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What Are the Penalties for Not Paying Taxes?

Michael Atias
Director of Tax Services, Instructor

The US tax laws expect taxpayers to pay taxes on income earned from wages, capital gains, interest income, dividends, rental income and even on inheritances and lottery winnings.

However, there could be numerous reasons and circumstances where taxpayers fail to pay their taxes; such as financial constraints, health issues, divorce, fear to face the IRS, procrastination, or simply because they don’t want to pay taxes.

Whatever the reason may be, failing to file your taxes or pay your tax bill could have severe impacts on you. The price of ignoring the IRS and avoiding your tax issues is high. The IRS will seek you out and will not stop until you either fight back and defend your position or pay up. In the process, taxpayers may face penalties, interest and potentially even criminal charges if it can be established that the taxpayer knowingly evaded taxes.

Not paying your taxes results in steep penalties.

Let’s explore some of the penalties the IRS imposes:

Penalties for taxes that are past due

There are stiff penalties for not paying your taxes. Monthly late fees and interest charges are imposed and the longer your taxes go unpaid, the bigger the consequences. First, interest is compounded daily and accumulates on the owed amount (the interest rate is equal to the Federal short-term rate, plus 3%). Afterwards, late payment penalty is imposed at a rate of .05% of the owed amount and increases each month the taxes remain unpaid up to a maximum of 25%! The combined penalty for both filing and paying late is 5% of the tax owed and if your return is over 60 days late, the penalty may be up to 100% of the tax owed. However, if you can provide reasonable cause for not filing or paying on time, you may be able to avoid incurring the late filing/payment penalty.

Failure-to-File Penalty When Negligence or Fraud is Involved

Schedule a Free Tax ConsultationIf you didn’t file your tax return purposefully or you filed a false tax return, you committed tax fraud. The penalties for tax fraud can be significantly higher than for those whose tax mistake was unintentional. In these situations, the IRS triples the punishment. That makes the monthly penalty 15% and the maximum penalty 75% of the total tax debt. Moreover, taxpayers can face jail time. Taxpayers who believe that filing is voluntary and illustrate tax protester contentions may face a Frivolous Tax Return Penalty. The taxpayer faces a penalty of $5,000 ($10,000 if married filing jointly).

Inability to Pay Your Tax Debt

There are numerous reasons to file your tax return even if you cannot pay:

  • avoiding or minimizing the failure-to-file penalty
  • avoiding having a substitute return filed by the IRS
  • starting the statute of limitations (in most cases, three years) for a possible audit of your return.
  • starting the statute of limitations (ten years after assessment) for collection of the tax, interest, and penalties on your return. This means the IRS cannot collect the tax, interest or penalties after ten years from the date you file. However, if you don’t file, the ten-year expiration clock won’t start ticking.
  • starting the clock to make your taxes, interest and penalties from your tax return eligible to be dismissed in Chapter 7 Bankruptcy (two to four years after filing). Just like the statute of limitations expirations, your tax debt will be eligible for Bankruptcy sooner if you file immediately.

If the IRS finds that you owe them money, they will send you a bill called a Notice of Tax Due and Demand for Payment. This bill includes the taxes you owe, plus interest and penalties. Because interest and penalties continue to accrue, you are encouraged to pay your tax bill as soon as possible. The IRS accepts payment by credit card, electronic funds transfer, check, money order or cash.

What if You Can’t Pay Your Tax Bill?

Try to pay as much as you can to minimize your penalties and interest. Then, you should contact the IRS and explain your situation. Based on your circumstances the IRS may offer you one of the following options:

  1. Installment Agreement. Allowing you to make monthly payment over a period of 72 months. The amount still accrues interest charges.
  2. Temporary delay. The IRS may give you the option of temporarily delaying the collection of your bill if the IRS determines you cannot pay any of your tax debt. During this period, the IRS continues to review your ability to pay and the IRS may also file a Notice of Federal Tax Lien to protect the government’s interest in your assets.
  3. Offer in compromise. If you qualify for an Offer in Compromise, the IRS will settle your unpaid tax accounts for less than the full amount of the balance due. This applies to all taxes, interest and penalties.An Offer in Compromise is only considered after all other collection alternatives have been explored.

Taxpayers should strive to always file taxes on time to avoid penalties and interest regardless of their ability to afford the projected tax bill. Not paying your taxes will warrant stiff penalties and interest, resulting in an ongoing and very expensive relationship with the IRS.

For more information contact a tax professional.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.