Tax debt can become a heavy financial burden when ignored or missed unintentionally. You may fail to pay taxes due to several reasons, such as being unaware of your tax liability, financial hardships, or under-withholding. Regardless of the reasons, it’s important to be aware of the consequences. 

What Is Tax Debt?

Tax debt occurs when you fail to pay the taxes you owe by the filing deadline, which is usually on April 15. If you have a job, your employers will automatically withhold your taxes, and if they’re calculated correctly, this won’t usually be a problem.  

However, if you’re self-employed, you’ll need to file taxes and pay what you owe before the tax filing deadline. If you don’t pay it in full before the deadline, you’ll owe tax debt to the Internal Revenue Service (IRS). 

In 2022, Americans owed more than $120 billion in taxes, interest and penalties. Not paying your taxes can have serious consequences, which we’ve listed below. 

Common Causes of Tax Debt

There are many reasons people fall behind on their taxes. However, neglecting your debt can have a high price. Here are some common reasons why you may have IRS debt. 

Failing to File Tax Returns

This is one of the most common mistakes you can make as a tax filer. If you live in the U.S. and earn over $13,850 in a year as a single individual under the age of 65, you must file your federal tax return.  

If you don’t file your taxes, you may not know if you owe taxes or how much. This can lead to tax debt. 

Under-Withholding of Taxes

Employers withhold taxes by law. However, the amount that is withheld may not be enough to cover what you owe. Under-withholding of taxes can be because you may have claimed a lot of exemptions on your W-4. 

If enough taxes aren’t withheld from your paycheck, you’ll owe to the IRS when you file a tax return. If your employer has withheld too much, you’ll get the money back through a tax refund.   

Not Paying Estimated Taxes

If you’re self-employed, you’re responsible for paying your own taxes quarterly. If you don’t pay estimated taxes throughout the year, you may have a large tax liability at the end of the financial year. It’s best to work with a tax professional to ensure you’re filing your taxes correctly as a business owner.  

Other Reasons

There may be other reasons why you may fail to pay taxes, such as a medical emergency that prevents you from filing your tax returns and paying taxes on time. Some taxpayers, especially when they’re filing taxes on their own, may make mistakes or claim deductions or exemptions they’re not qualified for.

8 Consequences of Tax Debt

While it’s not uncommon to forget to pay the taxes you owe before the tax deadline, ignoring the issue can have serious consequences. The IRS offers a number of options, such as payment plans and extensions, to make it easier to pay. 

Here are eight consequences of ignoring your tax debt.

1. IRS Notices

The IRS will send you notices to inform you about your tax bill or before they take any collection action. While these notices and letters can be stressful, ignoring them can lead to more serious IRS collection actions.

2. Automated Collection 

If you ignore the notice that the IRS sends you, you’ll likely be placed in automated collection for collecting back taxes. IRS’s Automated Collection System can issue wage garnishments and liens, and you’ll receive notices explaining these consequences if you don’t pay by the deadline. 

3. Withholding Tax Refund

If you owe tax debt from a previous year and are due to receive a refund in a later year, you can expect the IRS to withhold it. The refund amount will be applied to your tax bill. 

4. Interest Charges

The IRS will start charging interest on the amount you owe. Interest starts accruing from the date of the filing deadline. Your tax debt increases as interest charges are added to it.

5. Penalties 

The IRS also charges a failure-to-pay penalty for any unpaid taxes, which is 0.5% for each month you fail to pay taxes, up to 25% of the unpaid amount.   

6. Liens 

The IRS can also file a federal tax lien to protect their interest if you try to borrow against or sell your property. A lien on a house can impact your ability to sell your property and access credit because it is public information. 

7. Seizure of Assets

The IRS can seize your money and assets if you fail to pay your tax debt. Some common types of levies are wage garnishment, bank levies, and accounts receivable levies. 

Levies can make it difficult for you to pay your bills since wages are garnished. For businesses, levies can disrupt cash flow, and make it difficult to purchase inventory and pay employees.

8. Restriction of Passport

If you’re seriously delinquent and haven’t agreed to any payment options, the IRS can restrict your passport. This means you won’t be able to renew your passport unless you repay your tax debt. If you don’t have a passport, you won’t be able to apply for one. 

Get Help For Tax Debt Today

Owing tax debt to the IRS can be stressful, but you’re not alone. The best course of action is to explore your tax debt relief options.

You can set up an installment agreement or negotiate a tax settlement with the IRS. We recommend taking action as soon as possible. Ignoring your tax payments can result in wage garnishment, levies, penalties, and interest.