The Top 10 Consequences Of Tax Debt
Facing tax debt can be intimidating, leading some to avoid dealing with it altogether. But ignoring the issue only makes things worse. The IRS has various methods to collect what you owe, like placing liens on your property, seizing assets, or garnishing your wages. Ignoring your tax bill means penalties and interest will keep adding up.
However, there’s good news. The good news is that there is help available to those in need of tax relief.
If you’re unsure about resolving your debt with the IRS, here are the top 10 consequences of ignoring your tax bill:
- Federal tax liens could be placed on your property.
- Your assets might be seized through levies.
- The IRS could garnish your wages.
- Penalties and interest will continue to accrue.
- Your credit score could suffer.
- It may affect your ability to get loans or credit cards.
- Tax debt can lead to legal action.
- You might miss out on potential refunds or credits.
- Your Social Security benefits could be affected.
- Ignoring the issue won’t make it go away – it’ll only get worse.
1. Federal Tax Liens Could Be Placed On Your Property
A federal tax lien is a legal claim the government puts on your property when you fail to pay a tax debt. It’s a way for the IRS to secure the debt by establishing their right to take your property if you don’t pay what you owe. This lien attaches to all your property, including real estate, personal property, and financial assets. Essentially, it’s a public notice to creditors that the government has a claim against your property, which can make it difficult for you to sell or borrow against those assets until the lien is resolved.
2. Your Assets Might Be Seized Through Levies
When the IRS places a levy on your assets, it means they have the legal authority to seize and sell your property to satisfy your tax debt. This could include seizing funds from your bank accounts, taking possession of your vehicle, real estate, or other valuable assets. The IRS typically issues a levy after multiple attempts to collect the tax debt have failed, and they provide notice before taking any action. Levies are serious measures used by the IRS to collect unpaid taxes, and they can have significant financial consequences for the taxpayer.
3. The IRS Could Garnish Your Wages
When the IRS garnishes your wages, it means they legally require your employer to withhold a portion of your paycheck and send it directly to the IRS to satisfy your tax debt. This process is initiated after the IRS has made multiple attempts to collect the unpaid taxes but has been unsuccessful.
The amount that can be garnished from your wages is based on a specific formula determined by federal law, which takes into account your standard deduction and exemptions. The IRS will notify you in advance before garnishing your wages and provide an opportunity to resolve the debt or make payment arrangements.
Having your wages garnished can have a significant impact on your finances, as it reduces your take-home pay. It’s important to address any tax debt issues with the IRS promptly to avoid wage garnishment and explore other options for resolving the debt.
4. Penalties And Interest Will Continue To Accrue
When you owe taxes to the IRS but fail to pay them on time, the IRS imposes penalties and interest on the unpaid amount. These penalties and interest accrue over time until the full tax debt is paid off. Here’s a breakdown of how they work:
- Penalties: The IRS charges two main types of penalties for unpaid taxes:
- Failure-to-Pay Penalty: This penalty is assessed when you don’t pay your taxes by the due date. It starts accumulating the day after the tax deadline and continues until the tax is fully paid. The penalty rate is usually 0.5% of the unpaid taxes per month, with a maximum penalty of 25% of the unpaid amount.
- Failure-to-File Penalty: If you don’t file your tax return by the deadline (including extensions), you may incur this penalty. The penalty rate is typically higher than the failure-to-pay penalty, amounting to 5% of the unpaid taxes per month, up to a maximum of 25%.
- Interest: In addition to penalties, the IRS charges interest on any unpaid taxes, including penalties. The interest rate is determined quarterly and is generally based on the federal short-term interest rate plus a certain percentage. Interest accrues daily and compounds, meaning you’ll owe interest on the unpaid taxes as well as on any accrued penalties.
It’s important to note that penalties and interest can significantly increase the total amount you owe over time if left unpaid. Therefore, it’s in your best interest to address any tax debt promptly to minimize these additional charges and prevent further financial strain.
