The IRS Collections Process – What Happens When You Don’t File and Pay Your Taxes

If you do not pay your tax liability before the filing deadline, the IRS treats the taxes owed as back taxes. If you are required to file a return and you do not file, even if you do not owe, the IRS will charge a failure-to-file penalty for non-compliance. If, on the other hand, you file your tax return but do not pay your taxes in full, then the IRS will charge a failure-to-pay penalty and treat the balance as tax debt.

The IRS uses various collection actions, beginning with notices and ending with the selling/garnishment of property/assets.

Substitute Tax Return

To begin the collection process, the IRS requires an estimate of how much the taxpayer owes. If a tax return is not filed, the IRS files a substitute tax return for the individual. The IRS uses third-party sources to make an estimation of the taxpayer’s liability.

IRS Notices

After determining how much the taxpayer owes in back taxes, the IRS sends a notice that provides information on the amount owed, how to pay, and IRS contact information. The IRS sends multiple notices to encourage taxpayer resolution. If the notices are ignored or sufficient effort is not made to resolve the debt, then the IRS moves to more aggressive collection actions.

Federal Tax Lien

A lien is the government’s claim to a debtor’s property or assets. The IRS does not require a court order to place a lien. After a lien is placed, the taxpayer cannot sell the property and/or asset, and will likely not be able to obtain a loan or new credit.

Liens are damaging because the IRS files a public notice to alert creditors of the unpaid taxes. A lien can hurt a taxpayer’s ability to buy the property or even get a new car. It can also damage employment prospects, as many businesses look at the job applicant’s credit history.

Tax Levy

If an agreement is not achieved with the IRS even after a tax lien, then the IRS may use a levy to seize property or assets. The IRS can garnish a taxpayer’s wages, sell seized property, and garnish bank accounts. A levy can be financially devastating to a taxpayer.

To avoid aggressive collection actions, taxpayers should move toward a swift resolution. Even if they can only make a partial payment or cannot pay any of the debt, they can still achieve resolution using IRS payment plans. Along with avoiding collection action, it is also financially beneficial to resolve a tax debt as quickly as possible to avoid penalties and interest.