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It is not uncommon for people to have tax debts. While many want to settle their debt quickly and move on with their lives, others choose to ignore it. Unfortunately, ignoring your tax debt doesn’t make it go away, and it can actually negatively impact your life in several ways.
Here are the effects of unpaid taxes.
No federal tax refund
When you file your taxes, you may be eligible for a refund. Typically, you will receive a check in the mail or the money will be deposited into your checking or savings account; however, if you have a tax debt, the IRS will not issue your refund. Instead, the IRS will keep your refund and it will be applied toward the balance owed on your tax debt. And this will continue until the total tax debt is repaid.
Interest and penalties
The IRS will add interest and penalties to your tax debt when it remains unpaid. You will likely see a total of 5% interest added to your tax debt each year it remains unpaid. This will ultimately increase your total debt amount. For many, as debt gradually increases over time, it becomes more difficult for them to pay it off. This will likely happen if you wait too long to pay off your debt.
Refusal or revocation of passport
A seriously delinquent tax debt can result in refusal or revocation of your passport. If your debt, including interest and penalties, exceeds $53,000, it is considered seriously delinquent. Once the IRS certifies this debt to the Department of State, if you apply for a passport, the application will be denied. If you already have a passport, it will be revoked.
Seizure of money and goods
If you own a home, vehicle or other assets, the IRS can seize that property to cover the cost of your tax debt. This is called a levy. In addition to having the ability to seize your assets, the IRS can take money from your bank accounts or money earned by your small business, and your wages can be garnished. This may create a challenge for you if you have other monthly expenses to cover.
One way the IRS can attempt to collect a tax debt is to turn it over to a private collection agency who will become responsible for collecting that debt. If this happens, the collection agency will contact you using a number of communication methods to try to help you resolve your tax debt.
It can also negatively affect your credit score!
If your taxes go unpaid for a period of time, the IRS will file a Notice of Federal Tax Lien. Property you own, such as your house or vehicle, will no longer be in your possession. And creditors will be aware of this lien, making it difficult to be approved for any type of credit. There are ways to remove the lien and return possession of the property to you, but paying the tax debt is the easiest.
It’s understandable if your budget doesn’t allow you to pay your entire tax debt before the due date. It may be tempting to ignore your tax debt, but you will need to think about the consequences before deciding not to pay your debt. And because the IRS offers taxpayers several ways to pay their tax debt, it’s possible to pay off your debt and avoid facing the same consequences that other people have faced when they chose not to. not pay their taxes.