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The Top 10 Consequences of Tax Debt

6 min read

6 min read

Let’s face it. When you owe the IRS and can’t pay, it’s tempting to ignore the issue. Usually, this boils down to fear of the unknown.

If you contact the IRS, will it get you in even more trouble?

The reality is, you should only be afraid if you ignore the issue. If you ignore the tax bill you owe, the IRS can eventually force you to pay using several tools – like federal tax liens, levies, and wage garnishments. And that’s on top of penalties and interest that will pile up.

The good news: The IRS offers options when you can’t pay the taxes you owe – from simple extensions of time to monthly payment plans – and even programs for people in financial hardship situations.

But if you’re still weighing whether to get in touch with the IRS – here are the Top 10 consequences of ignoring your tax bill.

1. You’ll get IRS notices.

The IRS has to notify you of your tax bill and send certain notices before doing anything else, like collecting your balance with enforcement tools. In and of themselves, IRS letters and notices are a minor nuisance – but if you ignore them, they’ll lead to more significant actions.

2. The IRS will put you in automated collection.

The IRS Automated Collection System (ACS) is your likely next stop if you ignore the notice. ACS is the primary IRS function that collects back taxes. ACS can issue liens and levy bank accounts and wages. The notices you receive from ACS will start to explain more serious consequences if you don’t comply by the deadline.

3. The IRS can take your refund.

If you owe taxes to the IRS and end up with a tax refund due to you in a later year, the IRS will keep the refund. That’s true regardless of whether you’re in an agreement to pay. The good news is that your refund will reduce the tax bill you owe, also reducing your interest.

4. Interest will build up on your balance.

On top of your tax bill, the IRS is going to charge you interest. As the balance grows, so does the interest. The current rate is 5% annually.

5. The IRS will charge you penalties.

On top of interest, the IRS charges a failure to pay penalty on your unpaid tax balance (0.5% per month). But that penalty rate doubles to 1% per month if the IRS has sent you many notices to collect and you haven’t made arrangements to pay. There is a little good news, though. Once you set up a payment agreement with the IRS, the penalty rate drops to 0.25% per month.

6. The IRS could publicly file a federal tax lien.

If you owe taxes to the IRS and got a notice about the balance due, but you didn’t pay, the IRS can file a Notice of Federal Tax Lien. A federal tax lien alerts creditors about your tax debt, which basically protects the IRS’ interest in your assets, if you try to sell property or borrow against it.

Because federal tax liens are public information, many people don’t want the negative impact to their reputations. Also, a lien will negatively impact your access to credit.

Note: Declaring bankruptcy won’t get rid of your tax debt and associated liens.

Practically speaking, even though the IRS has the right to file a Notice of Federal Tax Lien on a smaller balance, the IRS normally won’t file one if you owe less than $10,000. And the IRS usually won’t file a lien if you enter into certain payment agreements.

7. The IRS can seize your money and assets.

You might have heard that the IRS can “seize your assets.” Essentially, that’s a levy (not to be confused with a lien). However, the IRS usually only seizes money. It’s a huge hassle for the IRS to seize houses, boats, etc., and then sell them. In fact, the IRS only seizes property a few hundred times a year.

The most common levies are:

  • Wage levies (also called wage garnishment) – The IRS takes some of your wages to pay your tax bill. If you get into a payment agreement with the IRS, the IRS will normally stop the levy.
  • Accounts receivable levies – The IRS takes the money you’ve earned as a small business or independent contractor. If you get into a payment agreement with the IRS, the IRS will stop the levy (although you might have to jump through some hoops to make sure your clients or customers stop sending money to the IRS).
  • Bank levies – The IRS takes money from your bank account. Again, if you get into a payment agreement with the IRS, the IRS will typically stop the levy.

For individuals, levies can create a huge hassle and disrupt your ability to pay your bills. For businesses, levies can be devastating. By disrupting cash flow, levies can make it impossible to pay your employees, purchase supplies and inventory, and run your business.

8. A revenue officer might show up.

Revenue officers are IRS employees who collect tax debt, usually when you owe large amounts of back taxes, owe for continuous years, and/or have unfiled back tax returns. You’ll want to comply with all your revenue officer’s requests by the deadline, because they have the authority and the duty to quickly enforce back tax issues by filing liens and issuing levies.

9. You may not be able to travel abroad.

Recently, the IRS added a new tax-collection tool to its list. If you owe more than $51,000 and the IRS has tried to collect from you before, but you’re not in a payment agreement or other arrangement with the IRS, the IRS can label you a “seriously delinquent” taxpayer. When that happens, the State Department can restrict your passport.
If you don’t have a passport, this restriction will prevent you from getting one. If you already have a passport, you won’t be able to renew it until you are removed from the “seriously delinquent” list.

10. The IRS could give your case to a debt-collection agency.

If after a few years the IRS has failed to collect your tax balance, the IRS can turn your account over to a private debt collector. Like you’d experience with most debt-collection agencies, if your case goes here, you’ll receive calls and inquiries from strangers. In short, not paying can lead to years of hassle.

Get some help from the experts

Learn what to do when you can’t pay your taxes – to avoid these 10 consequences. Or, your H&R Block tax professional can help you investigate which payment option or other alternative is best for you and request it from the IRS.

Learn more about H&R Block’s Tax Audit & Notice Services. Or make an appointment for a free consultation with a local tax professional by calling 855-536-6504 or finding a local tax pro.

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