What Happens If I Don’t Pay My State Taxes?

State tax obligations are a fundamental component of civic responsibility, funding a wide array of public services that communities rely on. These revenues support local school systems, the maintenance of roads and public transportation, and the operations of first responders. This guide provides information on the processes and consequences related to unpaid state taxes.

Initial State Actions and Financial Penalties

The process of collecting overdue taxes begins when a state tax agency issues a formal notice to the taxpayer. This communication, called a Notice of Tax Due or a Notice of Deficiency, details the amount of tax the state believes is owed and includes an explanation of how the figure was calculated. This document will also specify a deadline by which the taxpayer must pay the balance or formally dispute the assessment.

Upon issuing a notice, financial penalties are applied to the outstanding balance. A failure-to-file penalty is assessed when a taxpayer does not submit their state tax return by the established deadline, including any approved extensions. This penalty is calculated as a percentage of the unpaid tax, around 5% per month, and can accumulate up to a maximum of 25% of the tax bill.

A separate failure-to-pay penalty is charged when a taxpayer files their return on time but does not remit the full tax amount by the due date. This penalty is smaller than the failure-to-file penalty, around 0.5% to 1% of the unpaid tax for each month the debt remains outstanding, also capping at 25% of the total tax liability. If a taxpayer is subject to both penalties in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty.

States also impose accuracy-related penalties if a taxpayer substantially understates their tax liability through negligence or disregard of tax rules. Interest is charged on the entire unpaid balance, which includes the original tax debt plus any accrued penalties. Interest rates are set by state law and are variable, adjusting periodically.

Understanding a State Tax Lien

Following initial notices and the accrual of penalties, a state may secure its claim to a delinquent taxpayer’s assets by filing a tax lien. A lien is a legal claim against a person’s property that makes the state a secured creditor. This public declaration of the state’s interest must be settled before the property can be sold or refinanced with a clear title.

Because tax liens are public records, they are visible to credit reporting agencies, which can lower an individual’s credit score. A lower score makes it more difficult to qualify for new credit, such as mortgages, auto loans, or credit cards.

A state tax lien is a broad claim that attaches to all of a taxpayer’s current and future assets. The lien remains in effect until the tax liability is paid in full, including all penalties and interest, or until the state agrees to release it. The public nature of the lien ensures that the state’s claim takes priority over many other creditors.

State Tax Levies and Asset Seizure

When a tax debt remains unpaid after a lien has been filed, a state can escalate its collection efforts by issuing a levy. A levy is the actual seizure of property to satisfy the outstanding tax liability, unlike a lien, which is only a claim against property. Before a state can levy assets, it must provide the taxpayer with a final notice, called a Notice of Intent to Levy, which grants a specific period, around 30 days, to pay the debt.

One of the most common forms of a levy is a wage garnishment. The state tax agency sends a legal order to the taxpayer’s employer, requiring them to withhold a certain amount of the employee’s wages and remit it directly to the state. The amount that can be garnished is determined by state law and is a percentage of disposable income.

Another collection tool is the bank levy, which allows the state to seize funds directly from a taxpayer’s financial accounts. The tax agency sends a notice to the bank or financial institution, which is then legally required to freeze the account. After a short holding period, the bank sends the funds, up to the full amount of the tax debt, to the state.

In cases of significant non-payment, a state may seize physical property, including valuable personal property like vehicles, boats, or jewelry, as well as real estate. State revenue officers are authorized to take possession of these assets, which are then sold at a public auction. The proceeds from the sale are applied to the tax debt, and any surplus funds are returned to the taxpayer.

Additional State Enforcement Measures

States possess other enforcement tools to compel payment of delinquent taxes. Many states have the authority to suspend or revoke various licenses necessary for an individual’s livelihood, preventing them from legally working until the tax debt is addressed. This can include professional or occupational licenses for:

• Doctors
• Lawyers
• Contractors
• Real estate agents

States can also suspend a person’s driver’s license.

States also operate offset programs to intercept funds that would otherwise be paid to a delinquent taxpayer. If a taxpayer is due a future state tax refund, the state can automatically apply that refund to the outstanding tax liability. This authority can extend to other government payments, such as lottery winnings or certain vendor payments, and some states have agreements to intercept federal tax refunds.

As a further measure, some state tax agencies publish lists of the most delinquent taxpayers. These lists appear on the agency’s public website and name individuals and businesses with significant outstanding tax liabilities. The threshold for being included on such a list varies but involves a substantial debt that has been delinquent for an extended period.

Resolution Options for Unpaid Taxes

Taxpayers unable to pay their state tax debt in full have options for resolving the liability. An installment agreement, or payment plan, allows an individual to make manageable monthly payments until the debt is satisfied. To qualify, taxpayers must be current on all tax return filings and provide financial information to demonstrate the inability to pay the full amount at once.

For those facing severe financial hardship, an Offer in Compromise (OIC) may be a possibility. An OIC is an agreement to settle the tax debt for a lower amount than what was originally owed. Eligibility for an OIC is strict and requires submitting extensive documentation of one’s financial situation to prove that the full amount could not be collected.

The application process begins with obtaining the correct forms from the state tax agency’s website. Applications for installment agreements are often streamlined and can sometimes be completed online, while OIC applications are more complex and require mailing a detailed packet of financial documents. After submission, the state will review the application, which can take several months, and may accept the proposal, reject it, or return with a counteroffer.