What Happens if You Can’t Pay Your Taxes

When comedian and actor Eddie Murphy accepted a Lifetime Achievement award at the Golden Globe Awards, he had a tip for how to succeed and survive in the entertainment industry.

“Pay your taxes,” Murphy warned.

That’s not only good advice for aspiring entertainers, it’s good advice for everyone.

You can go to jail for not paying taxes – the most serious, but not only, penalty for ignoring this obligation to the government. At the very least, you must pay what you owe as well as penalties and interest.

The best way to avoid jail or expensive penalties for unpaid taxes, of course, is to pay on time. But if you owe taxes and can’t pay them, address the issue as soon as possible. Be upfront and responsive with the Internal Revenue Service.

No matter why you fell behind, the problem will not disappear. The longer you wait, the more you’ll owe and the more severe the penalties will be. The IRS wants to work with you too, and has a variety of programs to help people who have fallen behind catch up. It’s expensive to investigate and prosecute tax nonpayment cases, so it’s in the IRS’s interest to resolve the issue rather than send you to jail.

What Are Back Taxes?

“Back taxes” are defined as any amount of tax that’s owed but hasn’t been paid. If you haven’t paid your taxes by the time they’re due, or have only partially paid, that applies.

The latest IRS estimate is that 15.1% of taxpayers don’t pay what they owe by the tax deadline, which resulted in a $625 billion “tax gap” in 2021, the last year for which figures are available. Of that, $77 billion was from taxpayers not filing on time, $542 billion was under-reporting what was owed, and $68 billion was underpayment.

The IRS eventually gets much of that money back, and more, since it charges interest and penalties on back taxes.

If you are one of those taxpayers, the longer you wait to pay, the more it will cost you. Penalties and interest increase for every year the debt remains.

Unpaid back taxes can hurt individuals or businesses in many ways. Not only does the debt continue to grow, but it can affect your ability to get credit or a loan. If you are owed a refund, but also owe back taxes from previous years, the IRS can use the refund towards what you owe, rather than send you the money.

The IRS can also place a tax lien on your property, which could lead to foreclosure or make it impossible to sell your home. Your passport can even be revoked.

Federal taxes aren’t the only ones that have consequences for not paying, there are many different types of taxes that have penalties for nonpayment. If you live in Washington, D.C., or one of the 43 states that charges a state tax, you also face penalties for not paying. Most states charge fines that are a percentage of what’s owed, and like federal fines, the amount increases the longer you don’t pay. Not paying your local property tax also carries penalties that could mean losing your house. Like the federal government, state and local governments can assess penalties, seize property, or impose tax liens.

How to Avoid Owing Back Taxes

Filing your tax return by April 15 is the best way to avoid owing back taxes. If you can’t pay in full, pay what you can to reduce interest and penalties. The IRS takes not filing much more seriously than not paying, and penalties are more severe.

To avoid owing back taxes:

• Create a budget and save money for taxes
• Pay with a credit card
• Increase your paycheck tax deduction

Filing an extension gives you until Oct. 15 to file a return, but you still have to make an estimated payment by April 15.

Can You Go to Jail for Owing Back Taxes?

Can you go to jail? Yes. Will you go to jail for back taxes? Probably not.

You are in danger of jail time if you’ve lied on a tax return or hidden your assets. You can be sentenced to 1-5 years in prison for hiding taxable assets on your federal tax return and up to one year for every year you don’t file a return. Some 401 people were sentenced for federal tax fraud and evasion in 2022, the most recent year for which statistics are available, representing 59.6% of those convicted. The average sentence for tax evasion was 13 months. Sentences were higher for those who used sophisticated means to conceal their offense, played a leadership role, abused a public position, or obstructed justice during the investigation. You can also go to jail for not paying state taxes for the same reasons – fraud and tax evasion.

The majority of people who don’t pay what they owe, but work with the IRS to resolve the issue, are not headed to jail.

You will pay penalties, with the amounts based on whether you filed on time, how much you owe, and how quickly you pay it back.

The key to reducing the financial pain is taking responsibility. If you owe money to the IRS, you will be informed by mail. The IRS will spell out the options for paying the bill, including installment payment plans or even paying less than what you owe. The IRS will only contact you by mail. If you receive a phone call from someone saying they work for the IRS, or local law enforcement, telling you to pay your taxes immediately, it’s a scam. Report it to your local law enforcement agency.

If you ignore your unpaid taxes, they won’t go away. The original amount will grow through interest and fines. The faster you address the problem, the lower the added costs will be.

What Can the IRS Send You to Jail For?

Technically, the IRS doesn’t send anyone to jail for criminal tax code violations – it passes the case to the U.S. Department of Justice. There is a six-year statute of limitations to prosecute from when the criminal violation occurred. Civil violations don’t carry jail time and are pursued by the IRS.

Tax violations that may result in jail time are:

• Tax evasion (willful failure to file a return, supply information, or pay tax)
• Tax fraud (fraudulent or false returns, statements, or other documents)
• Assisting tax evasion or fraud
• Failure to file a tax return

What Actions Do Not Lead to Jail Time?

