Here’s What Happens When You Owe Back Taxes and Don’t Pay

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Owe the IRS money from a previous tax year? Read on to see why you don’t want to blow off that debt. [[{“value”:”

Many people who file taxes every year end up getting a refund. But what if you landed in the opposite boat somewhat recently and owed the IRS money?

A situation like that can be stressful when you’re not expecting to have to write a check. And it can be even more stressful when you don’t have the money in a savings account to cover your IRS bill.

You may be inclined to ignore an old tax debt and hope the IRS will forget about it in time. But that’s highly unlikely to happen. And if you let an old tax bill go unaddressed, it could cost you in a very big way.

You might face expensive penalties

The IRS doesn’t take kindly to delays in getting paid. As such, when you owe money and don’t pay in time (which means you don’t pay by that year’s filing deadline, which is typically April 15), you incur interest and penalties on the sum you owe.

The penalty for failing to pay a tax bill is 0.5% of the unpaid total for each month or partial month your bill is delinquent. The penalty has the potential to total 25% of your unpaid taxes. If you owe money on an old tax return, you should know that the longer you let that debt linger, the more interest and penalties you might accrue.

The IRS could come after your paycheck

If you owe the IRS money and make no attempt to pay your tax debt at all, the agency has the right to garnish your wages. This doesn’t mean the IRS can take your entire paycheck and leave you with no money left over to buy food or pay rent. But the IRS can claim a portion of your wages in an attempt to get repaid. That could put you in a really tough financial spot.

Don’t ignore an old tax debt

If you owe the IRS money on an old return, ignoring the problem is possibly the worst thing you can do. Instead, reach out to get onto a payment plan.

The IRS commonly works with taxpayers to set up installment agreements where tax debts are paid off over time. Getting onto one of these agreements won’t necessarily exempt you from accruing interest and penalties on the sum you owe. But if you stick to the terms of your agreement, the IRS will not come after your wages to get repaid. At that point, you’ll be considered current.

It’s similar to making minimum payments on a credit card. Doing so won’t stop interest from accruing on your remaining balance. But your credit card issuer is not going to report you as delinquent on your debt if you make your monthly payments in a timely manner.

The IRS isn’t going to just let an unpaid tax debt go. In some cases, it is possible to reach a settlement with the IRS where some or all of an old tax debt is forgiven. But there are specific channels to go through, and the IRS will generally only forgive a tax debt if paying it constitutes an undue financial hardship or if the agency deems you incapable of paying that debt (such as if you’re disabled and can no longer work).

Otherwise, expect the IRS to try to get its money one way or another. And if you want to avoid a hassle, reach out to make arrangements to pay your overdue taxes rather than ignore the problem and hope it goes away.

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