Unpaid Taxes Overview: Consequences of Unpaid Taxes and Options If You Can’t Pay
Falling behind on your taxes is incredibly common—all it takes is a miscalculation, an unexpected increase in income, or an event that strains your budget. If you’re unable to pay your taxes on time, you do have options. However, you have to be proactive, face your situation, and communicate with the IRS.
Learn more about the consequences of unpaid taxes, what to do if you cannot pay, and potential solutions. Or contact us now to get help with your unpaid taxes.
Key Takeaways
- Interest and penalties begin accruing as soon as your tax payment is late.
- The IRS attempts to collect by sending multiple notices to taxpayers.
- Continued failure to pay may result in levies, liens, garnished wages, and seized assets.
- The IRS offers a variety of payment options, including installment agreements and offers in compromise.
- The sooner you apply for an IRS relief option, the better.
What Happens If You Don’t Pay Taxes?
When you don’t pay your taxes, you’re typically caught by the IRS’s automated collection system (ACS). This triggers the start of their collection process, which involves a series of notices that urge you to pay, remind you of the potential consequences of not paying, and give you different resolution options. There are several weeks between each notice, giving you time to explore your options and seek professional guidance. Take a closer look at the consequences of nonpayment.
Penalties and Interest
When you file your tax return, you must pay your tax bill by the due date. If you don’t, penalties and interest begin to accrue. The failure-to-pay penalty is 0.5% of the total amount due, charged for each month or partial month that the bill remains unpaid. It is capped at 25% of the initial tax bill.
Interest can also cause your tax bill to escalate quickly. As of the second quarter of 2025, the interest rate for underpaid taxes is 7%. Interest on taxes compounds daily, which means that every day you do not pay your tax bill, it grows.
Collection Actions
After giving you multiple chances to pay your taxes or set up alternate payment arrangements, the IRS may pursue more aggressive collection actions. Remember that if they do not hear from you, they have to assume that you will continue not to pay your taxes. This basically forces their hand.
Collection efforts generally begin with a lien. This lays claim to your property and ensures that if you sell anything, the IRS will get back what they are owed. Liens are public record. If the debt continues to accumulate, the IRS may move forward with levies. This may involve intercepting your state tax refund, garnishing your wages, seizing your bank account, or seizing and selling your other assets.
What to Do If You Can’t Pay
If you know you cannot pay your taxes in full, it’s important to take action and look into other solutions. Ignoring your growing tax bill dramatically increases the likelihood of a lien or levy. Here are some tips on how to avoid unpaid taxes:
File On Time
One of the most important things you can do when you can’t pay your taxes in full is to file your tax returns on time. Some taxpayers do not file their tax return if they know they won’t be able to pay the resulting tax bill, assuming that it’s better to wait to file until they can pay in full. This is a mistake that can cost you a substantial amount of money.
Remember that the failure-to-pay penalty is 0.5% of the balance due for each month you’re late—now, compare that to the failure-to-file penalty of 5% of the unpaid balance for each month you are late. Within five months of not filing your taxes, you will have maxed out the penalty and added 25% to your tax bill. The failure-to-pay penalty stacks on top, leading to a possible total penalty of 50% of your balance.
Filing on time is always recommended, even if you cannot yet pay.
Communicate With the IRS or a Tax Professional
Being proactive about your tax problems is crucial if you want to avoid liens, levies, wage garnishments, and other aggressive collection actions. The IRS is firm about collecting what it’s owed, but the agency is also fairly flexible. If taxpayers communicate with them about their issues and show a good faith effort to resolve their tax problems, they are willing to work with them.
Having said that, we recognize that many people do not like communicating with the IRS directly. You may be overwhelmed about your options or find yourself putting off the phone call out of worry. In these situations, reaching out to a tax professional is highly recommended. Your tax attorney can communicate with the IRS on your behalf, look over your tax records and documents, and provide personalized guidance on what to do next.
Look Into Other Payment Options
While paying in full is the best way to limit what you have to pay in penalties and interest, the IRS knows that this isn’t always a plausible option for taxpayers. That’s why they provide a variety of other payment and resolution options.
Resolution Options for When You Can’t Pay Your Taxes
The IRS offers a wide range of payment options for taxpayers who cannot pay in full. The options that suit you depend on your financial status, how much you owe, and your tax compliance history.
