jail

Here's What Happens If You Don't Pay Your Taxes

Carrie Kirby — Fri, 03 Mar 2017 11:00:14 +0000

As Tax Day looms, you may wonder how high the tax man should rank on your list of creditors. Is it better to postpone paying taxes in order to pay off credit card debt, or to keep the electricity running?

Here's what happens if you're not able to pay everything you owe to the IRS, as soon as you owe it.

1. You'll Pay a Penalty

Assuming that you filed your tax return on time but didn't pay your full tax bill, the IRS will charge you 0.5% of what you owe, every month until you pay, up to 25% of the debt. So if you still owed $1,000 when you filed your return on April 18, you'll owe an additional $5 a month.

It's a very good idea to file your return on time, or file an extension, even if you won't be able to pay right away — fees increase if you haven't filed a return by Tax Day. Also, filing on time might get you a break: The IRS says that if you file for an extension or file your return, you may not have to pay the penalty if you've paid 90% of what you owe by Tax Day.

2. You'll Pay Interest

The IRS isn't going to lend you that money interest-free. The rate on money you owe to the IRS is currently 4%.

3. You'll Get a Bill

If you haven't filed your tax return at all, the government will kindly figure out how much you owe for you and send a bill. Actually, not so kindly, because the way they'll calculate your taxes, you'll end up owing more than you would have if you'd done them yourself. The government doesn't have access to all your financial records, so they may not give you credit for your deductions.

Even if you file your return, if you owe money, eventually you'll start getting mail about it from the IRS.

4. You Could Get a Lien on Your Home

If you don't pay those bills (or show the IRS they're wrong and you don't owe), the next step is putting a lien on your property — usually your house, if you own one. This tends to happen if you owe $10,000 or more and haven't worked out a plan with the IRS to pay it off.

A federal tax lien is a legal document that says if you sell your property, the proceeds will go toward your debt before you see a dime. This could make it tough or impossible to take out a mortgage on your home, and complicate the deal if you try to sell your home.

The tax lien will be reported on your credit report and will stay there for seven years, even after you pay the debt. This can make it impossible to get approval for new credit cards or other loans.

5. You Could Lose Your Passport

Thanks to a new law, the State Department can now revoke your passport (or refuse to issue you one) if you owe the IRS $50,000 or more in delinquent debt. So if your plan was to skip out on your debt, you won't get far.

6. The Government Could Seize Your Property

It's called a levy, and it means the IRS can take your Chevy. Or your Ford, or your RV, or boat, or house. They can even garnish your wages or take what you owe right out of your checking account. If you think owing the mob is bad, try owing the federal government.

In the IRS' defense, it doesn't start seizing citizens' property out of the blue. You'll get lots of mail warning that you're in default, telling you that you have the right to a hearing, and explaining that next, they're coming for your stuff. Don't ignore that mail.

7. You Could Pay Larger Penalties

If the IRS determines that your failure to pay in full was due to negligence or fraud, the penalties could climb to 20% or even 75%.

8. You Could End Up in Court

The IRS would rather work with you to get the money. But if you're recalcitrant or showed intent to defraud them, they can charge you with one or more felonies. In 2008, they charged actor Wesley Snipes with conspiracy to defraud the government for refusing to pay taxes on $38 million in earnings. Snipes had joined a movement of tax deniers who interpret various laws to mean that paying taxes is not required.

9. You Could Go to Prison

Most people who owe the IRS don't do time. But Snipes did. He was convicted of three misdemeanors related to his failure to file tax returns and served three years. It could have been worse: Snipes was acquitted for the felonies he had been charged with.

10. Maybe Nothing Will Happen

If the government doesn't have record of your earnings — for instance, if you work for cash and don't get dividends on investments — the IRS may never notice if you don't file a tax return and don't pay a dime. But flaking on filing is definitely a bad idea: Not only will you live in fear of all the consequences mentioned above, but if your earnings are modest, you could be missing out on the earned income tax credit and other benefits of being on record as a wage earner, like the ability to get a mortgage loan.

