When money is owed to the government, it will eventually seek payment. If the amount climbs into the thousands, penalties and interest can make the debt much harder to resolve.
Because balances can increase quickly, taxpayers should understand what may happen next.
Penalties and interest can pile up
Once taxes are unpaid, a late-payment penalty begins to apply. The failure-to-pay penalty is 0.5% of the amount owed each month, or part of a month, up to a maximum of 25% of the unpaid balance.
Interest also accrues. The rate is based on the federal short-term rate plus 3%. It is set quarterly and compounds daily, so a large balance can become even harder to eliminate over time.
What liens and levies mean
If payment still does not arrive, the IRS may file a federal tax lien against your assets, which is a legal claim on your property. H&R Block says the agency may be more likely to do this when balances are larger. Liens can hurt credit access and make it more difficult to borrow money or sell property.
The IRS can also issue a levy, which allows it to seize property. According to the agency, that can include garnishing wages, taking funds from bank or other financial accounts, and seizing and selling vehicles, real estate and other personal property.
It may also collect up to 15% of Social Security benefits.
Notices from the IRS
If you owe money after filing, you will receive a CP14 notice showing the amount due. If possible, paying right away is the best option.
If the balance remains unpaid, a CP501 notice will follow as a payment reminder. A CP503 notice is a second reminder.
A CP504 notice signals the agency’s intent to levy, while an LT11 notice or 1058 letter is the final notice before a levy.
The 10-year collection window
The IRS generally has a collection deadline known as the Collection Statute Expiration Date, or CSED, which gives it 10 years from the date the tax is assessed to collect taxes, penalties and interest. That clock can be paused for several reasons, including bankruptcy, an offer in compromise application or a request for an installment agreement.
Still, waiting out that period usually is not a practical strategy. The IRS can use strong collection tools, and penalties and interest continue to add up.
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