7 Consequences of Your Tax Debt

By John Boitnott,

Tax evasion is a major issue in the U.S. today. The Brookings Institute reports that one out of every six dollars owed to the IRS goes unpaid. [1] Other findings show the amount of unpaid taxes is equal to three-quarters of the entire annual federal budget deficit. Both business owners and individual taxpayers commit this crime. 

Are you willing to risk the repercussions of not reporting or paying the IRS each year? If so, click through this slideshow to see some of the consequences you could face...

IRS notices will start to arrive in your mailbox

The first consequence is an increase in communications that you will now receive from the IRS as the agency pushes for payment. 

The IRS notices will include notices of your tax debt balance, any penalties and fees that have been added, and information on enforcement of tax debt collection. These notices may seem annoying and you might be tempted to ignore them.

However, if you do, the other consequences in this slideshow will follow.

The IRS Automated Collection System (ACS) will be activated

When you don’t respond to the IRS notices, you will be added to the IRS Automated Collection System (ACS), which is the system that the IRS uses to collect back taxes. 

This system can issue liens as well as levy bank accounts and garnish wages as part of the consequences of your tax debt.

You will accrue interest on your tax amount due balance

The IRS will charge you interest on your tax bill. The current interest rate the IRS charges is five percent annually. This means your balance owed will keep growing with each month you choose not to make a payment to the IRS.

The IRS will charge you penalties

It’s not just the interest that will accelerate the size of your tax debt. Penalties are another consequence of your tax debt. The penalties are currently 0.5 percent per month on your unpaid tax balance. However, if you have ignored the IRS notices and have not made any arrangements to pay that tax bill, the penalties will increase to one percent per month. 

Once you establish a payment agreement and start making payments, the penalty rate will remain but be reduced to .25 percent per month.

The IRS can take any refunds you may get

If you end up getting a tax refund on a future tax filing but owe back taxes, then you may not receive that refund. The IRS can opt to keep that refund to offset your tax debt, even if you are already in an agreement to pay them. 

If the IRS does keep your tax refund, then it will apply that to what you owe, reducing your tax bill and interest accordingly.

The IRS will get its money somehow

The measures the IRS will enact include garnishing your wages, filing a federal tax lien, seizing money and assets, and sending your account to a debt collection agency. 

If you owe more than $10,000 but don’t pay, you may first get a Notice of Federal Tax Lien. This means that if you try and sell your property or borrow against it, the IRS will get its payment first before you get your proceeds. These liens are public information, which means anyone can see that you have this obligation. As a result, it could negatively impact access to future credit. Declaring bankruptcy won’t clear these liens or discharge the tax debt. 

Second, the IRS can assess levies by seizing assets. Typically, the IRS starts with seizing money but can move to other assets like property, vehicles, boats, etc. Common levies include wage levies, which is also known as wage garnishment. Here, it will take a portion of your wages to pay your tax bill until it’s settled.

The IRS can also conduct accounts receivable levies and bank levies. These levies can create problems for you in terms of paying your other bills or disrupting cash flow in your business.

Third, the IRS may go as far as to turn you over to a private debt collector to collect on your tax balance. This could lead to even more pressure and inconvenience as these debt collectors repeatedly call you and do anything they can to get you to pay. 

Finally, revenue officers may pay you an in-person visit. The IRS may send these employees when you owe a significant amount of back taxes, have many unfiled back tax returns, or owe for many tax years. These revenue officers have the power to file liens, issue levies, and start seizing assets.

You may lose passport privileges, prohibiting international travel

The last consequence of your tax debt is that it could stop you from traveling outside of the country. This is a relatively new consequence that the IRS has decided to enact. It primarily applies to those who owe more than $51,000 and have not responded to previous collection attempts or are not in a current payment agreement. 

In these circumstances, the State Department can restrict your passport or deny your application or renewal request.

Take Action

With so many consequences facing you and your tax debt, it is a smart decision to take action and deal with that obligation as soon as you can. The IRS offers numerous short-term and long-term payment plans that can help reduce penalties and interest. 

By contacting the IRS and entering a payment agreement, you can eliminate many of the aforementioned consequences of tax debt. As a result, you can reduce pressure and stress. Even making small payments can make a difference in how the IRS contacts and treats you. 

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Finance Magazine: 7 Consequences of Your Tax Debt
7 Consequences of Your Tax Debt
Avoiding your tax obligation only leads to bigger problems.
Finance Magazine
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