Every year, the IRS sets a filing deadline for all U.S. taxpayers. The deadline isn’t an arbitrary date. The IRS expects you to not only file but pay your taxes in full by this date. Yet, in 2018, over 14 million Americans owed more than $131 billion in taxes (as well as penalties and interest).
Under-reporting, failing to file, and being unable to pay your taxes is very common. But what happens if you pay your taxes late – if anything? The answer may surprise you.
Read on to find out!
What Happens if You File Taxes Late?
According to IRS data, there were 143.3 million taxpayers in the U.S. in 2017. With so many people to keep track of, you might wonder: will the IRS notice if you don’t file or pay your taxes?
The answer is yes. Your employer, banks, investment companies, and other businesses report income to the IRS. So, the IRS can see if your employer pays you and you don’t declare your income.
If you owe even $1 in taxes, one of two (or both) things will happen. First, the IRS will send you a notification letter. It will state that you didn’t file a tax return and the IRS intends to penalize you. You may not get it the week after the tax deadline, but it will come eventually.
The second thing that can happen is the IRS may choose to create your return for you if you’re a W-2 employee. If your employer reported your information to the IRS, the IRS could whip up a return based on your employer’s data. However, the IRS won’t grant you any deductions. If the IRS creates a return on your behalf, then you could face a huge tax bill.
What happens if you can’t afford to pay what you owe? Much of the process depends on whether you cooperate with or hide from the IRS.
What Happens if You Pay Your Taxes Late?
The IRS considers you to be ‘late’ the day after the deadline passes. Unfortunately, if you owe taxes, there’s nothing you can do about being late – even if you have a good reason or if you ask the IRS for help.
Everyone who pays their taxes late must pay penalties. You’ll pay interest and fees on the total amount until you pay in full. These penalties are a good reason to file by the deadline, even if you can’t pay. You face a separate failure to file penalty of 5% of your total tax due per month that you must pay on top of the failure to pay interest and penalties.
The answer to the question “what happens if you pay your taxes late” is always that you pay more than if you paid on time.
Once you’re late, you need to find a way to mitigate the damage to your finances, usually by working with the IRS.
Does the IRS Offer Payment Plans?
If you cannot pay the full balance and you owe less than $25,000, then the IRS will allow you to use an installment plan. However, you can’t continuously use these plans. You only get automatic approval if you and your spouse haven’t used one in the past five years.
Another option is to ask for an Offer in Compromise. An Offer in Compromise is a settlement offer agreed upon between you and the IRS. To qualify, you must file all outstanding returns and be able to make a reasonable payment towards your tax bill.
As you can see, the IRS has multiple avenues available to help taxpayers manage their payments – at a cost. It’s always in your interest to engage with the IRS. Ignoring their letters or waiting too long can land you in hot water. When you don’t agree to negotiate, the IRS takes the reins, and you no longer have much say in the matter.
What Happens if You Ignore the IRS Letters?
Ignoring the IRS isn’t like pretending a bill collector doesn’t exist. The IRS has legal powers to do things like seize your bank accounts or property and even garnish your wages. Unlike other creditors in the U.S., the IRS doesn’t need a court order to do so.
The good news is that the IRS doesn’t send you a failure-to-file notice and take your paycheck the following week. The IRS must mail you a series of warnings before escalating the matter. Every letter is an opportunity to respond and engage with the IRS to prevent seizures and garnishments.
It’s much easier to prevent wage garnishment than it is to stop it once it happens.
What’s more, the IRS can levy far more from your paycheck than another creditor can. They can leave you with the bare minimum needed to pay your bills and survive. It’s challenging to end the wage garnishment before the IRS collects the debt owed in full. You’ll need a very competent tax accountant and maybe even an attorney to make a difference.
Are You Facing Tax Debt? Help is Available
Everyone who works in the United States is subject to federal income tax. There’s no way around it. You receive a tax bill according to what you earn, and you can use qualifying expenses to lower the amount due. However, the IRS expects you to file and pay your income tax return and bill on time every year.
What happens if you pay your taxes late? The answer is simple. You will pay more than you initially owed due to interest, penalties, and fees. If you choose to ignore the IRS, then you may lose control over what you pay and when.
Dealing with tax debt is scary and stressful. However, you do have options. To learn more about how to pay late taxes or even lower your amount due, contact us today for a free consultation.
