates for overpayments. When a large corporation owes taxes, the IRS assesses interest at 9%, but if the IRS receives an overpayment from a corporation, it only pays out 6% in interest. That drops to 4.5% for corporate over-payments that exceed $10,000. Note these rates are current as of Q3 2023, and they are subject to change based on fluctuations in the prime rate.

IRS Collection Notices

The IRS sends a variety of notices to people who have unpaid taxes. Often people don’t receive notices for years, but then, they see a flurry of activity all at once. The IRS’s initial notices demand payment and explain the interest/penalties on your account, but eventually, the notices get more severe.

Once you receive the first notice, you will typically continue to receive letters every six to eight weeks. The final demand and intent to levy is, perhaps, the most serious notice because the IRS can take your assets 30 days after issuing this letter. The IRS may also attempt to contact you using their automated collection system.

IRS Tax Liens

A tax lien is the IRS’s legal claim to your assets. If you sell your assets while a tax lien is in place, the IRS will have the rights to the proceeds. The IRS has the right to issue tax liens for any level of unpaid taxes, but generally, the agency only files liens against people who owe at least $10,000. If you owe $20,000 or more, the consequences can be even more severe.

Wage Garnishments

With a wage garnishment, the IRS contacts your employer and has them deduct payments for your tax debt from your paycheck. This can be incredibly embarrassing and professionally damaging. But even worse, it’s expensive — the IRS only has to leave you with a very, very small amount of money if it garnishes your wages.

Bank Levies

A bank levy is when the IRS seizes the funds in your bank account. The agency can seize everything in your account up to the amount of your tax debt plus interest, fees, and penalties. Once the bank receives the levy notice, it will freeze the funds in your account for 21 days. It doesn’t matter if you have outstanding payments — all of the funds up to the amount of the debt will be frozen. If you don’t resolve the situation in 21 days, your bank will send the funds to the IRS.

Property Levies

A tax levy is when the IRS seizes your real property or other assets. Once a lien is in place, the IRS has laid the legal groundwork to move forward with property seizures, and in some cases, the agency can even seize your home. In the event of a seizure, the IRS will add the collection costs to your bill.

Passport Revocation

If you have seriously delinquent tax debt, the IRS can certify your debt to the state department. Then, the state department will revoke, reject, or refuse to renew your passport. If you’re out of the country, you will be allowed back in, but after that, you won’t be able to use your passport. As of 2023, seriously delinquent tax debt is $59,000 or more — this number adjusts annually with inflation.

What If I Can’t Pay My Taxes in Full? IRS Relief Options

The IRS has a lot of power, and many people are afraid of this agency. However, if you have the right knowledge, there’s no reason to be afraid. The IRS offers many different programs to help people who can’t afford to pay their taxes. Here are the main options.

Penalty Abatement

As explained above, penalties can significantly increase your balance due, but the IRS will waive (abate) penalties in a few different situations. Namely, you can get penalties waived if this is your first time paying late. As long as you haven’t been late during the last three years, you should qualify. You may also be able to get penalties removed if you paid late due to a death, a natural disaster, or another very serious issue — this is called abatement for reasonable cause.

If you’re dealing with unpaid tax discovered during an audit, you may have incurred accuracy-related penalties or fraud penalties. These penalties are 20% and 75% of the unpaid tax, respectively, and getting them removed requires strong negotiation skills and extensive knowledge of the tax code. For best results, you should work with a professional.

Short-Term Extension

If you need extra time to pay, the IRS will give you 180 days. You can request the extension on the IRS’s website, but generally, even if you don’t put in a request, the IRS won’t enforce collections during this time. Interest and penalties will accrue on your account, but as long as you pay the full balance within 180 days, you don’t have to worry about any additional collection actions.

Installment Agreements

A monthly payment plan is one of the most common resolution options for unpaid taxes. The IRS generally accepts payment plan requests as long as you owe less than $50,000 and can pay off the bill within six years. If you owe more or need longer, the IRS will probably require you to submit detailed financial information with your application.

Although it’s relatively easy to get a payment plan, they have unfortunately high default rates. To avoid default, consider working with a tax attorney who can help you determine if this is truly the best option for your situation and budget.

Offer in Compromise

If you can’t afford to make monthly payments or pay in full, the IRS may let you settle for less than you owe. With an offer in compromise, you make a lump sum payment or monthly payments over two years. Then, the IRS forgives the rest of the debt.

This can be a very attractive arrangement for people who qualify. However, the big tax relief firms abuse the potential of this program. To draw in clients, they often tell people they can qualify for an offer whether they can or not.

When reaching out to different tax pros, be very leary of anyone who promises that you can get an offer in compromise without collecting detailed information about your financial information first. The IRS is the only entity that can approve or deny your application, but an experienced tax attorney can let you know if it’s a possibility for your situation (once they learn more about your finances).

Currently Not Collectible

Uncollectible or CNC status is for people who don’t have disposable income or equity in their assets. You reach out to the IRS to explain that you can’t afford to pay, and then, the agency marks your account as currently not collectible. If your finances improve, you may have to pay in the future, but if you can’t afford to pay through the collection statute expiration date, the tax debt will expire and the IRS will no longer be able to collect on it.

Innocent Spouse Relief

Were your unpaid taxes due to your spouse? Did your spouse incur a tax liability without your knowledge? Then, you may be able to qualify for innocent spouse relief. This program is only available to taxpayers who filed jointly and meet very specific criteria, but if you qualify, it can absolve you of taxes due to your spouse, ex-spouse, or late spouse’s actions.

Bankruptcy

You should usually only consider bankruptcy if you have other consumer debts, such as medical bills or credit cards that you can’t afford to pay. Only some taxes can be discharged in bankruptcy, but when you file, the courts will issue a temporary stay that prevents the IRS from pursuing collection actions against you.

FAQs About Unpaid Taxes

There are a lot of different consequences of not paying your taxes, but there are also a lot of resolution options. The IRS tax code is nearly 7,000 pages long, and it’s understandable to have a lot of questions. Here are answers to some frequently asked questions about unpaid taxes.