What Happens When You Don’t Pay Your Tax Bill?

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The quick answer? Nothing good. 

Many people who file a tax return wind up seeing a refund hit their checking accounts after the fact. But what if you land in the opposite boat this year?

You might file your taxes only to realize that you underpaid the IRS in 2022 and now have a debt to pay off. But what if you don’t have that money just hanging around in your savings account?

Not paying a tax bill could have severe financial consequences. So if you’re looking at a tax bill you can’t pay, your best bet is to reach out to the IRS as soon as possible and try to work out an agreement.

You could accrue penalties and interest

The IRS doesn’t take kindly to being owed money. So if you’re unable to settle up your 2022 tax bill in full by April 18, this year’s tax-filing deadline, you should know that you’ll face interest and penalties on the sum you owe the IRS.

The penalty you’ll be looking at is 0.5% of your unpaid taxes for each month or partial month you’re late with that payment, up to a total of 25%. So as an example, if you owe $1,000 and are six months late in paying that bill, you’ll be penalized $30. You’ll also rack up interest on the sum you owe, which is separate from your penalty.

That said, the IRS is actually pretty understanding when it comes to filers not being able to cover their tax bills in full. For many people, owing money is something that comes out of the blue. So the IRS frequently works with filers to pay off their tax debts in installments over time. When you sign up for one of these arrangements, the penalty for being late with your payments is cut in half to 0.025% per month or partial month you’re late.

When you don’t pay at all

It’s common to land in a scenario where you can’t pay your entire tax bill in one fell swoop. But ignoring the problem could lead to a very unfavorable outcome.

If you don’t pay the IRS what you owe, and you don’t reach out to get on an installment plan, the IRS will contact you with reminders of the money you owe. If you ignore those notices, eventually, the IRS can begin to garnish your wages in order to get repaid. And that’s not something you want.

Now, rest assured that if you’re on an IRS-approved payment plan and are current with your payments under it, that won’t happen. The IRS also can’t garnish your wages right away — it will first send you several notices encouraging you to reach out and/or pay what you owe. But if you owe the agency money, don’t pay, and don’t communicate in any way, you might face wage garnishment eventually.

All told, the IRS isn’t necessarily as heartless as you might think. So if you can’t pay your tax bill, reach out and see what your options are. You may be surprised at how affordable it is to pay off your debt over time.

That said, the sooner you’re able to pay your tax bill, the less interest and penalties you’re apt to accrue. So while the IRS might give you plenty of time to pay that debt, it’s in your best financial interest to knock it out as quickly as possible.

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