Have you ever thought, “What would happen to me if I didn’t pay my taxes?”
I have, but it’s a fleeting, nonsensical thought because to willfully not pay taxes, or not file a return for that matter, is tantamount to crazy.
The IRS is one of the most powerful bureaucracies there is, with extremely broad powers and a lot of discretion about what to do when you don’t pay the piper.
So without further ado, here’s a quick list of what the IRS is likely to do, if you don’t pay up.
1. You’ll get a letter
If you don’t pay your taxes, you’ll get a letter from the IRS that explains to you that – for one reason or another – you owe the IRS money. (The title of the letter will most likely begin with CP and then a series of two or more numbers.)
For example, if you stated on your return that you paid a certain amount of estimated taxes, but that amount doesn’t match what you actually paid to the IRS that year, the IRS will send you a CP23 notice alerting you to this fact.
Another very common example of a letter you might receive from the IRS is the CP2000 notice, which explains to the taxpayer that the amount of income stated on the return doesn’t match what the IRS has on file.
If you receive one of these letters, take it seriously because they’re the initial and most innocuous tools the IRS uses in the face of unpaid taxes. It only gets harsher from here.
My recommendation is that you call a tax professional as soon as possible if you receive one of these letters. In the end, it will probably save you money and a lot of worry.
2. You’ll be charged interest/penalties
You’ve probably heard of interest and penalties, but few people actually know how this applies in the tax realm, so I’ll explain.
Interest on unpaid taxes begins to accrue on the day after the date the tax money is due, sometime in April. The exact interest rate you are charged fluctuates and equates to the federal short-term rate (which I won’t go into here) plus 3%, with interest compounded daily.
A tax penalty, which is a separate charge, is imposed because the IRS is under the assumption that there was a degree of civil wrongdoing, at least negligence, on the part of your not paying taxes.
There are two distinct types of penalties, the failure to pay and the failure to file.
The failure to pay penalty derives its name from the fact that the taxpayer has filed a return, but has not paid all the taxes that return indicates. This penalty is .5% per month for the duration of time that there’s an outstanding tax debt, up to 25% of the starting balance.
On the other side of the coin is the failure to file penalty. This penalty kicks in when you owe taxes but haven’t filed a return. It’s 5% of your unpaid tax liability per month, and like the failure to pay penalty, stops accruing when it hits a total of 25% of what you initially didn’t pay, after five months of non-filing.
3. You’ll have a lien/levy put on your property
The IRS can take your stuff. It employs two tactics to do this.
A tax lien is used by the IRS to secure payment and is imposed on all your assets. This lien may make it impossible to sell your property before you pay what you owe the IRS. Generally, the taxpayer is affected by an IRS lien in one or more of four ways.
- First, the lien will attach not only to property you currently own, but also property that you acquire in the future.
- Second, the IRS will notify the three credit bureaus of its lien against your property. You can imagine what this will do to your credit.
- Third, if you own a business, the lien attaches to all your business property. This includes amounts that you are owed for work completed, but have not received yet.
- Finally, you generally can’t default out of a tax lien. It will follow you into bankruptcy and beyond.
An IRS tax levy is a slightly different animal. It allows the IRS to physically take your property and money. For example, if the IRS levies your car, they take possession of it, and usually sell it. You’re probably aware of some high profile people that have had the IRS levy against their property, such as Willie Nelson and Nicholas Cage.
Before the IRS levies, it will have notified you; after which, you refused to pay; and the IRS reached out to you again with a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. You ignored this second letter, too, and then you finally got what was coming to you.
So, levies don’t spring up out of nowhere. You see them coming.
Take comfort in knowing that the IRS generally uses lien and levy methods when you make no attempt to play ball with them. Therefore, if this pertains to your immediate situation, understand that you should cooperate with the IRS.
4. You’ll be charged with a crime
I’ve saved the best for last, if you consider the best, the harshest.
Some of the horror stories about the IRS stem from its ability to bring criminal charges against those who have willfully refused to comply with tax obligations, including filing, collecting, and paying taxes.
You’ll notice that the word ‘willfully’ appears in that last sentence. This is because criminal law generally dictates that the perpetrator act intentionally, or with a guilty mind. Therefore, if you simply forgot to file your return one year, you probably won’t be prosecuted. However, if you didn’t file for a number of years, that would suggest that you more-than-likely knew you were skirting your responsibility.
Truth be told, even a taxpayer who doesn’t file returns for several years in a row is probably not going to be prosecuted, even though he or she has arguably committed a crime.
However, don’t push your luck. Always comply with all tax laws that pertain to you and your business. When your taxes become too complex to do by yourself, ask for professional help.
I invite you to read some examples of extreme tax law violations that lead to prosecution, conviction, and imprisonment of those indicted at this link: http://www.irs.gov/uac/Examples-of-General-Fraud-Investigations-Fiscal-Year-2013
As you can tell after reading only a couple of the examples given:
- The punishments for criminal tax violations can truly be severe.
- These are people who thought that the law would never catch up to them, which it inevitably did.
- Many of the criminals that are nabbed on tax laws aren’t just guilty of tax crimes. They’re also running Ponzi schemes, laundering money, lying, cheating, and stealing.
I know that you’re not a tax cheat, but beware of running afoul with the IRS. Do everything in your power to make sure your taxes are done right.
Contact Dino Tax Co
If you need help with your tax preparation, so you don’t get in trouble with the IRS, call Dino Tax Co. We’d be happy to keep you out of trouble. We’re a local Houston-area business and ready to help.