Doing income taxes can be a trying time for many taxpayers. There are numerous forms to fill out, cumbersome calculations to perform, not to mention, the rules change every year. When you finally finish, you might end up owing a lot of taxes to the government. The IRS isn’t know for being forgiving, but that doesn’t stop people from wondering, what happens if I don’t pay my taxes?
Failure to File Taxes
First, it is important to distinguish between not filing your income taxes, failure to file, from not paying your income taxes. There are significant additional penalties for not filing your income taxes on time. If you can pay your taxes, but can’t get them done on time, then consider filing a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax. Filing this form grants taxpayers an automatic extension of time to file. This form must be filed by the April 15th filing deadline just like a regular tax return would be. Once filed, the new deadline for filing your taxes moves to the beginning of October.
Beware, even if you file for an extension, you do NOT get any additional time to pay your income taxes. Just because you haven’t submitted the forms doesn’t mean the taxes aren’t due. You have to estimate how much you will owe and send the IRS a check. Keep in mind that penalties and interest for not paying your taxes are percentage based, so even if you are off in your estimate, submitting a payment will lower any potential charges. If you are expecting a refund, there is no need to send any additional payment with your extension request.
Failure to Pay Taxes
One of the first questions asked is often, “Can the IRS send me to jail if I don’t pay my taxes?”
Technically, the IRS cannot send you to jail. However, a judge can order you to serve jail time for failure to pay income taxes. However, this is not a common occurrence. The IRS actually has many other remedies at its disposal that it uses instead. After all, sending someone to jail doesn’t bring any money in to the government.
If you don’t pay your taxes on time, the IRS will begin charging you penalties and interest. The interest rat the IRS charges is set on a quarterly basis and is equal to the federal short-term rate plus 3 percent. In addition, there is a late payment fee of 1/2 of one percent of the amount owed for each month that it is owed, up to a maximum 25 percent penalty.
If you do not pay, the IRS will eventually begin what are called enforcement actions. There are a wide range of possible actions. The most common are an IRS levy and garnishments. With a levy, the IRS takes money or property that you own in order to settle your tax debt. A garnishment occurs when the IRS intercepts payments (typically a paycheck) before they are made to you.
The most common IRS levy is made against any tax refunds you might have. It goes without saying that the IRS will take any tax refund you are due in future years to pay off any unpaid prior year taxes. In addition, the IRS will also intercept any state income tax refund you might be due. A notice of levy will be sent to the taxpayer before each event.
Stopping IRS Levy or Garnishment
It is surprisingly simple to stop IRS enforcement actions such as a levy or garnishment. The IRS offers most taxpayers, who are delinquent for a single tax period, the ability to enter into a payment plan with the IRS. Although not required, the IRS typically stops all enforcement actions once a payment plan has been filed.
You can request a payment plan online and be informed immediately if your plan has been accepted. The monthly payment requirements can be relatively low. A $100 per month payment may be accepted for tax due amounts over $5,000 or more.
Although the interest charged for paying late does not stop, the penalty is reduced from one-half of one percent to one-quarter of one percent. Still, it is in your best financial interest to pay down your balance as quickly as possible to lower these fees. However, keep in mind that additional payments DO NOT pre-pay your installment agreement. That means if you agree to pay $100 a month and then you send in an extra $500, you still have to make next month’s $100 payment. You do not get credit for five months worth of payments.
There is a fee to setup a payment agreement and the consequences for failing to follow through on such an agreement can get nasty quickly since you have now not only failed to pay your taxes, but failed to honor your installment agreement as well.
Use the online installment agreement tool and choose the lowest amount possible, even if you can pay more. You can always send in extra money if you have it, but you won’t be stuck with a too high payment later if something goes wrong.