Let’s be honest—owing the IRS is stressful, and it’s no surprise that many people avoid addressing it. Often, it’s fear of the unknown that holds people back. The truth is, ignoring your tax debt doesn’t make it go away; it only makes things worse.
You might think, “If I call the IRS, will I make things worse for myself?” The reality is, taking proactive steps can prevent the situation from spiraling out of control. From payment plans to hardship programs, the IRS offers solutions if you reach out. But if you ignore your tax bill, here are 10 major consequences you might face.
What Happens if You Ignore Your Tax Debt?
1. The IRS Will Start Sending Notices
The first thing the IRS does when you owe taxes is send letters, called notices. These notices inform you of the balance due, explain penalties and interest, and provide instructions on how to resolve the debt. While the first notice may seem routine, ignoring it leads to more aggressive correspondence.
Here’s why you shouldn’t dismiss these notices:
- They contain crucial deadlines for resolving your debt.
- Ignoring them could limit your options for resolving the issue.
- Continued inaction may result in penalties or enforcement actions.
By addressing these notices promptly, you can often resolve your debt on more favorable terms. A tax lawyer can help you make sense of the notices and communicate with the IRS effectively.
2. Your Case Will Land in Automated Collections
If you ignore the IRS notices, your account is likely to end up in the Automated Collection System (ACS). ACS is the IRS department responsible for recovering unpaid taxes, and they have significant authority to act.
Once ACS takes over:
- You’ll receive notices warning of enforcement actions like liens and levies.
- Deadlines for compliance will become stricter, with fewer chances to negotiate.
- The IRS may seize funds directly from your bank accounts or garnish wages.
Dealing with ACS can be stressful, but it’s manageable with professional help. A tax lawyer can negotiate with ACS to stop enforcement actions and help you regain control of your finances.
3. Say Goodbye to Future Tax Refunds
If you owe back taxes, the IRS has the right to offset your future tax refunds. This means that any refund you’re entitled to in subsequent years will automatically be applied to your debt, even if you’re in a payment plan.
Why this matters:
- Losing your refund can throw off your financial plans, especially if you rely on it for essential expenses.
- The IRS won’t notify you before offsetting your refund—it will simply disappear.
- While it reduces your overall debt, it doesn’t stop penalties or interest from growing.
If losing a refund would create financial hardship, consult with a tax lawyer to explore options to protect your funds and resolve your debt more strategically.
4. Interest Will Keep Growing
Tax debt isn’t static; it grows over time because the IRS charges interest daily. At the current rate of 5% annually, interest adds up quickly, making your total debt much larger than the original amount owed.
The impact of interest:
- Compounding interest means your debt grows faster the longer it goes unpaid.
- Even small balances can balloon into unmanageable sums over time.
- Interest stops accruing only when your balance is fully paid or the IRS agrees to settle.
A tax lawyer can help you set up a payment plan or negotiate a settlement to stop the runaway growth of your tax debt.
5. Expect Penalties on Top of Interest
In addition to interest, the IRS charges penalties for failing to pay your taxes on time. The failure-to-pay penalty starts at 0.5% per month but doubles to 1% if you ignore repeated notices. However, once you enter into a payment plan, the penalty drops to 0.25% per month.
Here’s what to know about penalties:
- They can quickly add up, especially if your balance remains unpaid for years.
- Penalties, like interest, grow the longer your debt sits unresolved.
- In some cases, you may qualify for penalty abatement if you meet specific criteria.
A tax lawyer can evaluate your case to determine if penalty abatement is possible, potentially saving you thousands of dollars.
6. A Federal Tax Lien Could Be Filed
When the IRS files a Notice of Federal Tax Lien, it becomes public information, alerting creditors that the IRS has a legal claim on your property. This can harm your financial standing and make it difficult to borrow money or sell assets.
Effects of a tax lien:
- It can lower your credit score and damage your financial reputation.
- Selling or refinancing property becomes challenging with a lien in place.
- The lien remains until your debt is fully resolved, including penalties and interest.
Although liens are often filed for larger balances, the IRS can file them for debts over $10,000. A tax lawyer can help you negotiate with the IRS to avoid or remove a lien.
7. The IRS Can Levy Your Money and Assets
A levy allows the IRS to seize your money or property to satisfy your tax debt. While physical seizures like homes or cars are rare, financial levies are far more common and disruptive.
Types of levies:
- Wage garnishments: The IRS can take a portion of your paycheck before you see it.
- Bank levies: Funds in your bank account can be frozen and seized.
- Accounts receivable levies: For business owners, the IRS can intercept payments from customers or clients.
Levies can cause severe financial strain, especially if you’re already struggling to pay bills. A tax lawyer can help you negotiate the release of levies and prevent future enforcement actions.
8. A Revenue Officer Might Show Up at Your Door
If your tax debt is significant or spans multiple years, the IRS may assign a revenue officer to your case. These officers have the authority to take swift enforcement actions and often deal directly with taxpayers who owe large amounts.
Here’s what to expect:
- Revenue officers may visit your home or business to discuss your tax debt.
- They can issue liens or levies if you don’t comply with their requests.
