Tax forms

Oops, I didn’t pay my taxes!

It can be an inviting thought, but too many people have found out the hard way that not paying their federal, state or local taxes is a serious mistake.

The best outcome when federal taxes aren’t paid on time or paid at all, is penalties and interest charges. Worst-case scenarios involve arresting police officers, bail bondsmen and court dates. The last thing a taxpayer wants is to involve his or her family in the time-consuming, expensive and upsetting process of hiring a bail bond firm to help release him from jail because of unpaid taxes. There are several steps the Internal Revenue Service (IRS) takes, however, before calling for a delinquent taxpayer’s arrest.

Penalties and interest

A taxpayer who doesn’t pay his federal taxes because he didn’t realize he needed to, because he never got around to calculating or filing them or because he doesn’t have the money available will pay penalties. Penalties are assessed on taxpayers who don’t file returns on time, and add up to five percent per month on the taxes that aren’t paid.

Interest is compounded daily, which allows it to add up quickly. Interest is calculated on the unpaid amount of taxes due. A taxpayer who doesn’t have enough money available to pay an annual tax bill is advised to pay what he can to reduce the interest payments.

If a taxpayer just doesn’t file his federal tax return by the deadline, whether it’s due to illness, other major life emergencies or plain laziness, will frequently find that the IRS has filed a return for him. He won’t be in any legal trouble, but he will be responsible for the taxes, penalties and interest that accrue until the full bill is paid.

Forfeited refunds or garnished wages

A delinquent taxpayer who has reformed and is filing his taxes as legally mandated in the current year could very well lose any refund due him for previous years’ unpaid taxes. Until the unpaid tax bill equals zero, refunds will go toward it. Likewise, a worker who hasn’t paid his taxes for a longer period of time may find that part of his regular wages are automatically taken to meet the tax bill. The IRS even has the legal right to take Social Security payments for a delinquent tax bill.

Hit on credit score

It’s not surprising that delinquent tax payments show up on credit reports. Tax bills, like other debts, are considered bad financial decisions. Potential creditors looking at a report that includes unpaid taxes may seriously wonder why a taxpayer would risk getting on the bad side of the IRS. While unpaid taxes might not prevent someone from getting a loan, they’ll definitely have an impact on his credit score and the resulting interest payments and terms.

Tax liens and levies

When the IRS announces its plans to collect taxes owed from a delinquent taxpayer, the agency may make a claim, or a lien, against the taxpayer’s property. Liens can be placed against bank accounts or income, such as when wages are garnished. However, the IRS can also place liens against real property like a home or a car. Once the IRS proceeds with its actions, it can levy the property, which means that the property can actually be taken.

Arrest and jail

Arrest and jail time are usually reserved for the most blatant delinquent taxpayers who are many years in arrears in their taxes, or for taxpayers involved in illegal activities. The IRS does not pursue taxpayers who failed to file or pay taxes for just a year or two. A delinquent taxpayer who has been contacted by the IRS numerous times and hasn’t worked out a repayment plan can expect to be visited by a law enforcement official or IRS agent and placed under arrest.

The IRS, despite its reputation, is willing to work with taxpayers who are having trouble filing or paying taxes they owe. A delinquent taxpayer who truly wants to rectify his situation doesn’t need to worry that he’ll be thrown in jail and his family left homeless and hungry.

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