Civil tax violations that won’t result in jail time include:

• Mistakes on tax returns
• Can’t afford to pay
• Tax avoidance
• Not filing if you’re not required to (for instance, because your income is too low)
• Failure to pay self-employment tax if you earn $400 or more

Some of these violations still result in financial penalties. In all cases, be responsible and meet deadlines for filing returns. Tips to file your taxes correctly can help you avoid honest mistakes.

Additional Penalties for Not Paying Taxes

Non-jail penalties for not paying federal taxes include:

Non-payment: 0.5% monthly of the unpaid balance (0.25% if filed on time and enrolled in a payment plan), capped at 25% of the total. Interest is also charged on unpaid balances (8% in 2024).

Failure to file: 5% of what’s owed for each month the return is late, maxing at 25%, not including failure to pay penalty.

Tax returns are withheld until the debt is paid. The IRS may put a lien on property or garnish the wages of taxpayers who don’t respond to collection efforts.

What To Do If You Have Back Taxes or Can’t Pay Your Taxes

A wise person once said that if you find yourself in a hole, the first thing to do is stop digging. The same logic applies to tax trouble. That hill of back taxes will soon be a mountain if you don’t deal with it.

If you’ve filed for bankruptcy, your tax debt won’t be discharged unless the debt is the result of an IRS mistake, fraud, or undue hardship. In some rare cases, the IRS may help settle your tax debt if you find that bankruptcy and tax debt are a combination that you can’t solve.

That said, the steps are the same whether you’ve filed for bankruptcy or not.

Ways to pay back taxes and avoid serious trouble with the IRS include:

• Be proactive in paying back taxes: File your taxes and then work with the IRS to pay the bill. The agency has a variety of programs that can help people, depending on their circumstances.
• Apply for a payment plan: The IRS offers short and long-term payment plans, settlements, and deferments, depending on the taxpayer’s financial situation. When you apply, you can also apply for a penalty abatement, which removes or reduces fines and interest accrued before or during your attempts to settle the debt.
• Provide a reason for a tax error or failure to pay taxes: Business, financial, personal, or health reversals during the year may have left you unable to pay what you owe the IRS. Or maybe you made an honest mistake while calculating your business or personal taxes. Be upfront with the IRS and your outcome is likely to be more favorable.

Government Tax Forgiveness Programs

There are programs available to help settle tax debt. The IRS has payment plans, depending on your financial situation and eligibility.

Offer In Compromise: If your financial situation is not going to improve, the IRS may accept less of what you owe as your payment.

IRS Payment Plan: If you owe less than $50,000, you can apply to pay in monthly installments. Fees, penalties, and interest apply until the debt is cleared.

IRS Short-Term Payment Plan: If you owe less than $100,000 and can pay what you owe within 180 days, the IRS will allow you to with no fee, but will charge interest. If you don’t pay by the deadline, penalties will apply.

Currently Non-Collectible Status: If you can prove to the IRS that you don’t have the money to pay your taxes, even in monthly installments, and the IRS agrees, you can defer what you owe for up to 10 years.

Lower or Waived Penalties: It is possible to get penalties reduced or waived altogether if you are in what the IRS considers extreme circumstances. You will still owe the original tax and any interest it may have accrued.

Nongovernment Tax Help

An Internet search for tax debt relief will produce an endless list of companies. Some are legitimate, many are scams. What is certain is that there are many debt relief options and resources available to provide advice and financial relief from back taxes and other debts. They include:

Credit Counseling: A good first step whether your trouble is tax debt, credit card debt, or other financial woes. Counselors are obligated to offer the best financial advice to clients and are trained to find the best solutions.

Tax Attorney: Tax attorneys understand taxation laws and help people and corporations meet tax obligations by representing clients in disputes with the IRS.

Debt Relief Programs: If you have credit card debt in addition to tax debt, a debt management program, debt settlement, or debt consolidation will help free up money to pay the IRS. Lowering interest rates and monthly payments is the goal. If you can do that, you’ll have extra money each month to pay down your tax debt.

Debt Consolidation Loans: A loan specifically for debt consolidation that pays off all of your debts, with you making one monthly payment, usually at a lower interest rate. If possible, you can negotiate a lower payoff total with each creditor, including the IRS.

Low-Interest Personal Loan: You may qualify for a low-interest loan that you can use to pay your tax bill, costing you less than the fees and interest charged by the IRS.

Get Professional Help With Your Debts

Most of the strategies for dealing with tax debt without facing criminal prosecution are available to anyone who needs them. There are times, though, when the best strategy is to seek professional help.

The tax code is overwhelmingly complex, and the bureaucracy is massive, and that makes for a forest that can best be navigated with a guide.

A tax professional can help with all manner of financial difficulties at no cost to you. They are up-to-date on the latest laws and regulations, and trained in the various options for resolving tax debt.