What Happens if I Can't Pay My Income Taxes

If you do not pay your federal and/or state income taxes when due, interest and penalties will start to accrue on the outstanding amount they claim is owing.

If you cannot pay the income taxes owing, you should at least file an Application for Automatic Extension of Time to File Tax Returns by the due date. It is important to be aware that filing for an extension does not give the taxpayer an extension on the time to pay their taxes, only the time to file the return.

If a taxpayer files late, he or she will be subject to failure to file penalties. These fees accrue just like interest and other penalties. The charges accrue at the rate of 5% of the unpaid taxes for each month or part of a month that a tax return is late. The charges max out after five months, at which time, the failure to file penalty is 25% of the unpaid tax liability as determined by the government.

At a certain point, the government will send a letter to the taxpayer demanding payment. If the taxes are not paid, the IRS will file a Notice of Federal Tax Lien to alert the taxpayer and the taxpayer's creditors that the IRS has the right to seize his or her personal assets including bank accounts, securities, real estate, vehicles, and other assets. The lien secures the government's claim.

If the government initiates a levy, they can garnish the wages of the taxpayer, seize bank account deposits, sell their vehicles, and even sell their home. In some cases, they will pursue criminal charges for tax evasion.

Remember, the government does not need a court judgment in order to be able to seize a taxpayer's assets. Taxpayers do not receive the same constitutional rights as criminal defendants. There is no presumption that a taxpayer is innocent.

If you expect that it will take more than a few months to pay your taxes, penalties, and interest, you can apply for an Installment Agreement or possibly even an Offer in Compromise. Our firm can assist taxpayers with these alternatives.


Offer in Compromise

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