“Consequences of Not Paying Taxes: What You Need to Know”

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Does Not Paying Taxes Affect Your Credit?

Late or unpaid tax payments won’t directly impact your credit score. However, not paying your income taxes on time could lead to penalties, interest, tax levies, and tax liens that could affect your finances and ability to qualify for new credit accounts.

Consequences of Not Paying Taxes or Paying Them Late

If you file your tax return and don’t pay the full amount you owe, the IRS may send you a notice with a bill for the past-due amount, plus interest and penalties.

• Failure to pay penalty: If you pay less than the income taxes you owe, the IRS may charge a 0.5% failure to pay penalty, plus interest, on the unpaid amount each month. Or, if you start a payment plan, 0.25% plus interest. The penalty is capped at 25% of your unpaid taxes.
• Tax liens: If the IRS sends you a tax bill and you ignore it, federal tax liens may automatically be attached to your personal and business assets, including real estate, vehicles, and other assets. A lien means that the IRS has a claim to the property, which could affect your ability to sell the property or refinance your loans secured by property that has a lien against it.
• Collection calls: The IRS may contract with a private debt collection company that could try to contact you to collect a payment or get you on a payment plan. But unlike collection accounts for other types of debt, this collection account won’t be reported to the credit bureaus.
• Tax levies: A tax levy allows the IRS to take money from your paycheck, bank accounts, retirement income, or Social Security benefits—with limitations. It also may be able to take your property, such as your home, vehicle, or other valuable assets.
• Passport restrictions: If you have a seriously delinquent debt—owing more than $62,000 in 2024—the IRS may notify the State Department. When this happens, the State Department could revoke your passport and refuse to issue you a new passport.
• IRS takes future tax refunds: If you file a return in the future and would otherwise receive a tax refund, the IRS can withhold the money and apply it to the amount you owe.

Consequences of Not Filing Your Tax Return

You may want to file your tax return by the filing deadline even if you can’t afford to pay all your taxes. Or, file for a free tax extension, which gives you another six months to file your return but doesn’t extend your payment due date.

Otherwise, failing to file your tax return on time could lead to additional consequences:

• Failure to file penalty: The failure to file penalty is much higher than the failure to pay penalty—5% of the unpaid tax amount each month instead of 0.5%. The minimum penalty may depend on how long you wait, and the maximum penalty is 25% of your unpaid taxes, plus interest.
• Lose access to health care tax credits: Even if you aren’t required to file a tax return to pay income taxes, you may need to file a tax return to claim the advance premium tax credit, which can help cover health insurance premiums.
• Lose Medicaid coverage: If you’re self-employed and have health insurance through your state’s Medicaid program, you may need your most recent tax return to prove you qualify based on your household’s income.

What to Do if You Can’t Afford to Pay Taxes

You may have several options if you can’t afford to pay your taxes when you file your tax return.

• Set up a payment plan: You can apply for a payment plan with the IRS online, by mail, over the phone, or in person. Short-term payment plans give you up to 180 days to pay and are available without any setup fees. Long-term plans have setup fees ($31 to $130) and allow you to pay off your tax bill with monthly payments over a longer period.
• See if you qualify to remove or reduce IRS penalties: You might qualify for relief that waives or lowers your penalties and the associated interest. Eligibility may be reviewed on a case-by-case basis, but if this is the first time you’ve missed a payment you may qualify for the First Time Abate waiver.
• Apply for an offer in compromise: You may qualify for an offer in compromise, which allows you to settle the amount you owe for less than the total balance. However, you need to have filed all your required tax returns and made required estimated tax payments. And, even then, your eligibility may depend on your overall financial situation and how much you can offer. The IRS’ online offer in compromise pre-qualifier can help you determine if you might qualify.
• Consider financing options: Taking out a loan or using a credit card to pay your taxes may be an option. However, you might wind up paying more in fees and interest than if you use an installment plan from the IRS.

Don’t Shy Away From Your Taxes

Even if you can’t afford to pay your taxes when you file, it’s best to take action instead of ignoring the situation. Completing and filing your tax return on time can help you avoid additional penalties and interest, and there might be different options for paying what you owe over time.

If you have more questions or need help, you could contact an accountant or reach out to the Taxpayer Advocate Service, an independent organization within the IRS that helps taxpayers. The Taxpayer Advocate Service and IRS websites also have lots of helpful resources.

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