“Ignore them and they’ll go away” is great advice for some of life’s annoyances. Unfortunately, it doesn’t apply to taxes. While the IRS has taken great pains to rehab its scary image (and is actually pretty decent to deal with), it still can and will go after people who blow off their taxes and deliver some pretty expensive consequences.
Will the IRS even notice your missing return among the millions it processes? “They will, no question,” says Craig Wild, partner at Wild, Maney & Resnick, LLP. “Within 30 days you will get a notice.” The agency will keep trying to get in touch with you via mail for about six months, give or take, before stepping it up with phone calls.
At this point, you’ll owe failure to file penalties if you didn’t file. According to the IRS’s website, the total late-filing penalty is around 5% of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is more than 60 days late, the minimum penalty for late filing is either $135 or 100% of the tax owed, depending on which one is smaller.
(MORE: 5 Emergency Last-Minute Tax Tips)
If you filed a return but didn’t send the IRS what you owed, you’ll be hit with a late payment penalty, plus the interest on your outstanding tax bill itself, which is the current federal short-term interest rate plus 3%.
How much you’ll pay overall depends on how much you owe and for how long you put off filing and/or paying. The IRS is pretty flexible about giving taxpayers more time to pay via installment plans. In addition to the penalties and interest for paying late, you also have to pay a one-time fee of $52 or $104 (depending on your income and how you intend to pay).
Don’t do that, though, and things could get ugly. Generally, the IRS won’t hit you with a lien unless you’re delinquent for years, but a lien is a huge headache. Officially, “The federal tax lien is a legal claim to your property, including property that you acquire after the lien arises,” the IRS website says. If you have outstanding back taxes, the agency also can claim any refund you would have been entitled to and put it toward that debt.
Liens are public record, which means that credit reporting agencies gather that information and include it in your credit report. “A tax lien is considered a serious derogatory in the vein of a foreclosure or a collection,” says Anthony Sprauve, spokesman at Fair Isaac Corporation. “So someone’s credit score as a result of that is going to take a serious hit.” Depending on other factors in your credit history, that could be in the neighborhood of 100 to 150 points.
Unlike other debts, which eventually drop from your credit report even if you don’t pay them, that lien will stay on your report indefinitely as long as it’s outstanding. If you settle with the IRS for less than what you owe, it will stay on your credit report for 7 years, says John Ulzheimer, president of consumer education at SmartCredit.com.
That used to be the case for liens paid in full, too, Ulzheimer says. But a year ago, the IRS made a new rule, a “carrot” to get delinquent taxpayers to pay their back taxes in full. If you pay in full, you can ask the IRS to withdraw the lien, which will remove it from your credit report immediately.
If the IRS has its way in the future, big-time scofflaws won’t even be able to scoot out of the country to avoid a tax bill. Legislation currently in Congress would give the State Department the right to “deny, revoke or limit” the passport of anyone who owed the IRS more than $50,000 and wasn’t making any effort to repay it.