Like most Americans, you realize that you’re expected to pay your taxes. If you haven’t had to deal with a tax debt head on, consider yourself fortunate. Resolving a tax liability can be expensive, time-consuming and stressful. Many people choose to enlist a licensed tax professional, such as an enrolled agent or a tax attorney, to help them through their issue. Unbelievably, though, some taxpayers choose to ignore their debt, thinking they can simply wait the government out and are often rudely awakened to reality.
When a tax debt is assessed (that is, when the government identifies the amount you owe and notifies you), there is a ten-year statute of limitations. In other words, the debt expires after ten years and is then considered uncollectible. Some misguided individuals believe that they can hold out for the expiration date, thinking that the IRS can’t or won’t take any action. Nothing could be further from the truth.
If you end up owing a tax debt, the IRS will inform you of the amount you owe and instructions on how to make your payment. There’s a chance that you won’t be able to pay back the full amount at one time and, in that event, there are installment options available. But if you decide that you’re simply not going to pay it, you should be aware of the consequences you’ll be facing:
Your Debt Grows – First and foremost, the amount of your tax debt is growing from the moment you’re assessed. Penalties and interest quickly inflate what you owe and in as few as four years, your tax debt will double. So, if you original debt was $9000, after four years of accumulating penalties and interest that amount is now $18,000. And the IRS is extremely unlikely to reduce any portion of the additional fees.
You Don’t Get Tax Refunds – When you have a tax debt, the IRS will keep any future tax refunds you’re due until the amount you owe is fully satisfied. The faster you pay back your debt, the faster you’ll start seeing tax refunds again. Failing to pay at all means the IRS will take your refund every single year to apply to your debt.
Expect a Tax Lien – A tax lien from the government is basically a claim they’re making against your property because of an outstanding debt. This lien lets creditors know the IRS has an active interest in your assets. A tax lien can also negatively impact your credit report, impairing your ability to apply for loans or obtain new credit.
Your Property Can be Seized – Continued inaction toward paying your tax debt can result in property seizure. Boats, cars, jewelry, land, houses and other possessions are all able to be taken and sold in order to satisfy your debt.
Wage Garnishments are Possible – The worst part of a wage garnishment is you probably won’t know about it until you get your paycheck. When the IRS garnishes your wages, a hefty percentage of your earnings are taken every pay cycle until you work out another arrangement or your debt’s paid off.
Your Bank Account May be in Jeopardy – Repeated noncompliance with the IRS can result in your checking or savings account being levied. Put simply, your money can be completely drained from your bank by the IRS to put toward what you owe. Obviously, this can be devastating to anyone.
Avoiding Collection Actions
There’s no reason to let a tax debt mutate into an uncontrollable problem. Even if what you owe is sizeable, you have options to pay the IRS over time. Depending on your situation, you may want to seek help from a tax resolution company. A licensed tax professional can help you find an installment plan that’s going to work best for you, your budget and – more importantly – keep you from facing severe IRS collection efforts.