What Happens if You Don’t Pay Your Taxes on Time?

What Happens if You Don't Pay Your Taxes on Time?

When you don't file or pay your taxes by the due date, you may be charged late-filing and late-payment penalties plus interest. Penalties recur every month (or part of a month) you're late and interest accrues daily. Late filing and late payments are actually two different problems. Here's how each one works.

Filing Late

The tax deadline has come and gone, and you haven't filed your taxes. You didn't complete a tax return. You didn't e-file or mail in your 1040. You didn't calculate or pay your tax bill.

According to the IRS, when you fail to file, you'll pay 5% of the total taxes you owe as a penalty every month your tax return is late. The late-filing penalty maxes out at 25% of your total taxes owed. For the 2023 tax year, a minimum penalty of $450 applies after 60 days. Additionally, the IRS charges interest on the amount you owe, accrued daily. The interest rate the IRS charges for late payments adjusts quarterly. As of this writing, the annual interest rate is 8%.

You can apply for an extension using Form 4868 if you think you won't be able to complete your tax return by the April filing deadline. The IRS automatically extends your filing deadline to mid-October, though you still have to pay your tax bill by the original filing deadline. Typically, you'll estimate and pay your tax bill when you file an extension and receive a refund or pay additional tax when you submit your return.

Paying Late

Here's a different scenario: You've completed your tax return and filed (or are ready to file), but you don't have the money to pay your taxes. In this case, you may be able to avoid late-filing penalties, but you'll need to find a way to pay your bill to avoid late-payment penalties and interest.

The penalty for failing to pay your taxes is 0.5% of the tax owed after the April due date, for each month or part of a month the tax remains unpaid. These penalties also top out at 25%. If you failed to file on time and failed to pay, you'll pay a 5% combined penalty (4.5% late-filing and 0.5% late-payment) for the first five months, until your late-filing penalty reaches 22.5% of your taxes owed. You will then continue paying a late-payment penalty of 0.5% until your late-payment penalty reaches 25%, for a combined total of 47.5%.

You may be able to avoid late-filing or late-payment penalties if you can show a reasonable cause for the delay. What's reasonable? The IRS lists natural disasters, death and serious illness as possible reasons for penalty relief.

How Does the IRS Collect Late Payments?

When you fail to file a tax return or pay your tax bill when you file, the IRS will send you a bill. The first notice will include the amount of tax you owe plus penalties and interest that have accrued since the date your taxes were due.

Tax Liens

If you fail to pay your taxes after receiving a bill, the IRS may file a lien against your property, which could include wages, future tax refunds or even your car. Although the IRS typically doesn't seize your property until you've failed to respond to multiple bills, a lien may be filed if you fail to respond to your first bill. Federal tax liens do not appear on credit reports at the three major credit reporting agencies—Experian, TransUnion and Equifax.

Payments and Installment Plans

If you receive a bill from the IRS, don't ignore it. Pay your bill in full or apply for a payment plan with the IRS. You'll pay a reduced penalty if you set up an installment plan with the IRS and will avoid further collection actions.

Offers in Compromise

Taxpayers who can't pay their IRS bills may be able to negotiate an offer in compromise. The IRS agrees to accept a reduced amount as payment in full. To be eligible, taxpayers must have filed all required tax returns, be current on estimated tax payments and received at least one tax bill. Use the IRS OIC Pre-Qualifier tool to see if you may be eligible.

Seizure of Assets

If you don't pay your tax bill or make a payment arrangement with the IRS, you may receive a final notice of intent to seize or levy assets. This notice is sent 30 days before the IRS may begin seizing assets. The IRS won't levy assets if you have a current or pending installment agreement, offer in compromise or demonstrated economic hardship. With few exceptions, they also won't begin seizing assets until you've received multiple notices and either refused or neglected to pay.

Disputes, Deferments and Relief

Throughout the collection process, taxpayers have the right to dispute bills and appeal decisions, request hearings or relief from penalties, ask for a military deferment or pause for uncollectible debts, and more. Look for information on how to respond on any IRS notification you receive. Also check out the Taxpayer Bill of Rights to learn more.

Do I Have to Pay My Taxes All at Once?

Your entire tax bill is technically due on the tax filing deadline in April. Most people contribute toward their tax bill throughout the year, either through paycheck withholding or quarterly estimated tax payments. If you still owe additional tax after factoring in your withholding and estimated payments, that tax is due and payable in full on tax day. Even if you get a filing extension, your payment is due on the original tax deadline.

If you don't have the money to pay your outstanding tax bill, you may be able to work out a payment arrangement with the IRS. With a long-term or short-term payment plan, expect to continue to pay penalties and interest.

• You'll pay a 0.25% late payment penalty for every month you carry an unpaid balance.
• You'll be charged interest, currently 8% annually, on the amount you owe, accrued daily.

Set Up a Payment Plan Online

You can apply for a payment plan online at IRS.gov. To set up an online account and payment plan, you'll need a photo ID, the amount of tax you owe and your bank routing and account numbers if you want to set up direct payments.

Source: IRS

You can also set up a payment plan by phone by calling the IRS helpline at 800-829-1040, or by submitting Form 9465 by mail. Fees and terms may vary if you set up a payment plan offline.

Options if You Can't Afford to Pay Your Taxes

Suppose you need to pay your taxes right now, but you don't have the bank balance to cover the payment and you aren't sure you want to pay installments to the IRS. You may have additional options.

Use Your Emergency Fund

If you have enough to pay your IRS bill, you might want to activate your emergency fund to settle your tax debt instead of applying for a payment plan. You'll save on IRS penalties and interest and won't have to live with the aggravation of owing money to the government. Be sure to put a plan in place to replenish your savings so you won't be caught short at the next emergency.

Pay With a Credit Card

Making a credit card payment will cost you between 1.85% and 1.98% in IRS transaction fees, plus credit card interest if you don't pay your balance off before the grace period ends. Here are two instances when it might make sense to use your credit card to pay your tax bill:

• You have the money to cover your tax bill, but you need a few days or weeks to move money around. Paying with your card has the advantage of resolving your IRS debt immediately without penalty. With IRS processing fees, the cost may be just slightly higher than setting up a short-term payment plan, as long as you can pay your balance off fast.
• You can use a credit card with 0% interest. If you have (or can get) a credit card with a 0% promotional period, you may be able to use it to pay your balance with the IRS—and pay off your debt before the promotional period ends. You may also be able to pay using an existing card, then transfer the balance to another card with a 0% balance transfer option (though you'll likely pay a balance transfer fee for doing so).

Be cautious about using your credit card to pay a large IRS debt. If you can't pay off your balance quickly, interest rates on revolving credit card debt are high. Also, if your IRS payment eats up a large portion of your available credit, your credit utilization could soar and possibly hurt your credit score.

Get a Personal Loan

You can get a personal loan to cover your IRS bill. The trick is finding a personal loan that charges less in fees and interest than an IRS payment plan. For reference, an IRS payment plan equates to roughly 8% annually plus 0.05% monthly in charges.

The Bottom Line

Whether you bite the bullet and pay your bill in full, set up installments with the IRS, use your credit card or a personal loan to pay, or negotiate another arrangement with the IRS, don't wait to take action. Once tax day has passed, the clock is ticking on penalties, interest and additional actions like seizure of assets.

As you're working through your payment options, you may want to check your credit score and credit report to get a sense of what credit and loan offers might be available to you. You may also want to monitor your credit to keep up with any changes to your credit file as you pay for—and pay off—your tax bill.