What Happens if You Don’t Have Money to Pay Taxes?

Owing taxes but not having the money to pay can be stressful. Many assume that if they can’t afford their tax bill, ignoring it is the only option. However, failing to address unpaid taxes can lead to serious financial and legal consequences.

Understanding what happens when you can’t pay and knowing your options can help you avoid penalties.

Consequences of Not Paying Taxes

Ignoring unpaid taxes leads to escalating financial and legal trouble. The IRS and state tax agencies have broad authority to collect what is owed. The first consequence is a formal notice, typically a CP14 Notice from the IRS, informing you of the outstanding amount and requesting immediate payment. If no action is taken, additional notices follow with increasing urgency.

If the debt remains unpaid, tax authorities may file a federal tax lien against assets, including real estate, vehicles, and financial accounts. A lien makes it difficult to sell or refinance property and can affect business operations for self-employed individuals. If the balance goes unpaid, the IRS can issue a levy, seizing wages, bank accounts, or even Social Security benefits. Employers must comply with wage garnishments, meaning a portion of your paycheck could be withheld until the debt is settled.

Unpaid tax debt can also lead to passport restrictions. Under the Fixing America’s Surface Transportation (FAST) Act, the IRS can certify seriously delinquent tax debt—defined as exceeding $62,000 in 2024—to the State Department, which can deny or revoke a passport. This can be a major issue for those who travel for work or family obligations.

Options for Tax Payment Plans

If paying the full amount isn’t possible, tax authorities offer structured payment arrangements. The IRS provides short-term and long-term installment agreements, allowing taxpayers to spread payments over time. A short-term plan, available for balances under $100,000, extends up to 180 days without a formal application. For larger debts or longer repayment periods, a long-term installment agreement can be set up, often requiring direct debit payments.

For those facing financial hardship, an Offer in Compromise (OIC) may be an option. This program allows taxpayers to settle their debt for less than the full amount owed if they can prove that paying in full would create an undue burden. The IRS evaluates OIC applications based on income, expenses, asset equity, and future earning potential. While approval rates are low, individuals with little disposable income or assets may qualify for substantial reductions.

If even an installment plan is unaffordable, the IRS may classify an account as “Currently Not Collectible” (CNC). This status temporarily halts collection efforts, though interest and penalties continue to accrue. Taxpayers must provide financial documentation proving that any payment would prevent them from covering basic living expenses. The IRS periodically reviews CNC accounts to determine if collection actions should resume.

Penalties and Interest on Unpaid Taxes

Failing to pay taxes on time increases the total amount owed due to penalties and interest. The IRS imposes a failure-to-pay penalty, starting at 0.5% of the unpaid tax per month and growing to a maximum of 25%. If a taxpayer also fails to file a return, the penalty for not filing is significantly higher—5% per month, up to 25% of the unpaid amount. When both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty, capping the combined charge at 5% monthly.

Interest compounds daily on unpaid taxes and penalties, making it more difficult to settle the debt over time. The IRS calculates interest based on the federal short-term rate plus 3%, adjusted quarterly. For example, if the short-term rate is 5%, the total interest rate applied would be 8%, accruing on the outstanding balance until fully paid. Because this interest is compounded, taxpayers who delay payment for months or years may see their debt grow much faster than expected.

In some cases, penalties can be reduced or waived if a taxpayer demonstrates reasonable cause for late payment. The IRS considers factors such as serious illness, natural disasters, or erroneous advice from a tax professional when evaluating penalty abatement requests. First-time penalty relief is also available for those with a clean compliance history over the past three years.

Impact on Credit Score

Unpaid taxes do not directly affect a credit score since tax debts are not reported to consumer credit bureaus like Equifax, Experian, or TransUnion. However, unresolved tax liabilities can still impact creditworthiness. Taxpayers who use personal loans or credit cards to cover their tax debt may see their credit scores drop due to high credit utilization. If they miss payments on these borrowed funds, delinquent accounts get reported to credit agencies, further damaging their credit.

Unresolved tax debt can also create obstacles when applying for loans. Mortgage lenders often require borrowers to demonstrate they are current on tax payments before approving home loans. The Federal Housing Administration (FHA) and Fannie Mae guidelines mandate that applicants with outstanding tax liabilities either pay the balance in full or have an established installment agreement with a history of on-time payments. Without such arrangements, loan approvals may be denied.

Legal Actions by Tax Authorities

If unpaid taxes remain unresolved for an extended period, tax agencies can escalate enforcement measures beyond liens and levies. The severity of enforcement depends on the amount owed, the length of delinquency, and the taxpayer’s responsiveness to collection efforts.

In extreme cases, the IRS or state tax agencies may initiate legal proceedings, including tax litigation or criminal charges for tax evasion. While civil penalties are more common, willful tax avoidance—such as deliberately underreporting income or failing to file returns—can result in prosecution. Convictions for tax fraud can lead to substantial fines and even imprisonment. Additionally, tax authorities can summon financial records, interview third parties, and conduct audits to assess fraudulent activity.

For businesses, unpaid payroll taxes are particularly scrutinized, as the IRS holds company officers personally liable for failing to remit withheld employee taxes. Beyond criminal enforcement, tax agencies can revoke business licenses or professional certifications for individuals in regulated industries. Some states also publish lists of delinquent taxpayers, which can damage reputations and create difficulties in securing future employment or business contracts.

Seeking Professional Tax Assistance

Navigating tax debt can be overwhelming, especially when penalties, interest, and enforcement actions accumulate. Seeking guidance from a tax professional can help individuals and businesses explore the best resolution strategies while ensuring compliance with tax laws. Tax attorneys, certified public accountants (CPAs), and enrolled agents specialize in negotiating with tax authorities and can provide valuable insights into available relief programs.

A tax professional can assist in preparing and submitting installment agreements, Offers in Compromise, or requests for penalty abatement. They can also represent taxpayers in audits, appeals, or litigation, ensuring legal rights are protected. In cases where financial hardship makes payment impossible, professionals can help document income and expenses to support claims for reduced payments or temporary collection suspensions. Their expertise can also prevent costly mistakes, such as missing filing deadlines or agreeing to unfavorable repayment terms.