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2023 Tax Season: What Happens If You Don’t Pay Your Taxes?

Taxpayers from 21 states still await the IRS instruction regarding the special tax refund they received last year.
Taxpayers from 21 states still await the IRS instruction regarding the special tax refund they received last year. (Photo: Bloomberg)

What Happens If You Don’t Pay Your Taxes? Danielle Dryden is a tax lawyer who has seen it all. She has observed a variety of circumstances in which people have failed to pay their taxes and owed sums ranging from thousands to millions of dollars.

According to Dryden, the proprietor of Dryden Tax Resolution in Tampa, Florida, “I never in my wildest thoughts envisaged 95% of the scenarios I’ve seen when I started in this field.”

 

What Happens if You Can’t Pay Your Taxes?

What to Do if You Can’t Pay Your Taxes
If you can’t pay your taxes, the first thing you need to do is acknowledge you have a problem. In simple terms: You have a tax bill, and you don’t have the money to pay it. Don’t dwell on fear or what ifs. Take it one step at a time. (Photo via https://www.ramseysolutions.com/taxes/cant-afford-to-pay-taxes)

 

Fortunately, she noted, the Internal Revenue Service or the IRS provides taxpayers with a number of payment options. Very few people, according to Dryden, “end up with an unmanageable repayment deal.” “In a similar view, the IRS also takes a number of actions to safeguard its capacity to recover the debt in the event that things don’t work out with the taxpayer. Liens, levies, and, in extreme cases, the seizure of tangible property are some of these.

 

A Retiree Withdrew Money from an Account Before Retirement

A customer of Dryden’s in his fifties had chosen to take a $100,000 IRA distribution in order to purchase a property after retiring early. The deal didn’t work out, though. He then deposited the money back into his IRA, but in doing so, he raised a tax liability.

What followed was:

61 days after withdrawing the $100,000, Dryden’s client put it back into his IRA. He would not have had to pay taxes if he had just returned the money one day earlier. Instead, because he was under 59 1/2 when he pulled the money out of his IRA, it was considered an early withdrawal and was liable to a 10% tax. He owes around $30,000 as a result, according to Dryden.

What Was Done to Fix It?

Dryden’s client couldn’t pay the $30,000 tax bill because he had re-deposited the funds into his account. He would have had to take another early withdrawal penalty-laden withdrawal from his IRA in order to pay it.

In order to explain why her client didn’t receive his money back from the unsuccessful property purchase until 61 days after he withdrew it, Dryden prepared a letter to the IRS on behalf of her client. I also just pleaded for mercy,” she continued. And it succeeded. She replied, “The IRS agreed to remove the tax and delete the taxable event.

According to Dryden, there are a number of circumstances in which the IRS’s computer system forbids any flexibility. Nevertheless, if you write a letter, a real human will read it and respond. She said, “I see that going in favor of the taxpayer 50% of the time.”

 

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A Guy Ignored His Taxes and Let Debt Payments Take Priority

Steven had a surprise when filing his tax return a number of years ago when he was heavily in debt. He learned that he owed roughly $300. It wasn’t a big sum, but at the time he had so many creditors that he didn’t have the money to pay what he owed. Steven did not pay his tax obligation as a result.

What followed was:

Steven realized he was powerless to avoid his tax debt. I got a letter saying that I owed $300 and that I would have to pay this number by a specific date with the accrued interest, he added.

There are consequences for filing a tax return but not paying the associated taxes. Every month until you pay in full, there will be a 0.5% late fee added to the balance you owe. On top of the fines you pay, you also have to pay interest. The daily accumulation begins on the day of the tax filing deadline. Every three months, the rate is decided upon.

What Was Done to Fix It?

Steven recalls that the IRS was charging him interest at a rate of between 3% and 5%. He delayed paying back his tax bill because it was cheaper than the interest rate he was paying on his credit card loan. I had every intention of repaying the IRS debt, he added, “only at a later time, even though it’s a significant risk to not pay back your IRS debt.” He did pay what he owed, saying, “It also provided me time to save away the sum required.” Thankfully, because the initial debt was so small, he only had to pay a total of less than $400 in interest and fees.