5. Your Credit Score Could Suffer
When you owe taxes to the IRS and fail to pay them on time, it can negatively impact your credit score. Here’s how:
- Tax Liens: If you ignore your tax bill and the IRS places a federal tax lien on your property, this information may appear on your credit report. A tax lien is a public record indicating that the government has a legal claim against your property as a result of unpaid taxes. Having a tax lien on your credit report can lower your credit score because it suggests to lenders that you may have difficulty managing your financial obligations.
- Collections: If your tax debt remains unpaid and the IRS resorts to collection actions such as wage garnishment or seizing assets, these actions can also impact your credit score indirectly. While the IRS itself does not report to credit bureaus, if the IRS transfers your debt to a private collection agency, that agency may report the debt to credit bureaus, which can lower your credit score.
- Financial Stress: Owing a significant amount in taxes can also lead to financial stress, which may affect your ability to make timely payments on other debts, such as credit card bills or loans. Late payments or defaulting on other debts can also negatively impact your credit score.
Failing to address tax debt can lead to negative consequences that affect your credit score. It’s essential to address any tax issues promptly and explore options for resolving the debt to minimize the impact on your credit standing.
6. It May Affect Your Ability To Get Loans Or Credit Cards
When you owe taxes to the IRS and fail to pay them, it can potentially affect your ability to obtain loans or credit cards in several ways:
- Credit Checks: When you apply for a loan or credit card, lenders typically conduct a credit check to assess your creditworthiness. If you have outstanding tax debt or a tax lien on your credit report, it may raise concerns for lenders about your ability to manage your financial obligations. This could result in a higher interest rate, lower credit limit, or even a denial of credit.
- Credit Score Impact: Having unpaid taxes or a tax lien on your credit report can negatively impact your credit score. A lower credit score may make it more challenging to qualify for favorable loan terms or credit card offers. Lenders often use credit scores as a key factor in determining loan eligibility and interest rates.
- Lender Requirements: Some lenders have specific requirements regarding tax obligations. They may inquire about outstanding tax debt during the application process or review your credit report for any tax liens. Depending on their policies, they may be hesitant to extend credit to individuals with unresolved tax issues.
- Risk Assessment: Lenders assess the risk associated with lending money to borrowers. Unpaid taxes or tax liens may raise red flags for lenders, indicating potential financial instability or a higher risk of defaulting on loan payments. This could result in lenders being less willing to approve your loan or credit card application.
Unresolved tax debt or tax liens on your credit report can impact your ability to secure loans or credit cards by affecting your creditworthiness and raising concerns for lenders about your financial stability and ability to repay debts. It’s essential to address any tax issues promptly and work towards resolving them to improve your fin
7. Tax Debt Can Lead To Legal Action
When you owe taxes to the IRS and fail to pay them, it can lead to legal action being taken against you. Here’s how tax debt can result in legal consequences:
- IRS Notices: Initially, if you owe taxes, the IRS will typically send you a series of notices requesting payment. These notices escalate in severity if you continue to ignore them. They may also include details about penalties and interest accruing on the unpaid taxes.
- Tax Lien: If you still don’t pay your taxes after receiving notices, the IRS may file a federal tax lien against your property. A tax lien is a legal claim against your property to secure payment of your tax debt. It becomes a matter of public record and can affect your ability to sell or refinance assets.
- Levies: If you ignore the notices and fail to address your tax debt, the IRS may issue a levy on your assets. This allows the IRS to legally seize your property, such as wages, bank accounts, or other assets, to satisfy the outstanding tax debt.
- Legal Action: Continued non-compliance with tax obligations can lead to more serious legal consequences. The IRS may pursue legal action against you, including filing a lawsuit in federal court to collect the unpaid taxes. If the IRS wins the lawsuit, they can obtain a judgment against you, allowing them to take further collection actions.
- Criminal Charges: In extreme cases of tax evasion or fraud, the IRS may pursue criminal charges against you. This can result in fines, penalties, and even imprisonment.
