unpaid IRS taxes: frequently asked questionsUnpaid IRS Taxes: Frequently Asked Questions (FAQs)

If I can’t pay my income tax, should I still file my return?

Yes!! The penalty for not filing is much worse than the penalty for not paying. If you don’t file, the IRS charges 5% of your balance every month as a penalty. That starts the day after your tax return is due. If you don’t pay, the IRS charges you a half a percent (.5%) per month on the unpaid balance.

What if I can’t pay my taxes in full when they are due?

Not paying in full is not a major issue as long as you are willing to set up an agreement of some sort with the IRS. The IRS has many payment plans and resolution options available. You may be able to set up an installment agreement or settle for less than you owe with an offer in compromise. If you truly have no money, the IRS may declare your account as “uncollectible” until your situation improves.

What are the penalties for unpaid taxes?

Penalties for unpaid taxes are typically 0.5% of the tax you owe. The penalty increases to 1% if the tax remains unpaid 10 days after the IRS issues an intent to levy notice. The penalty decreases to 0.25% if you are in an installment agreement. The IRS assesses these penalties every month, and the total penalty can be up to 25% of your tax debt. Moreover, interest does accrue as well.

Is there Interest on unpaid or underpaid taxes?

Interest on unpaid taxes is the federal short-term interest rate plus 3%. This interest rate changes every three months. Interest accrues until the debt is paid in full, and there is no maximum amount that can be charged in interest. You can see the current rates here for underpayments.

Will the IRS levy my assets for unpaid taxes?

The IRS can levy your assets for unpaid taxes. The IRS sends several notices before this happens. The last notice is usually the “Final Notice of Intent to Levy.” After you receive this notice, you have 30 days to respond. If you don’t appeal or make payment arrangements, the IRS can start to levy your assets at the end of that time period.

Can I settle my unpaid taxes for less than I owe?

Yes, you can sometimes settle unpaid taxes for less than you owe. The two most common options are an offer in compromise or a partial payment installment agreement (PPIA). There are strict requirements for both programs, and you have to give the IRS detailed financial information to prove you meet the criteria.

How do I find out how much I owe the IRS?

There are 3 ways to find out. You can use the IRS’s online tool, call the IRS, request transcripts via mail, or look at the last notice sent to you from the IRS. Mailed notices do not have up to date information on interest and penalties, so it’s best to check online or over the phone. You can also contact a tax firm that specializes in tax relief. With software, and a dedicated IRS tax practitioner phone line, a tax firm can usually obtain transcripts and tax balances quickly.

Do unpaid taxes show up on a credit report?

Yes, if the IRS issues a tax lien. The IRS must first file a “Notice of Federal Tax Lien.”  This notice is a public document. The tax lien attaches to your property and alerts creditors. Consequently, the tax lien will appear on your credit reports and negatively impact your credit (whether an individual or business). The IRS usually will file a tax lien for taxpayers that owe more than $10,000.

What happens if you don’t pay IRS taxes for 10 years?

If you don’t pay your taxes for 10 years, the IRS usually will charge you interest and penalties for unpaid taxes. Assuming you filed your tax returns, you avoid the failure to file penalty. However,  you will still accrue the failure to pay penalty along with interest. If you don’t file your taxes, the IRS eventually files for you (normally after 3 years), which is called a Substitute for Return. You can read more about the consequences here.