- Delays in responding to a revenue officer can escalate the situation quickly.
If a revenue officer contacts you, having a tax lawyer represent you can ensure your rights are protected and prevent missteps that could worsen the situation.
9. Your Passport Could Be Restricted
If you owe more than $51,000 in unpaid taxes and haven’t resolved your debt, the IRS can flag you as a “seriously delinquent” taxpayer. This designation allows the State Department to deny or revoke your passport.
Consequences of passport restrictions:
- You can’t apply for a new passport or renew an existing one.
- If you frequently travel for work or family obligations, this can be a major disruption.
- The restriction is lifted only after you resolve your delinquent status.
Working with a tax lawyer can help you address the underlying debt quickly, ensuring your travel plans aren’t affected.
10. Your Case Could Be Handed to a Debt Collector
If the IRS is unable to collect your debt after several years, they may assign your account to a private debt collection agency. While these agencies can’t take enforcement actions like liens or levies, dealing with them can be stressful and time-consuming.
What to expect from debt collectors:
- Persistent phone calls and mail correspondence.
- Fewer options for negotiating flexible payment terms.
- Continued growth of penalties and interest on your unpaid balance.
Resolving your debt before it’s handed off to a debt collector can save you years of hassle. A tax lawyer can help you navigate the process and find a resolution that works for you.
How a Tax Lawyer Can Help You Avoid These Consequences
When it comes to tax debt, knowledge and timely action are your best tools for avoiding the serious consequences outlined above. But let’s face it—dealing with the IRS on your own can feel like navigating a minefield. This is where a skilled tax lawyer becomes invaluable, providing expertise and guidance to protect your finances and your future.
Why Hire a Tax Lawyer?
A tax lawyer specializes in understanding complex IRS policies and procedures, ensuring you don’t make costly mistakes. Here’s how they can help:
- Negotiating Payment Plans: Tax lawyers can work with the IRS to secure a payment plan that fits your financial situation, such as an installment agreement or partial payment arrangement.
- Exploring Settlement Options: If you qualify, a tax lawyer can help you pursue programs like an Offer in Compromise, where you settle your debt for less than the full amount owed.
- Stopping Collection Actions: Facing a wage garnishment, bank levy, or lien? A tax lawyer can intervene on your behalf to stop these actions and negotiate terms to resolve your debt.
- Penalty and Interest Abatement: If circumstances warrant, a tax lawyer can request the IRS reduce or remove penalties and interest, potentially saving you thousands of dollars.
- Preventing Passport Restrictions: If you owe a substantial amount and risk losing your passport, a tax lawyer can work quickly to resolve the issue and ensure your travel plans remain uninterrupted.
The longer you wait to address your tax debt, the more difficult and expensive it becomes to resolve. At Austin & Larson Tax Resolution, we specialize in helping clients navigate these challenges with personalized strategies that get results. Contact us today to learn how a tax lawyer can help you avoid the worst consequences of tax debt and get back on track.
Frequently Asked Questions (FAQs) About Tax Debt
Can the IRS seize my home for unpaid taxes?
Yes, the IRS can seize your home if you owe substantial back taxes and fail to resolve the debt. However, property seizures are rare, and a tax lawyer can often help prevent this outcome.
How long does the IRS have to collect unpaid taxes?
The IRS generally has 10 years from the date of assessment to collect unpaid taxes. After this period, the debt is typically considered uncollectible, but certain actions can extend this timeframe.
Can I negotiate my tax debt with the IRS?
Yes, the IRS offers programs like Offers in Compromise and installment agreements to help taxpayers resolve their debts. A tax lawyer can determine the best option for your situation and handle the negotiation process.
What should I do if I receive an IRS levy notice?
If you receive a levy notice, contact a tax lawyer immediately. They can help negotiate a release and prevent further levies by setting up a payment agreement or exploring other resolutions.
What happens if I don’t file my tax returns?
Failing to file tax returns can lead to significant penalties, interest, and even criminal charges. The IRS may also file a substitute return on your behalf, often resulting in a higher tax bill.
How does a federal tax lien affect my credit?
A federal tax lien can damage your credit score and make it difficult to secure loans or lines of credit. The lien remains on your credit record until the debt is fully paid or settled.
Can the IRS take my Social Security benefits?
Yes, the IRS can levy up to 15% of your Social Security benefits to collect unpaid taxes. A tax lawyer can help protect your benefits and negotiate with the IRS to reduce or stop the levy.
Take Control of Your Tax Debt Today
Dealing with tax debt can feel like a constant weight on your shoulders, but you don’t have to face it alone. A skilled tax lawyer can help you cut through the confusion, protect your finances, and find solutions that actually work for your situation. Whether it’s negotiating with the IRS, stopping levies, or reducing penalties, having an expert on your side makes all the difference.
At Austin & Larson Tax Resolution, we know how overwhelming tax issues can be, but we also know how to fix them. We’ve helped countless individuals and business owners resolve their tax problems and move forward with confidence. Whether you need help setting up a payment plan, exploring an Offer in Compromise, or handling a lien or garnishment, we’re here to guide you every step of the way. Don’t let tax debt control your life—let us help you take control. Contact us today to get started!
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