What Happens if You Don't Pay Your Taxes?

By Geoff Williams

TAX SEASON WILL BE HERE before you know it, and you may be wondering what could happen if you don't file your 2019 returns by the April 15, 2020 deadline. For many people, filing taxes is a straightforward process. Perhaps, you have tax withheld from your paycheck and you file your taxes on your own. Or maybe you enlist a tax preparer to do it for you. However, tax-filing can get more complicated if you have side gigs or you're self-employed.

Regardless of your financial situation, there are significant repercussions if you don't file or pay taxes. With that in mind, here's a primer on what happens if you don't file taxes – and expert-backed strategies to ensure you stay on track to dodge expensive penalties.

Here are likely outcomes if you don't pay your taxes:

  • You'll owe a debt that will keep growing.
  • Your credit worthiness may take a hit.
  • Your financial life may get uncomfortable.
  • You'll spend extra time and money cleaning up your mess.

You'll Owe a Debt That Will Keep Growing

If you've decided you aren't going to file this year because you're tired of doing it, you may want to rethink that plan. In that scenario, you would have interest – and penalties for not paying your taxes. Some of those penalties include a penalty for "failure to file," "failure to pay" and "failure to pay proper estimated tax."

However, how penalties are applied can get complicated. The IRS explains the penalties in detail on its website, IRS.gov. The penalty for the failure to file is a 5% charge of the unpaid tax required to be reported. The penalty will be charged each month or part of a month the return is late, up to five months.

But don't make a payment with, say, a check that you know won't clear. If it doesn't clear, you'll be saddled with a penalty of 2% of the payment if it's a check for $1,250 or more; if it's a check for less than $1,250, the penalty is the amount of the payment or $25, whichever is less.

Your Credit Worthiness May Take a Hit

If you compile enough unpaid back taxes (think: owing the IRS $10,000 or more), the federal government will put a lien on your property, most likely your house. You might also get hit with a state tax lien or one from your county. These are documents filed with the county government; if you sell your home, before you see any profits, the government will take what you owe first. Plus, you may also have trouble refinancing a home if you have a lien on it.

Your Financial Life May Get Uncomfortable

"To bury your head in the sand and not pay is not a good option at all," says Julie Reyes, chief financial officer at Reyes Financial Architecture, a retirement planning firm in San Diego. Eventually, she says, the government will contact you about your back taxes. If you refuse to work with them to pay back your taxes, she says, they may levy your bank accounts and garnish your wages.

"They also have the power to take away your passport and driver's license and make your life very uncomfortable. The government is relentless if you don't reach out to them, so do not think just because you haven't heard from them yet, they will forget. They will not," Reyes adds.

You'll Spend Extra Time and Money Cleaning Up Your Mess

At some point, you'll likely need to hire a tax professional to fix your tax situation. According to a 2017 survey by the National Society of Accountants, the average fee charged to prepare an itemized Form 1040 with Schedule A and a state tax return is $273, and the cost for a Form 1040 without itemized deductions and a state return is $176. That may not sound bad, but if you have several years of tax filings to catch up on, it adds up.

What if I Can't Pay My Taxes?

Even if you can't afford to pay your taxes, you should still file. You can hire a local tax preparer to put together your taxes, if you're overwhelmed by filing late. There are also a number of places that will help you do your taxes for free, though most organizations specialize in helping people who don't make a lot of money or are elderly. For instance, Volunteer Income Tax Assistance programs help people who make $55,000 or less, persons with disabilities and people who have limited-English-speaking skills.

Once you have filed, if you can't pay, the best option is to call the IRS and work something out, Reyes says. "They are typically very friendly and open to payment plans, but you must ensure you can stick to your payment plan and not fall behind, so make sure you set realistic expectations," Reyes explains.

In other words, don't agree to pay $400 a month in an installment plan if you can only afford $100. If your back taxes are taking a burden on your financial health, bankruptcy may be an option, but that can get tricky. For instance, taxes can't be eliminated from a bankruptcy until at least three years after they were due. You also can't have back taxes discharged until your filing is at least two years old. So if you have back taxes from 2016 that you haven't paid, and you haven't filed for yet, you would want to file them in 2019 – and then in 2021, you may be able to get them discharged in a bankruptcy.

You also might want to try an offer in compromise, says Brian Thompson, a certified public accountant and business attorney in Chicago. "An offer in compromise application is a request by the taxpayer to pay less than the full amount of taxes due," he says. "The taxpayer must submit a comprehensive financial statement in support of an offer in compromise request as evidence of the taxpayer's inability to pay all the taxes due."

Even so, you'll want to still try to pay the IRS as much as possible in the interim. "It often takes the IRS 12 months or more to rule on an offer in compromise request," Thompson says.