There are negative consequences to owing the IRS. They’ll typically give you time to pay, but if you refuse or neglect to pay your tax debt, collection actions will commence. The IRS generally has 10 years from the date the tax was assessed to collect a tax debt from you. The period may be longer than 10 years, such as if there’s a temporary suspension because you asked for it or because you were making a negotiation with the IRS. Here are a few of the drawbacks of owing money to the IRS.
No More Tax Refunds
You won’t get any future tax refunds. If you have an outstanding tax bill and you’re due a refund, the IRS will keep your refund and apply it to your tax debt. This may be a strategy you use to eventually pay off the tax debt, but keep in mind the IRS will continue collection efforts until your taxes are completely repaid.
Federal Tax Lien
The IRS may put a federal tax lien against your property. The tax lien probably keeps you from selling that property until you pay off the tax lien. One of the biggest consequences of a tax lien probably is that it goes on your credit report. It may cause severe damage to your credit score and could then make it harder to get approved for new credit cards and loans until after you pay off the lien. The lien could also mean you have to pay higher security deposits for services you have turned on in your name. Because of the impact to your credit score, the lien may cause you to pay a higher insurance rate.
The IRS may place a levy on your account or your wages. With a levy, the IRS has the right to actually take your property as payment on your tax debt. If they have a levy on your bank account, then they could withdraw funds you have in your account. The IRS can then continue to withdraw money from your account each time you get paid until your tax debt is paid in full. This may lead to additional financial problems because you won’t have money to pay your other bills. The levy also would allow the IRS to take possession of property you own, like a car or boat.
An IRS levy shouldn’t come as a surprise; the IRS will send you a Notice and Demand for payment, give you the opportunity to pay the tax, and send a Final Notice of Intent to levy before the levy happens. Even after the levy is placed on your account, there’s a 21-day hold on the account before the funds are sent to the IRS. You can use this time to make payment arrangements and stop the levy.
Summons to Provide Information
You may be served with a summons to provide information to the IRS that would help them collect the tax from you. Third parties like your bank or accountant may also be summoned to testify in your IRS case.
If you’re unable to pay off your taxes, you can try to settle your debt with the IRS through an Offer in Compromise. This would let you pay only a percentage of your debt either as a lump-sum payment or through payment arrangements.