It’s important to address any tax debt issues promptly to avoid escalating legal consequences. If you’re unable to pay your taxes in full, options like installment agreements or offers in compromise may be available to help resolve the debt and prevent legal action.
8. You Might Miss Out On Potential Refunds Or Credits
If you owe taxes to the IRS and fail to pay them, you might miss out on potential refunds or credits. Here’s how:
- Tax Refunds: If you have overpaid your taxes in previous years and are entitled to a refund, the IRS can apply that refund to your current outstanding tax debt. However, if you owe taxes and haven’t paid them, the IRS may offset any refund you’re owed against your existing tax debt. This means you won’t receive the refund you were expecting, and it will be used to reduce the amount you owe.
- Tax Credits: Various tax credits are available to taxpayers to reduce their overall tax liability. These credits can include the Earned Income Tax Credit (EITC), Child Tax Credit, education credits, and others. However, if you owe taxes and haven’t paid them, the IRS can use any refundable tax credits you’re eligible for to offset your outstanding tax debt. This means you won’t receive the full benefit of these credits, as they’ll be applied to reduce your tax debt instead.
Failing to pay your taxes can result in missing out on potential refunds or credits that you would otherwise be entitled to. It’s important to address any tax debt promptly to ensure you receive any refunds or credits you’re owed and to avoid offsetting them against your outstanding tax liability.
9. Your Social Security Benefits Could Be Affected
If you owe taxes to the IRS and fail to pay them, your Social Security benefits could be affected in several ways:
- Levies and Garnishments: If you have unpaid tax debt, the IRS has the authority to levy or garnish a portion of your Social Security benefits to satisfy the outstanding tax debt. This means the IRS can legally withhold a portion of your Social Security payments to put towards your tax debt.
- Offsetting Tax Refunds: If you’re entitled to receive a tax refund but have unpaid tax debt, the IRS can offset your refund against your outstanding tax liability. This means any refund you would have received may be applied to your tax debt instead of being paid to you. This offset can indirectly impact your finances, including your ability to cover expenses and reliance on Social Security benefits.
- Collection Actions: If your unpaid tax debt remains unresolved, the IRS may take further collection actions, such as placing liens on your property or seizing assets. While Social Security benefits are generally protected from most creditors, including private debt collectors, they can still be subject to IRS collection efforts for unpaid federal taxes.
- Tax Compliance Requirements: Additionally, owing taxes to the IRS may result in compliance requirements that could affect your Social Security benefits. For example, if you’re on a payment plan with the IRS to address your tax debt, you’re required to make timely payments. Failure to comply with these requirements could have consequences, potentially impacting your ability to receive certain benefits or financial assistance.
Unpaid tax debt can have implications for your Social Security benefits, including potential levies or garnishments, offsetting of tax refunds, and compliance requirements imposed by the IRS. It’s essential to address any tax debt promptly to avoid these consequences and protect your financial stability.
10. Ignoring The Issue Won’t Make It Go Away – It’ll Only Get Worse
Ignoring a problem doesn’t make it disappear; it only makes it bigger. If you owe taxes and don’t deal with it, the situation doesn’t magically improve. Instead, it gets worse over time. Ignoring tax debt can lead to more penalties, higher interest, and even legal trouble. The longer you wait, the harder it becomes to fix, and the more it can affect your finances, like your ability to get loans or keep your money safe. It’s important to face tax issues head-on, even if it feels scary, so you can work towards solving them before they spiral out of control.
Enlist The Help Of A Professional
At CuraDebt Tax, we have a team of tax professionals who are able to find the best IRS resolution available to you. Contact us to better understand your tax problems and to choose the best IRS resolution option. CuraDebt has been helping individuals and small businesses for over 22 years nationwide. As of May 2023 CuraDebt received a score of 5 out of 5 on CustomerLobby for a total of 1179 customer views. CuraDebt is an Accredited Member of the American Fair Credit Council. Contact us for a free consultation. 1-877-999-0486. Take advantage of exploring another option for free. Not only do we handle tax relief, we also offer debt relief.
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