A Brief Overview of IRS Penalties for Nonpayment

We’ve all heard stories about the consequences of not paying your taxes. Al Capone is one famous example. More recently, Eric Galanti, former owner of three bars and restaurants in Seattle, was sentenced to eight months in prison for several misdemeanor counts of failing to file tax returns (and, by extension, pay his taxes).

Although these are extreme examples, they are also reminders that the IRS frowns on nonpayment of income taxes. Filing and paying taxes is not voluntary if your gross employment income was over $10,000 (if you are filing as a single taxpayer) or your self-employment income was over $400. Despite what you may have heard about people who avoided paying their taxes for years, sooner or later the IRS does catch up.

Here is an overview of the penalties that may apply for nonpayment of federal income tax.

Financial Penalties

The IRS assesses a penalty of 0.5% on what you owe each month. For example, if you owe $10,000, the monthly penalty is $50. It applies every month you are late, up to a maximum of 25% of the unpaid balance. If you don’t respond when the IRS sends you an intent to levy notice, this penalty goes up to 1%, starting 10 days after the letter goes out.

Accrued Interest

The IRS assesses interest in addition to the failure-to-pay penalty described above. It amounts to 3% plus the federal short-term rate, which changes quarterly, so the total interest rate will vary.

Notice of Federal Tax Lien

Once your taxes are overdue, the IRS will start to send you CP (short for “computer paragraph”) notices. If you don’t respond to these notices, a federal tax lien may be placed on your assets. This produces two negative outcomes:

  • Your credit will be affected, making it difficult to apply for a mortgage, certain jobs, etc.
  • If you sell any assets, the IRS can seize the money

Tax Levy

With this penalty, the IRS will actually seize your assets. This is a more extreme measure that only happens when you ignore all letters and refuse or fail to make payment arrangements. You typically receive a final notice of intent to levy at least 30 days before it takes effect.

Examples of such levies include:

  • Wage garnishment
  • A bank levy that causes your account to be frozen and its contents sent to the IRS 21 days later if you don’t make arrangements.
  • Seizure of assets like cars and real estate. Your primary residence cannot normally be seized without court approval.

Passport Suspension or Revocation

If you owe more than $50,000 in taxes (including interest and penalties), the IRS will notify the state department, which may not issue you a new passport or renew your existing one. This will even impact domestic travel because as of January 2018, the TSA only accepts driver’s licenses and state-issued identification cards from states that are either REAL ID-compliant or have an extension.

Criminal Prosecution

If you willfully fail to file a return and pay taxes year after year, you could face criminal charges. This penalty is usually applied if the IRS is convinced that you are willfully committing tax fraud or tax evasion.

Many people refrain from even filing their tax return because they cannot pay the amount owed. Be aware that if you don’t file a return, the IRS will include 5% of your balance as part of the failure-to-file penalty each month. You can avoid this and other penalties or consequences for nonpayment by working with an experienced Seattle tax attorney.

At Boeshaar Law, we have helped many people find the best solution for their situation involving unpaid taxes. For a confidential case review and a recommendation on how to proceed with the IRS, contact us at (206) 899-4860 today!

Written by Robert V. Boeshaar

Robert V. Boeshaar

Robert V. Boeshaar is a Seattle tax attorney committed to helping individuals and small businesses who are facing problems with the IRS. He believes in using his experience to serve others and to make a difference in their lives.