What Will Happen If You Don't Pay Tax? [Ultimate Guide]

In the event that you don’t pay your tax there are a cascading series of events that can occur. We will go through the consequences of either not filing a tax return or failing to pay any tax that is owed by you. 

Let’s take a look at what will happen if you don’t pay tax. 

Also read: Are Home Improvements Tax Deductible?

Immediate Repercussions

Everyone who earns an income has to file a tax return regardless of whether they owe any tax. They could be owed a tax refund or may be liable for a tax they were unaware of. So by April 15th or tax day everyone earning an income should have filed their tax return. 

If you fail to file or pay your taxes in full by the deadline then the immediate consequence will be a charge of interest of 5-6% on what you owe. There is often a late payment penalty of 0.5% for every month you don’t pay with a 25% maximum penalty. 

These are known as failure to file penalties. 

Also read: Do You Have To Pay Back FAFSA?

Notices

If you still fail to pay your taxes after a month or two you will receive letters from the Inland Revenue Service telling you that a payment is due. These letters will gradually get more severe in tone if the tax liability is not paid. 

If you have requested a tax extension then you will have until October that year to file your return. However, you will still have to pay any taxes due by the deadline of April 15th or the next business day if that day falls on a weekend. 

The extension is purely for the filing of your tax return and does not apply to paying any tax liability due. 

Also read: What Is FUTA Tax - All You Need To Know

Penalties

The rate of interest on the tax you owe will continue to increase as long as it remains unpaid. In the second month of non-payment you can be charged 5% as well as a minimum penalty of $435or 100% of your tax liability. The lesser of the two amounts will be applied. 

These penalties of 5% of what you owe in tax will continue to be added to your debt every month. 

Also read: Payroll Tax Vs Income Tax - The Ultimate Guide

Tax Lien 

Between 2-6 months after the tax deadline has passed you may be subject to a tax lien. This is a legal claim against your property or any financial assets that you have or which are due to you. This is not a seizure of assets but instead is a claim against them. 

These types of penalties can happen days after your tax is due or can take several months. Although liens do not go on your credit report they are a matter of public record and may affect your credit worthiness in the future. 

Collection Calls

The Inland Revenue Service may send your account details to a private collection agency to try and recover the money owed. You will receive a letter from the IRS telling you that this has happened and giving you the collection agency’s contact details. 

For some accounts a revenue officer will be assigned to collect the tax owed, but this typically happens when the amount is quite large. More often than not it will be a collection agency that deals with your debt. 

IRS Levies

At some point if notices, liens and collection agencies have not recovered the tax owed the IRS can impose levies on your assets. This means that your property can be seized, and it can happen relatively quickly. 

The IRS can seize your home, car, bank accounts, 401k, Social Security payments and your paycheck. None of your property is shielded from being seized by the Inland Revenue Service unlike other creditors. 

Also read: How Much Is Social Security tax?

Passport Restrictions

If you owe tax money to the IRS the State Department can revoke your passport or reject an application for a new one. However, this is usually in extreme cases and the overdue tax liability has to be in excess of $54,000 including interest and penalties. 

It is also a last resort if all other efforts by the IRS have failed to get the tax paid by you. Being seriously delinquent with your payment means notices have been issued as well as any levies and your right to appeal has passed. 

While no-one will likely show up at your home to take your passport away the next time you hand it over you may not get it back. 

A Debt That Keeps Growing

If you fail to pay any tax liability that you owe the situation will not go away even if you could ignore it. The 5% penalty will continue to be applied to the balance every month or part month that it is owed for up to 5 months. 

By the second month you will also be hit with a penalty of $435 or 100% of the balance owed whichever is the lesser amount. The best advice if you haven’t filed or paid your taxes is to contact the IRS and discuss your situation. 

They may be able to arrange a payment plan for you. Don’t ignore the problem as there is no statute of limitations on late filings, so you should confront the issue rather than trying to avoid it. 

Damage To Your Credit Worthiness

Owing money to the IRS and having a tax lien against your property can have a serious detrimental effect on your future credit worthiness. 

Tax liens are a matter of public record, and although they don’t go on your credit report they can affect your ability to apply for credit in the future. 

As well as a lien from the federal government you may also be hit with a state or county lien. So even if you sell your house, the government will take what is owed to them from the proceeds. 

Final Thoughts

We hope that this guide to what will happen if you don’t pay tax has been helpful and given you the information you need for this situation. 

In the meantime, do try out our paystub creator today.