Failure to Pay Taxes – What Happens Next
By Justin Moyer, North Carolina Tax Attorney
Wrapping up another tax season has some taxpayers owing more than expected this year resulting in a failure to pay taxes. Those taxpayers may have filed their taxes by the May 17, 2021 deadline, but without the funds to pay all they owe, may finds themselves in a situation where they cannot pay. There is a difference between failure to file and failure to pay taxes. Both result in penalties and accruing interest.
Failure to File Taxes Penalty: The penalty is 5% of your unpaid taxes for each month your tax return is late. The penalty is capped at 25%.
Failure to Pay Taxes Penalty: If you file the return, but do not send in payment then you will be charged 0.5% of the total amount owed up to 25%. You will also owe interest on the unpaid amount with an interest rate set by the federal government.
That being said, even if you cannot pay the amount owed, be sure to file the tax return on time. Often the failure to file penalty can reach up to 10 times the failure to pay penalty. Also keep in mind that filing an extension only gives you additional time to prepare and file your return, it does not grant you additional time to pay what you owe. You will receive failure to pay penalties regardless of being granted an extension to file the return. You can pay 90% of the amount owed and not be charged the penalty.
If you cannot pay 90% of the amount owed, what other options are available?
- Pay using another type of credit. If you procure a personal loan or even use a credit card, you may find the interest rates are better than the penalties and interest accruing through the IRS.
- Negotiate with the IRS for a short-term extension of time to pay. You may also qualify for a first- time penalty abatement.
- Enter into an installment agreement with the IRS.
- Negotiate an offer-in-compromise.
Note that solutions 2, 3 and 4 fare better if you have a tax attorney involved to professionally handle all negotiations with the IRS, NCDOR or other tax authority. If you continually ignore your tax obligations, the IRS or other taxing authority may:
-File a federal tax lien to claim your property. These federal tax liens will last until satisfied or the statute of limitations on collections expires. A lien will attach to all of your assets such as property, securities and vehicles and future assets acquired during the duration of the lien. Check out our post on How to Avoid a Tax Lien.
-Seize your property (freeze bank accounts, garnish wages, levy on property, etc.) Read our post on Types of Tax Levies and How to Get Them Released.
-File criminal charges for tax evasion. If you hide a substantial amount of assets, attempt to defraud the government or show some other pattern of wrongdoing, the IRS may pursue criminal charges resulting in incarceration.
– Revoke your passport. Before contacting the State Department, the IRS will send Letter 6152, Notice of Intent to Request U.S. State Department to Revoke Passport, to the taxpayer. This gives the taxpayer 30 days to respond with an intent to resolve the tax debt in one of the following manners:
- Submit payment in full,
- Negotiate and adhere to an approved installment agreement,
- Negotiate and adhere to an accepted offer in compromise, or
- Request and receive approval of innocent spouse relief.
Read more in our blog post about Back Taxes Leading to Passport Revocation.
Seek an Experienced Tax Attorney’s Advice
Getting advice from an experienced tax controversy attorney is key to minimizing penalties from failure to pay taxes as well as finding the best solution to help you unburden yourself of tax debts. The tax attorneys at Murray Moyer, PLLC will be happy to discuss your situation and make sure you proceed on the best path forward. Contact us today for a consultation.