IRS Penalties and Consequences for Not Paying or Underpaying Taxes (2024)

Federal income tax returns are due April 15th every year. If that date falls on a weekend or holiday, you have until the next business day. The IRS begins charging interest and penalties the first day you’re late. Here’s a look at the details as well as the IRS penalties and consequences for not paying or underpaying your taxes.

Filing Extensions and Partial Payments

You can request an extension to file, but this is not an extension to pay. If you need an extension to file your return, you must remit at least 90% of your tax liabilities, or you must pay the IRS 100% of what you paid the previous year by the original due date (110% if you earned 150k or more). You need to send the IRS any remaining taxes by the extended filing deadline, or you will incur the failure-to-pay penaltyalong with interest.

Note that if you don’t file a return, the IRS charges 5% of your balance per month as part of the failure-to-file penalty. That is ten times more than the failure-to-pay penalty. To avoid that, you should always file, even if you don’t have the money to pay what is due on the return. There can also be other consequences of unfiled and delinquent tax returns.

IRS Penalties for Failure to Pay or Underpay Taxes

If you don’t pay your taxes or if you pay less than you owe, the IRS assesses a penalty of 0.5% of the amount you owe per month. Thisfine is known as the failure to pay penalty. This penalty applies every month you are late, up to a maximum of 25% of your balance.

If the IRS issues an intent to levy notice and you don’t respond, the failure-to-pay penalty increases to 1%. The increase happens ten days after the IRS sends you the letter. However, if you set up a payment arrangement with the IRS, the penalty drops to 0.25%. That’s a 50% drop from theregular rate the IRS charges for back taxes.

On top of the failure-to-pay penalty, the IRS also assesses interest. The interest rate changes quarterly, and it is 3% plus the federal short-term rate. That makes the total interest rate on federal income tax around 4%, but it can be higher depending on the federal short-term rate for the quarter in question.

Further Consequences of Unpaid Taxes

Once the IRS realizes your taxes are late, the Automated Collection System (ACS) starts. The IRS will begin to send you CP notices. CP stands for “computer paragraph.” The IRS sends a variety of CP notices with different numbers on them. Usually, the first piece of mail shows how much you owe and demands payment. These warnings continue to come for two to six months, and each letter tends to get a bit more demanding and threatening. Eventually, if you do not address the situation, the following can occur:

Notice of Federal Tax Lien That Impacts Your Credit Negatively

If you don’t respond to the CP notices, the IRS may place a lien on your assets. A tax lien means the IRS is staking a claim to your assets. If you try to sell those assets, the IRS is entitled to the funds before you are. Moreover, a tax lien will damage your credit, making it more difficult for you to obtain loans, a mortgage, a job, and so forth.

Tax Levy

A tax levy is when the IRS actually seizes your assets. This only happens if you ignore all communication and refuse to make arrangements. Typically, the IRS will send you a final notice of intent to levy at least 30 days before they take action. The IRS may take any of the following steps, with some less likely than others.

Wage Garnishment:

Wage garnishment is often referred to as a wage levy. The IRS contacts your employer and demands a portion of your paycheck. The garnishment applies to every pay period until you pay in full or set up another agreement with the IRS. Your employer must comply with the IRS wage garnishment request.

Bank Levy:

With a bank levy, the IRS contacts your bank. Your bank immediately freezes your account so you cannot take any money out. If you don’t make arrangements, the bank sends the money to the IRS 21 days later. An IRS bank levy is not something to take lightly.

Asset Seizure:

The IRS can seize assets such as cars, homes, boats, and other assets. However, your primary residence is usually not seized as this requires the approval of a U.S. District Court judge.

Tax Refund Offset

The IRS can seize your IRS tax refund if you owe back taxes. The IRS may also be able to seize your state tax refund to cover your back taxes. If you only owe state taxes, the state may be able to seize your state tax refund as well as your IRS refund.

Criminal Prosecution:

If you fail to file a tax return year after year or you willfully refuse to pay taxes you owe, you could face criminal charges. Criminal prosecution is usually tied to tax evasion or fraud as the IRS prefers to work with non-compliant taxpayers. Since proof of intent to defraud is hard to prove, the IRS looks typically for patterns of abuse before referring any case for criminal investigation.

Passport Revocation or Suspension:

Under the IRS Section 7345, the IRS informs the State Department of delinquent taxpayers who owe more than $50,000 in Federal taxes including any interest and penalties. Consequently, if you owe more than $50,000, the State Department may not issue or renew your passport. As a result, this law will impact domestic travelersbecause the TSA, as of January 2018, will only accept state-issued identification cards or driver’s licenses from REAL ID-compliant states or states with an extension.

You can avoid most penalties and the other negative consequences for failing to pay your taxes by working with a tax professional or the IRS directly. If you’re unsure of the best way to handle your unpaid taxes, consult with a tax professional to find the best solution for your situation. You can request a free tax analysis or consultation to get your likely tax options. Start your search today and search a large network of tax professionals based upon their particular experience.