Tax, tax, and tax! You are always filing and paying every tax season. Well, the thought of what will happen if you couldn't pay or choose not to pay may have crossed your mind.
If it has, then this article will expose you to the repercussion of missing or refusing to pay tax. While the circumstances behind missing a tax payment vary, the following four things are sure to result.
What happens if you don't pay your taxes?
You do not want to skip filing your tax return or fail to pay your taxes if you are having difficulty. If you do not pay your income tax, the government can seize your assets. You may even go to jail.
You'll Owe a Debt That Keeps Increasing
One of the obvious penalties or repercussions of not paying your tax is increasing debt and tax levy. For every delayed payment, a penalty charge of 5% is incurred on the outstanding amount owed. This charge will continue for five months if you still haven't paid.
While you may have another reason for not paying your tax as at when due, the penalty is categorized as "filing your tax return late or paying your taxes late". The failure-to-file penalties comes into full effect with a 25% penalty fee on the unpaid amount after 5 months. With a penalty this high, it's usually best to file your tax even if you don't have the means to pay.
If you filed, but couldn't pay, the penalty charge for failure-to-pay is the federal short-term rate plus 3% after the due date.
You'll Get a Lien on Your Property
When unpaid taxes pile up to a high figure around $10,000, the IRS can take drastic steps such as putting a lien on your property which often is your house. Hence, if you sell your home later, what you owed is deducted before you can claim a profit. Your vehicle which is also property can as well be seized and sold to cover up for overdue taxes.
The bigger disadvantage is difficulty refinancing your home since there is a lien on it. The credit score will likewise suffer a hit which in turn affects your chance to access many types of loans.
You'll Suffer a Loss on Your Wages
If your refusal to pay lingers for too long, you will be contacted regarding your pending and overdue taxes. If you deflect the attempt to reach you and decide on a repayment plan, your bank account can be accessed. At times the wages are garnished from your employer.
You'll Lose Your Passport and Driver's License
In some cases, passport and driver's license are seized as consequences for refusing to pay.
You'll Be Charged Extra to Clean Up The Mess
When it gets tough, and the need to file and clear all your tax charges becomes extremely necessary, you may need to hire a professional to accurately prepare your tax form. The cost of this may amount to close to $200, and when you have many years of tax to file, you end up paying a lot added to the penalty fee that has piled up.
You Can Face Jail Time
In some extreme cases that involve a huge amount of unpaid tax, often called tax invasion, the penalty is up to 5 years in jail.
Filing Your Taxes Late
If you are not going to be able to file your tax return by the deadline, you should submit Form 4868 to the IRS by the due date (usually April 15th).
The filing of this form does not give you an extension on when you must pay your taxes. Any money you owe must be sent by the deadline.
Helpful Resource: How to file a tax extension
Despite owing money, you might be tempted to file your tax return but not pay it. The amount you owe in taxes will begin to accumulate interest and penalties if you fail to pay them by the due date.
If you file late, you will continue to accrue interest and penalties. You should file your tax return regardless of whether you have the funds to pay your outstanding taxes by the due date to avoid more failure-to-file penalties on top of failure-to-pay penalties and interest.
What can you do if you can't pay your tax?
Well, some intentionally try to evade tax, but often, many are genuinely unable to pay their taxes. If you fall into this category, there are some steps you can take.
First, note that your inability to pay doesn't mean you won't file your tax. Failure to file taxes at all is almost inexcusable. However, what can be allowed is gradual payments of your taxes. Reach out to the IRS to make arrangements for a certain amount of payment each month. Be realistic when you make this arrangement to avoid falling behind later on. For example, do not promise a monthly payment of $300 when you can't afford it.
Request a Payment Extension
The extension often granted is for tax filing extension and not an extension on payment. So far you filed your taxes, you'll get penalized for late payment at 0.5% without the penalty that comes with late filing.
However, if you can prove to the IRS that you have severe or undue hardship, the payment extension can be granted. But if not granted, you'll have to use the installment payment option. This option as mentioned above allows you to pay a certain amount monthly of what you owe.
Avoiding Tax Evasion
There are penalties, both monetary and seizure of property attached to avoiding or failing to file your tax and deflecting payment. Don't intentionally evade tax as it will lead to extra payment later on even possible jail time if a huge amount has been avoided or evaded. However, take the option of payment on installment if you have financial constraints. Also, you can as well use the tax filing extension or a rarely granted tax payments extension.
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