Many taxpayers fail to pay their taxes. The Internal Revenue Service ("IRS") estimates that about seven million Taxpayers failed to file an income tax return and pay their income tax. This is a significant revenue problem for the IRS, as that causes a $28 billion shortfall. Because of this, the IRS has a strong incentive to collect that missing tax.
One means to encourage payment of those taxes is the penalties and interest they impose on delinquent taxes or the use of tax liens or a tax levy to seize assets. With a lien, the IRS places a notice of a claim on the assets to the public, including prospective buyers. With a levy, the IRS actually takes ownership of some or all of the asset, e.g., withdrawing money from a bank account or garnishing a Taxpayer's wages. Some taxpayers fail to pay their taxes because they have encountered financial difficulties and may not have sufficient funds available to satisfy their tax obligation.
If you find yourself in a situation where you have failed to file and/or pay your income tax for a year or two, and you have some financial resources that can be drawn upon to pay the tax, your best strategy is to pay as much as you can.
While some credit card companies may charge exorbitant interest rates, in the 20 to 30 percent range, the IRS charges penalties and interest that makes that look like a bargain.
Unpaid taxes, when you account for the late payment penalty and interest, generates an effective interest rate of 75 percent. Delays in dealing with these matters can be very costly.
Many people may believe that if they fail to file, it is unlikely that the IRS will identify them and even less likely that they could be charged with a criminal offense. While it is true that prosecution for non-filing of taxes is somewhat rare, it is not so rare as to be insubstantial.
The IRS may prosecute for numerous reasons, from the publicity value of targeting a particular taxpayer to the prospect for a substantial recovery of taxes owed. Advice of counsel is recommended for any of these situations, as the consequence of many of these situations can be very serious.