 

 

IRS ups standard deductions, tax brackets due to inflation

A portion of the 1040 U.S. Individual Income Tax Return form is shown July 24, 2018, in New York. Taxpayers will get fatter standard deductions for 2023 and all seven federal income tax bracket levels will be revised upward as the government allows people to shield more of their money from taxation because of persistently high inflation. For couples who file jointly for tax year 2023, the standard deduction increases to $27,700 up $1,800 from tax year 2022, the IRS announced. (AP Photo/Mark Lennihan, File)

 

 

A New Mom Mailed Her Papers Late

In 2016, Sarah gave birth to a child, and she experienced postpartum depression. Tax season came and went; I requested an extension, but by October I had not improved. “I knew it was a poor situation, but I just couldn’t bring myself to file my taxes or meet with an accountant. After being abused, I ended my relationship and had no one to turn to for support.

What followed was:

There is no penalty for failing to file a tax return if you are due a refund. Nevertheless, if you owe taxes and fail to file, the situation changes. According to the IRS, the failure to file penalty is 5% of the tax payable for each month your return is overdue, up to a maximum of 25%. In addition, interest is charged on the unpaid balance.

Yet it took some time before Sarah learned that she had neglected to submit a return for 2016. Early in 2018, she claimed, “the IRS summoned me to the carpet.” “I owed six figures, and it was really stressful.”

What Was Done to Fix It?

Sarah did submit a return, and the IRS put her on a payment schedule with monthly bank withdrawals made automatically to cover the amount she owed. Despite the fact that my bills have increased, they permitted me to make the lowest payment, she remarked. She pays more to the IRS on the months when she has extra money.

As long as you don’t lie or deceive, Sarah added of the IRS, “in the end, they can be extremely understanding creditors.” If they are unable to pay their bill in full when it’s due, taxpayers who owe less than $50,000 can apply for an installment plan online at IRS.gov. If you absolutely cannot afford to pay your taxes, you may be able to make a “offer in compromise” to reduce the amount you owe.

 

Family Fundamentals: Use your tax refund to pay off debt and save

Normally when we get our tax refund, we end up spending most or all of it on something we’ve wanted for a long time but couldn’t afford. But over the past year, we’ve had some major unanticipated expenses. This year, should we use the refund to pay down our credit cards, or would it be better to build up our emergency fund? (Photo: iStock)

 

A couple skipped 12 years of paying taxes.

A long-haul trucking business was owned and run by a couple who were Dryden’s clients. They neglected to file tax returns or pay taxes for a period of twelve years. Hence, the IRS intervened on its own.

“The IRS will file taxes for you if you don’t file returns for a long time,” Dryden added. These returns are not the only returns, but they are the only returns that matter. Literally, she remarked, “it’s the worst-case situation.

What followed was:

The IRS filed returns on the couple’s behalf for the twelve years during which they hadn’t done so themselves, disclosing millions of dollars’ worth of income. They owed an additional $2.3 million, according to Dryden.

After expenses, she said that the couple’s actual trucking business income was closer to $50,000 to $80,000 annually. Yet, only income was disclosed in the returns the IRS had been filing for the couple; no expenses were.

What Was Done to Fix It?

For the years the couple failed to file tax forms, Dryden did so, including all of the expenses they were qualified to write off as well as additional tax credits to reduce their tax burden. Their account now only had roughly $500,000 left, she added. She subsequently coordinated a payment plan for her clients with the IRS, which they are still adhering to.

 

How to Stay Out of IRS Trouble

According to Dryden, it’s typical for taxpayers who are unable to pay their tax debt to wish to forgo filing a return. Even if you are unable to pay your debt, you should still file a tax return. more often than not, the punishment is a failure-to-pay, The IRS advises completing forms, making as much of a payment as you can, and even taking out a loan to pay what you owe in order to avoid paying penalties and interest to the IRS. To reduce your tax obligation month by month, you could also choose the IRS installment plan.

Even if you’re not attempting to evade paying taxes, sometimes errors on your tax return can lead to you owing more than you anticipated. Get qualified assistance with your tax file to avoid that circumstance and receiving an underpayment letter from the IRS. Try to find an enrolled agent or a CPA who focuses on tax preparation, Dryden said. It is a fact that they know things that the program doesn’t, and they are able to do things that the software can’.

 

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