While they are most often mentioned simultaneously, filing and paying your taxes are two different things, and each accumulates independent penalties and interest when you don’t meet the deadline. Even if you cannot pay your taxes, you should always file your tax return on time.

Assuming you filed your return by this year’s extended deadline of May 17 for tax year 2020, what happens if you cannot pay the tax you owe? Are you at risk of being charged with tax evasion like Al Capone or former Atlanta Mayor Bill Campbell? 

Tax Evasion

Tax evasion is considered a crime by the IRS and comes in two forms:

  • Evasion of assessment – the most common, this happens when a taxpayer files a return and purposely understates or omits income, or affirmatively claims deductions to which they are not entitled.
  • Evasion of payment – this usually occurs after a tax liability has been established and involves a taxpayer concealing assets or money which could be used to pay taxes.

The IRS rarely prosecutes individuals for tax evasion. In 2020, the IRS’s Criminal Investigation Division only investigated 1,598 cases in total, representing a very small percentage of the overall US tax-paying population. These cases usually represent large amounts of unpaid tax occurring over several years. 

Non-Criminal Consequences of Not Paying Taxes

Just because you aren’t likely to be charged with tax evasion for not paying your 2020 income taxes, doesn’t mean you won’t face other consequences. The first step the IRS takes is to begin charging penalties and interest from the first day your taxes are late. In 2021, this date is May 18. Even if you filed an extension on your return, meaning you have until October 15 to file Form 1040 and all its supporting schedules, your tax payment is still due on Tax Day. Any unpaid balance will be assessed interest and penalties dating back to May 18.

The IRS assesses the following penalties on unpaid taxes:

  • 0.5% of the tax owed, for each month the tax remains unpaid, up to a maximum of 25% of your unpaid taxes.
  • 10 days after the IRS issues a final notice of intent to levy or seize property, the penalty increases to 1% per month.

If you have a documented reasonable cause for failing to pay your taxes, such as a fire or serious illness, the IRS will usually grant penalty relief. Not having enough money to pay your taxes is not considered a reasonable cause. 

On top of penalties, the IRS also charges interest for non-payment of taxes. This accrues from the date the tax is first late and compounds daily until the balance is paid in full. The rate for individuals is computed as the federal short-term rate plus 3% and updated quarterly.

Once you’ve missed the tax payment deadline, the IRS will start sending you tax bills. If these go unpaid and you fail to respond to the IRS, you will eventually receive a Notice of Federal Tax Lien alerting you that the IRS has put a lien on your assets. The IRS also has the right to seize your assets or garnish your wages.

What to Do If You Cannot Pay

If you cannot pay your taxes, the best course of action is to reach out to the IRS – not ignore the agency. You can apply for a payment plan, which ranges from short-term agreements that are paid off within 120 days to long-term plans or installment agreements that can be paid monthly over a period of several years. 

Individuals who cannot pay their full tax debt even with extended payment terms may be eligible for an offer in compromise, where the overall debt is reduced and paid over a period of time. These agreements involve an extensive application process that includes evaluation of your income, expenses, equity in assets, and ability to pay. 

Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer

If you cannot pay your taxes and are worried about next steps, we can help. The experienced attorneys at Wiggam & Geer can evaluate your situation, recommend a course of action, and assist you in the process. Contact Metro Atlanta’s top tax attorney’s by clicking here or giving us a call at (404) 609-1300.