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Whether we like it or not, we are legally required to file our tax returns and pay what we owe. But what happens if you do not pay your taxes? From tax liens to seizure of assets, the implications of failing to pay your taxes can be severe and damaging. Therefore, if you are thinking about avoiding your tax liabilities, you may want to reconsider. Read on to learn about the potential consequences of failing to pay your taxes in the United States.

1. Penalties

Failing to pay your taxes on time or neglecting to file your tax returns by the deadline, including any extended deadline, will result in penalties enforced by the IRS. These penalties can accumulate quickly and cause significant financial damage. A few of the most common tax penalties include:

  • Failure to File Penalties: If you fail to file your tax return by the scheduled due date or any extended due date, you will be charged with a failure to file penalty. This is generally 5% of the unpaid tax for each month that your return is late.
  • Failure to Pay Penalties: Failure to pay penalties are imposed when you fail to pay your entire tax balance by the scheduled due date or any other extended due date. The penalty is 0.5% of the unpaid tax amount for each month. If you've established an installment agreement with the IRS, the penalty may be decreased to 0.25%.
  • Accuracy Related Penalties: If you have an error or discrepancy in your tax return that leads to an underpayment of tax, you may be charged with a penalty of 20% of the underpayment of tax occurring as a result of the error.

2. Interest

In addition to penalties, the IRS has the authority to charge interest on unpaid taxes. Interest begins occurring on the due date stated on the notice. The interest rate is equal to the federal short-term rate plus 3 percent, compounded daily. While the standard interest rate has ranged between 3% and 5% in the past several years, inflation has raised the rate to 7% in 2023. Therefore, as the interest rate is subject to change based on various economic factors, it's essential to remain informed by checking the IRS updates on their website.

At a first glance, interest rates may seem low. Nonetheless, these charges can accumulate rapidly over time, especially if you have amassed a substantial tax debt. It is highly advised to address your tax debt as soon as possible, before interest starts piling up.

3. Tax Liens

If your tax debt is substantial, generally over $10,000, there is a possibility of a tax lien being imposed on your property. A tax lien is a legal claim that the federal government can place on your property if you fail to pay your taxes. It grants the government the right to seize your property or assets to pay off your tax debt. Tax liens are usually placed on a debtor’s home.

Due to the fact that tax liens are public records, they can ultimately damage your credit score, affect your ability to receive loans and get certain jobs. Moreover, the lien must be satisfied before you are able to sell your property or refinance a mortgage. 

4. Wage Garnishment

The IRS has the authority to garnish your wages if you do not fulfill your tax responsibilities by the scheduled due date or extended due date. Simply put, wage garnishment allows the government to take a portion of your paycheck to satisfy the unpaid tax debt. The amount that the IRS can garnish from your wages is based on various factors, including the frequency of your paychecks and the amount of tax debt you owe. United States federal law as well as state regulations limit what the IRS is allowed to garnish. 

5. Seizure of Assets

The IRS can seize, or levy, your property to pay off your outstanding tax debt. This is considered one of the most extreme actions that the IRS can take against a debtor. According to this law, the IRS is authorized to take possession of your assets, which may include your bank account or valuable items like real estate and cars. This can result in severe financial harm, leaving you with restricted access to your funds and potentially causing you to lose your property. Before resorting to asset seizure, the IRS usually sends a Final Notice of Intent to Levy to provide you with an opportunity to resolve the tax debt. If you receive such a notice, it is critical to take immediate action and seek the help of a tax professional to deal with the issue.

6. Criminal Charges

In severe circumstances, the IRS may decide to press criminal charges against you for tax evasion, which means deliberately avoiding paying your tax obligation. This can happen if the IRS has reason to believe that you are engaging in tax fraud or evasion, and they decide to refer your case to the Criminal Investigation Division for further investigation.

Tax evasion is a serious crime with a penalty of up to five years in jail. The exact length of the prison sentence depends on the severity of the offense. Although the IRS rarely sends debtors to jail, it's crucial to remember that it is within their power to do so, and it remains a potential consequence.

Seeking Legal Support

Neglecting to pay your taxes can lead to a variety of harmful consequences. However, if you are having trouble fulfilling your tax obligations, it is essential to remember that there are resources available to help. If you are looking for personalized assistance with your tax debt, reach out to one of our exceptional tax lawyers today. We are happy to provide assistance and guidance in handling this overwhelming situation.

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