Tax debt can become a heavy financial burden when ignored or missed unintentionally. You may fail to pay taxes due to several reasons, such as financial hardships or under-withholding. Regardless of the reasons, it’s important to be aware of the consequences. 

What Is Tax Debt?

Tax debt occurs when you fail to pay the taxes you owe by the filing deadline, which is usually on April 15. If you have a job, your employers will automatically withhold your taxes, and if they’re calculated correctly, this usually isn't a problem.  

However, if you’re self-employed, you’ll need to file taxes and pay what you owe before the tax filing deadline. If you don’t pay it in full before the deadline, you’ll owe tax debt to the Internal Revenue Service (IRS). 

Not paying your taxes can have serious consequences. Read on to learn more about the possible reasons and repercussions for tax debt.

Common Causes of Tax Debt

There are many reasons people fall behind on their taxes. However, neglecting your debt can have a high price. Here are some common reasons why you may carry IRS tax debt: 

Failing to File Tax Returns

This is one of the most common mistakes you can make as a tax filer. If you live in the U.S. and earn $14,600 or more in a year as a single individual under the age of 65, you must file your federal tax return. Individuals over 65 who file individually and make $16,550 or more must also file taxes.

If you don’t file your taxes when you fall into one of the required categories, this can lead to tax debt. 

Not Withholding Enough Taxes

By law, employers are required to withhold taxes from your paycheck. However, the amount that's withheld may not be enough to cover what you owe. This could require you to pay more than expected when you file your tax return with the IRS.

To fix this situation, reexamine the amount your employer withholds from each paycheck. Consider increasing your withholdings to avoid this error during the next tax year, which could even lead to a tax refund.   

Not Paying Estimated Taxes

If you’re self-employed, you’re responsible for paying your own taxes quarterly. If you don’t pay estimated taxes throughout the year, you may have a large tax liability at the end of the financial year.

As a business owner, it’s best to work with a tax professional to ensure you’re filing your taxes correctly. Paying estimated taxes and checking your withholdings is also important for gig workers or freelancers. 

Other Mistakes

Additional reasons, such as medical emergencies, natural disasters or financial distress can prevent you from filing your tax returns and paying taxes on time. Some taxpayers, especially when they’re filing taxes on their own, may make mistakes or claim deductions or exemptions they’re not qualified for.

The IRS offers an array of resources to guide taxpayers, including their website and dedicated phone lines. If you're unsure how to file your taxes, think you made a mistake, or miss a deadline to submit your documents, start by contacting the IRS or using the online help center to avoid tax debt. 

8 Consequences of Not Paying Taxes

While it’s not uncommon to forget to pay your taxes before the IRS deadline, ignoring the issue can result in serious consequences. The IRS offers a number of options, such as payment plans and extensions, making it easier to pay what you owe. 

Here are eight possible consequences of ignoring your tax debt:

1. IRS Notices

The IRS will send you notices to inform you about your tax bill or before they take any collection action. While these notices and letters can be stressful, ignoring them can lead to more serious IRS collection actions.

2. Failure To Pay Penalty

The IRS charges a failure to pay penalty of up to 25% of your unpaid taxes if you don't pay what you owe for any reason. You can also accrue interest on unpaid taxes for each month you continue as delinquent.

3. Interest Charges

The IRS will start charging interest on the amount you owe. Interest starts accruing from the date of the filing deadline. Your tax debt increases as interest charges are added to it.

4. Withholding Tax Refunds

If you owe tax debt from a previous year and are due to receive a refund in a later year, the IRS will likely withhold it and apply the refund amount to your tax bill. 

5. Wage Garnishment

If you ignore the notice that the IRS sends you, they can issue wage garnishments. This means the IRS can collect your earnings directly from your employer if you fail to pay tax debts. Wage garnishment is a type of levy that can make it difficult to pay for your expenses since you lose income, leading your further into debt. 

6. Liens 

The IRS can also file a federal tax lien to protect their interest if you try to borrow against or sell your property. A lien on a house can impact your ability to sell your property and access credit. 

7. Additional Levies

The IRS can seize your money and assets if you fail to pay your tax debt. Other common types of levies (besides wage garnishment) are bank levies and accounts receivable levies. 

For businesses, levies can disrupt cash flow, making it difficult to purchase inventory and pay employees.

8. Restriction of Passport

If you’re seriously delinquent and haven’t agreed to any payment options, the IRS can restrict your passport. This means you won’t be able to renew your passport unless you repay your tax debt. If you don’t have a passport, you won’t be able to apply for one under IRS restrictions. 

Get Help For Tax Debt Today

Owing tax debt to the IRS can be stressful, but you’re not alone. The best course of action is to explore your tax debt relief options. You can set up an installment agreement or negotiate a tax settlement with the IRS.

We recommend taking action as soon as possible. Ignoring your tax payments can result in wage garnishment, levies, penalties, and interest, resulting in more debt.