Short-Term Extension
If you’ve been blindsided by your tax bill and you don’t have the cash on hand, consider a short-term extension. This is nearly as good as paying in full by the due date, as it gives you 180 days from the due date to pay in full. There is no setup fee, and you can pay via your bank account, EFTPS, check, money order, or credit card. While interest and penalties do accrue, being free of tax debt in six months is still a great solution.
Installment Agreement
You may find that 180 days is not enough time to pay off your tax debt in full. In this case, consider a long-term installment agreement. A long-term installment agreement spreads your tax debt out over a period of up to 10 years, allowing you to make your tax debt fit into your monthly budget. While you’re on an installment agreement, you must file and pay all new taxes on time, make all payments on time, and otherwise comply with IRS requirements.
Offer in Compromise
Taxpayers who cannot afford to pay their tax bill in full but can afford a partial payment may qualify for an offer in compromise. This settles your tax debt for less than the initial amount owed. It is quite difficult to qualify for an offer in compromise, as the IRS takes into account your income, assets, and any equity you have in your assets. They calculate how much they can reasonably expect to collect from you, and if that amount is substantially lower than your actual tax debt, they may agree to an offer in compromise.
Partial Payment Installment Agreement
Like an offer in compromise, a partial payment installment agreement can be difficult to qualify for. You have to provide substantial documentation showing that you have financial need. This option is similar to an installment agreement in that it requires monthly payments, but the payments are less than what it would take to pay your debt off in 72 months.
As long as you qualify, you continue making payments until the Collection Statute Expiration Date. At that point, the rest of your tax debt is written off.
Currently Not Collectible
For those who cannot put any money toward their tax debt, currently not collectible status may be the solution. If the IRS determines that you qualify, they temporarily stop collection actions against you. This doesn’t stop interest and penalties—and that means if you eventually stop qualifying for currently not collectible status, you will owe more than you did before you applied.
We understand that owing taxes is stressful, and taking action can put a lot of pressure on you—especially if you’re unfamiliar with tax law, payment options, or collection actions. You don’t have to figure out your net steps alone. At the Law Offices of Stephen B. Kass, we help taxpayers like you find solutions and the peace that comes with no longer worrying about tax debt. Call us at 212-843-0050 or contact us online to discuss your tax concerns now.
Frequently Asked Questions
What happens if I don’t pay my taxes on time?
First, the IRS will try to contact you by sending a series of notices informing you of your tax debt and your obligation to pay. Interest and penalties add up, and if you continue to avoid the IRS, they may move forward with levies and liens.
Can the IRS really take my bank account or paycheck?
Yes. If the IRS sends you a notice via certified mail, they can levy your assets – the notice gives you 30 days to pay or appeal the collection action. If you don’t respond, the IRS can move forward with seizing your bank account or garnishing your wages. This is why you should make payment arrangements as early as possible—doing so can help you avoid these aggressive collection actions.
Should I file my taxes even if I can’t pay?
Yes. The penalty for failing to file your taxes is substantially higher than the penalty for failing to pay your taxes. Filing can lower the amount of penalties you owe and put you on track to finding a solution.
Will I go to jail for unpaid taxes?
It’s incredibly unlikely. Tax debt is generally a civil matter unless a taxpayer engages in fraud or tax evasion. However, liens and levies are still serious consequences, so it’s worth facing this problem head-on.
Can I settle for less than I owe?
If you meet strict financial qualifications, you may qualify for an offer in compromise. The application process is fairly lengthy, so we recommend talking to an attorney first before you invest the time.
What is the interest charged for unpaid taxes?
The IRS revisits interest rates each quarter. As of the second quarter of 2025, the interest rate for underpaid taxes is 7%.
How can I find out how much I owe?
For the most up-to-date number, you can log onto your IRS account and check your balance due. You can also apply for a payment plan from your online account portal.
What if I have unpaid state taxes?
If you have unpaid state taxes, the state revenue agency may also issue liens, garnish wages, or take other collection actions against you. Every state has a slightly different process. However, every state also offers resolution options. For example, in New York State, you may be able to set up an installment agreement or even qualify for a state offer in compromise.
Sources:
https://www.irs.gov/payments/failure-to-pay-penalty
https://www.irs.gov/payments/quarterly-interest-rates#2023
https://www.irs.gov/pub/irs-pdf/p4849.pdf
https://www.irs.gov/taxtopics/tc202
https://www.irs.gov/payments/payment-plans-installment-agreements
