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The Dangers of Ignoring IRS Notices

November 13, 2015

The IRS sends notices to inform taxpayers about the taxes they owe past the payment deadline. Sometimes, even after a taxpayer has paid their tax liability in full, they may owe more in taxes due to inaccuracies on the tax return. Whether a taxpayer has filed a return or not, the IRS will demand payment if the full tax bill hasn’t been paid.

Placement of a Federal Tax Lien

If the IRS notices regarding the payment of back taxes are repeatedly ignored and no effort is made to resolve the tax debt, the next step may be the placement of a tax lien. The IRS can place a lien on any property or asset of the taxpayer, such as a house, boat, car, etc.

A lien is damaging because the IRS can sell the property and/or asset on which a lien has been placed if no satisfactory resolution is achieved. The taxpayer, however, cannot sell the property until the lien is removed.

The IRS also files a public notice to alert creditors about unpaid taxes. This further damages the taxpayer’s ability to take credit or make large purchases. As more and more employers now look at a candidate’s credit reports, it can hurt employment opportunities, as well.

Tax Levy: Selling to Satisfy Tax Debt

If after a lien, the taxpayer has still not made effort to resolve the debt, the IRS can proceed to a levy. Under a tax levy, the IRS sells the property and/or assets on which the lien was placed. The IRS can garnish wages fully or partially; take out money from the taxpayer’s bank account(s); sell assets such as a car, boat, etc.

Mounting Penalties and Interest

Even if the IRS does not implement a levy, the accumulation of penalties and interest on unpaid taxes keeps increasing the total tax debt every month. The penalty for failing to pay taxes on time is 0.5%. The penalty for failing to file a tax return is 5%. If both the penalties apply, the larger of the two is applied.

The interest rate charged is the federal short-term rate plus 3% for a year. It is compounded daily and is charged on unpaid taxes from the due date of the return. It does not include payment extensions.

Every month that the tax debt remains unresolved, the taxpayer will pay more to the IRS. For taxpayers with limited financial capability, an increase in the debt over time can make it difficult for them to satisfy the balance. Therefore, a quick resolution is the best way to pay less in tax debt to the IRS.