No one relishes the idea of forking over a large portion of their paycheck to the U.S. government. It can be tempting to think about what you would do with all the extra cash in your pocket that you pay each year in taxes.
With the Average American giving 28.9% of their income to Uncle Sam each year, taxes can eat up thousands of dollars from your paycheck. However, we’ve all heard the Benjamin Franklin quote, “… in this world, nothing can be said to be certain, except death and taxes.”
So, what happens if you try to avoid the certainty of taxes and abscond with 100% of your earnings?
We’ll answer that question in this article.
The reason people don’t pay their taxes is usually due to one of the following:
– You voluntarily refuse to pay your taxes by not filing
– You don’t have the money to pay your tax bill
– You forgot or didn’t have time to file by the deadline
It might seem like an odd distinction, but your intent behind not paying your taxes matters.
As you can imagine, the IRS doesn’t look incredibly kindly on individuals who actively try to avoid paying a dime in taxes. Though there’s strong support for the “taxation is theft” movement, and some people have tried to declare themselves as sovereign citizens to avoid paying, the reality is that the IRS is bound to catch up with you eventually.
This is especially true if you have income from a W2 or W9, or you have investment or interest income that a financial institution is reporting. Eventually, the IRS will make the connection between your social security number coming in on tax documents and your corresponding lack of tax returns.
The consequences of not filing or paying taxes due depends on a variety of factors, including:
– How much you owe
– How long it’s been since you’ve filed
– How much information the IRS has
If your tax bill isn’t significant, you’re likely to get some letters in the mail notifying you that you haven’t paid, and there will probably be a sample tax return that the IRS has prepared based on what they think your income is. This return won’t include any exemptions or deductions, so it’s likely to be an overestimate of the total amount due.
These letters will escalate in nature, and you’ll be accruing interest and penalties in the meantime.
Jail time is unlikely as the IRS would rather have you pay the amount due than incarcerate you, but there are plenty of celebrity cases that should give you pause and make you reconsider the consequences of avoiding taxes long-term. What’s more probable is that the IRS will issue a levy, which involves wage garnishment and liens on bank accounts, property, and other assets.
Though it can feel like your stomach has bottomed out and your life is crumbling, it’s not the end of the world if you get a tax bill that is more than you expected.
There are plenty of things you can do to get on track with your tax bill, and the IRS will work with you to get you back on track.
Keep in mind that you are likely to accrue penalties and interest the longer that you wait to pay. However, you can set up an installment agreement that will spread out your payments over a period of time, making your payments more manageable.
The IRS can also grant an extension. Filing Form 1127 can result in an extension that’s six months long, giving you half a year to compile some cash to pay your tax bill.
You could even potentially borrow from your home or 401(k). These options shouldn’t be taken lightly, and the wisdom of going this route will depend on how large your bill is and what penalties you face.
It happens. Life is hectic, or maybe you didn’t get your financial records to your accountant on time. If you didn’t file an extension, you’ll likely incur a late penalty, but the saying “better late than never” is perfect for taxes.
The longer you wait, the more expensive the mistake will be, so it’s important to file as soon as you realize your mistake.
If you’re in a situation where you’ve avoided taxes or you can’t pay your bill, you do have options. Depending on the circumstances, you may be eligible to waive a significant portion of what you owe through an offer in compromise.
This is just one option to explore. We encourage you to get in touch with us for a free tax analysis where we’ll discuss your tax liability and come up with a solution you can live with.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.