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What Happens When You Have Back Taxes?

businessman counting taxes As the saying goes, “Only two things are certain in life: death and taxes.” As a responsible member of society, you should always remember to pay your taxes on time. However, some extenuating circumstances may prevent you from doing so. When you fail to pay your taxes fully or even partially, you may incur back taxes – tax owed from the previous year – and those back taxes, in turn, accumulate penalties and interest, resulting in even bigger debt than you previously owed.

Unpaid back taxes can become a serious issue for a taxpayer. If you fail to pay taxes, you will get IRS notices. Ignore the notices, and you may have to deal with being put in the IRS Automated Collection System (ACS), which can issue federal tax liens and levy your bank account and wages. The IRS may also take your tax refunds while charging you interest. While taking the tax refunds may reduce your back taxes, the interest may make it grow if you continue to default on your payments. The current rate for IRS interest is 5% annually.

On top of this interest, the IRS also charges a 0.5% per month “failure to pay” penalty on your unpaid tax balance. This penalty may even double to 1% if the IRS has already sent you many notices to collect and you still haven’t paid them. However, this penalty does halve to 0.25% a month once you set up a payment agreement with the IRS. These penalties and interests increase the balance that you owe.

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woman having tax problems

Now, if you owe taxes, received the notices, and still aren’t able to pay, then the IRS can file a Notice of Federal Tax Lien. This federal tax lien is public information; it may alert creditors to your tax debt and impact your credit negatively. Fortunately, the IRS normally won’t file a tax lien if you owe less than $10,000.

The most serious consequence of not paying back taxes is having the IRS seize your money and assets. This is called a levy and it will disrupt your ability to pay your bills. Fortunately, you can negotiate your back taxes. They don’t have to lead to lost wages or assets. Contact a tax professional to help you if you ever accumulate back taxes.

  • Posted on March 25, 2019