By Geoff Williams
"What would happen if I just didn't pay my taxes?" That question has probably crossed your mind at least once. But rather than finding out the hard way, here are some likely outcomes.
You'll Owe More
If you've committed yourself to not ever paying taxes, this may not matter to you. But if you've decided you aren't going to file this year because you're tired of doing it, you may want to rethink that plan. We're not talking about filing and not being able to pay what you owe. If that's the case, don't panic. The Internal Revenue Service has a reputation for being easy to work with.
But if you're feeling tax inertia, you should do what you can to pay your taxes by the April 15 deadline, or ask for a six-month extension by filing Form 4868. No, the ground won't open up and swallow you whole if you fail to do either. You won't likely be carted off to jail or lose your house. But you will be penalized with fees.
You'll eventually learn this when you receive a letter from the IRS, according to John Gregory, a tax practitioner and founder of 1040Return.com, which provides tax preparation software and tax resources for individuals and businesses. "The IRS will calculate your income for you, using the worst case, which would be filing you as a single individual with one exemption. Based upon these deductions, the IRS will calculate your tax liability with penalty and interest," Gregory says.
You'll Spend Time and Money Cleaning Up Your Mess
In other words, if you don't do your taxes, the IRS will file them for you. While it may sound like a great way to spare yourself the hassle of filing your taxes, this is hardly free professional tax help. Gregory breaks down what you'd owe if you had $30,000 in reportable income in 2012 and didn't pay taxes for it until 2015. In that case, you would owe $2,653 in back taxes. About half of that sum would be due to tax penalty fees for failing to file and pay up.
And we still haven't gotten to the interest you'd pay. "Generally, interest accrues on any unpaid tax from the due date of the return until the date of the payment," Gregory says. "The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily. So you would accumulate approximately $159 in interest."
Assuming this was a momentary blip in judgment and you later decide to pay your taxes, you should factor in the amount of time and money it'll take to catch up. "You'll likely need to pay a tax professional more to fix your tax situation than you would have paid to file properly in the first place," says Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group, in Scarsdale, New York.
Your Creditworthiness May Take a Hit
If you have piles of unpaid back taxes, eventually -- usually by the time you owe the IRS $10,000 -- the federal government will put a lien on your property, most likely your house. You might also get hit with a state tax lien or one from your county. These are documents filed with the county government; if you sell your home, before you see any profits, the government will take what you owe first.
But before that happens, tax liens show up on your credit report as unpaid debts, and they will have a significant negative impact on your credit score. The appearance of a tax lien or liens may not prevent you from getting a loan -- for a credit card or car, for example -- but you can probably kiss any low-interest loans goodbye.
By Geoff Williams