How Unpaid Taxes Can Affect You

Written by Alayna Okerlund, Content Management Specialist for

Most people try not to think about taxes until they absolutely have to. Thanks to the recent tax season, you’re probably still thinking about your tax situation, especially if you have a large tax bill looming over your shoulder.

Nothing is worse than realizing you don’t have enough money to pay your taxes on time. There are several options you can take to make sure you do pay off your tax bill; however, many people end up procrastinating their tax payments. They might think obtaining enough money is possible if they wait, or are unaware of what payment options are available.

Little do they know, putting off tax payments can financially hurt in more ways than one.

Potential Consequences

Multiple consequences arise when you fail to pay your taxes on time.

Penalties and Interest

The longer you procrastinate your tax bill payments, the more money you will likely end up paying.

The IRS will give you what is called a “failure-to-pay penalty” if you do not pay your taxes by the tax due date. The penalty is a recurring monthly charge that you must pay until you’re done paying off your tax bill. In addition to this penalty, you will have to pay whatever interest is accruing during the time you’re not paying your taxes. Over time, you will be spending more money than if you were to pay your tax bill on time.

Keep in mind that you can receive a different penalty for failing to file your tax return. Consider filing your taxes regardless of whether you can afford to pay your taxes on time. Filing your taxes can help you avoid the “failure-to-file penalty” and other tax issues.

Wage Garnishment/levies

The IRS can also garnish/levy your wages. If a wage levy takes place, the IRS website states that “part of your wages will be sent to the IRS each pay period until

  • You make other arrangements to pay your overdue taxes,
  • The amount of overdue taxes you owe is paid, or
  • The levy is released.

Part of your wages may be exempt from the levy and the exempt amount will be paid to you. The exempt amount is based on the standard deduction and an ‘amount determined’ calculated in part based on the number of dependents you are allowed for the year the levy is served.”

Indirect Credit Impact

Paying your taxes late could indirectly put your credit in a bind.

Late tax payments and unpaid taxes might not show up on your credit reports, but there are ways tax liens can indirectly affect your credit.

According to Experian, “paying extra money in penalties and interest because you sent in your tax payment late could make it more challenging to keep up with the rest of your bills. If this happens, and you fall behind on any credit obligations as a result, your late tax payment could indirectly harm your credit. Payment history is the most important factor in your credit score, counting for about 35 percent of your score, so late credit payments reported by your creditors can damage your credit quickly.”

Potential Tax Payment Solutions

Paying your taxes is important. Paying on time would be best, but if you can’t manage to pay your taxes before the tax due date, here are a few options to consider:

Payment Plan/installment Agreement

The IRS has a few different payment plans that you can request. The IRS payment plan options include the following:

Pay now plan

  • Full amount in one payment
  • $0 to apply
  • No interest or penalties

Short-term plan

  • 120 days or less
  • $0 to apply
  • Interest + Penalties

Long-term plan option 1

  • More than 120 days
  • Automatic payments via direct debit
  • $31 to apply online
  • $107 to apply via phone, mail, or in-person
  • Interest + Penalties

Long-term plan option 2 

  • More than 120 days
  • Electronic, non-direct debit payment (Direct Pay or credit/debit card)
  • $149 to apply online
  • $225 to apply via phone, mail, or in-person ($43 for low income)
  • Interest + Penalties

Personal Loans

A personal loan might not be your first option, but it can be helpful in some unpaid tax situations.

You can obtain a personal loan from credit unions, banks, and online lenders. So depending on a few factors like credit score, interest rates, applications, etc., you could receive funding within a short time. 

It could be smart to get a short-term personal loan if you are planning on using it to pay off your tax bill. However, it’s important that you compare lenders and consider interest rates, your particular financial situation, potential repayment plans, and other payment options before you decide to take out a personal loan for tax payment purposes.

Credit Cards and Debit Cards

Paying your tax bill with a credit card may be an option for you, depending on your circumstances. However, it’s generally not the first option people consider due to a variety of fees and high tax bills.

It’s important to note that paying your taxes with a credit card could be a good option if you can afford to pay off your credit card bill. If you can’t afford to pay it off, however, your credit score could suffer.

Before you start making tax-related payments with a credit/debit card, visit the IRS website to learn about processing fees and actions, payment limitations, and more.

The Bottom Line

Tax bills shouldn’t be put on the backburner for too long. Although owing the IRS money doesn’t put you in an ideal situation, sometimes it can seem inevitable. Knowing what can happen when you fail to pay your taxes on time and what you can do about it will help you avoid dealing with future tax debt. Consider conducting your own personal research to figure out which tax relief options are best for your specific situation.

If you notice that your credit situation is indirectly suffering from tax debt, consider looking into credit repair services sooner rather than later. After all, poor credit can restrict your loan options and harm your overall financial situation.