Penalties and Consequences of Tax Debt

Paying taxes is a responsibility strictly enforced to citizens. As such, the government implements different penalties for failing to do so. The penalties apply to people who fail to file tax returns on time or pay the taxes by the deadline. Other consequences may also arise, and the longer the owed taxes remain unpaid, the worse the consequences get.


Calculation of penalties for partially and completely unpaid taxes start from the due date of the taxes. Penalties accumulate at a monthly basis – 0.5 percent of the owed tax each month with a cap of 25 percent.


In addition to the penalty, owed taxes also accumulate interests, which change every three months. The basis for calculation is the set federal short-term rate plus three percent and compounds daily. The rate is generally four percent per year.

Tax Lien

After a certain time and numerous notices and the taxpayer hasn’t taken action to settle the debt, the IRS will send a notice of federal tax lien. This means they have a claim on the taxpayer’s assets. If the taxpayer sells these assets, the IRS can take a portion of the funds to pay off the tax debt.

Tax Levy

A tax levy is the final step if the taxpayer still doesn’t take action after the tax lien. This means the IRS can legally seize property to settle the tax debt.



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