It's a good idea to keep in touch with the IRS if you owe them money. In fact, if you file your tax return, pay what you can, and then call them up, they may work out a payment plan with you, or even settle for less than the full amount you owe.

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Unfounded Credit Card Fears

Dan Rafter — Wed, 18 May 2016 09:30:25 +0000

Credit cards get plenty of bad press. Scan the web and you'll find countless stories of consumers who've run up thousands of dollars of high-interest rate debt, fallen behind on their monthly payments, and destroyed their credit scores.

But credit cards, if used responsibly, are important financial tools. They're safer than cash. They can actually help you build your credit score. They often come with valuable rewards programs. And you won't have to worry about those high interest rates if you're disciplined enough to charge only what you can afford to pay back each month.

Are unfounded fears keeping you from using credit cards? If so, it's time to stop. Here are five credit card fears that have been overblown, and the truths that debunk them.

1. Credit Cards Will Ruin My Credit Score

True, lenders rely on your FICO (and other) credit scores to determine if you qualify for loans. They also use these scores to set the interest rates attached to your loans. Credit scores are important. It's natural for consumers to worry that charging too much will send their scores plummeting. But the truth is, using credit cards responsibly will actually boost your credit score.

The Truth

Every time you pay your credit card bill on time, you are helping your credit score. According to myFICO.com, 35% of your credit score is made up of your payment history. Establish a history of paying your bills on time, and you'll be on your way to building a good credit score. Just be careful to not carry a large balance on your card each month. First, you'll pay too much in interest. Secondly, using too much of your available credit will hurt your credit score.

2. I'll Pay a Ton in Interest

It's true that if you misuse your credit card, you will pay plenty in interest. It's not unusual for credit cards to come with interest rates of 19% or higher. If you carry a large balance each month, your interest charges will skyrocket. But again, if you use your credit card wisely, you'll have nothing to fear from high interest rates. (See also: Best Low Interest Rate Credit Cards)

The Truth

Credit cards work best for people who pay off their balances in full each month. If you do this, your credit card's interest rate won't matter because you won't ever pay interest on your debt. You only pay interest when you don't pay off your balance in full with every statement. If you do find yourself carrying an ever-growing balance each month, though, it's time to stop using your card and focus on paying down that debt.

3. Someone Will Steal My Card and Run Up Tons of Debt

It's true that thieves can steal your credit cards. They might also steal your card's information and use it to make online purchases. But credit cards are actually safer than cash.

The Truth

Consumers, if they report their card stolen or lost in a timely fashion, aren't responsible for unauthorized charges on their credit cards. If someone steals your card and charges thousands of dollars, you can dispute the illegal purchases and your credit card company won't charge you for them. Under federal law, you won't be responsible for any fraudulent charges if you report your card stolen or lost before any charges are made on it. If you report your card stolen or lost within two business days and charges have already been made, you are only responsible for a maximum of $50 worth of those fraudulent purchases, though most credit card providers will waive even that.

Compare that to cash: If someone steals $100 from your wallet, that money is likely gone forever.

4. Applying for Credit Cards Will Hurt My Credit Score

Your credit score will take a small hit when you apply for new credit. That's because whenever you apply for a new credit card, what is known as a hard inquiry is added to your three credit reports. A hard inquiry hurts your score because every time you take on a new line of credit, you are exposing yourself to the possibility of running up debt that you can't afford. But the reality is, the damage from applying for credit cards prudently, is minimal.

The Truth

If you apply for a single credit card, that hard inquiry will typically drop your FICO credit score by about five points. That's not much, and it won't take long for that small dip to disappear. Keep paying your bills on time and don't run up credit card debt, and that five-point loss will evaporate. But if you apply for, say, six credit cards at the same time? That can cause a bigger drop in your credit scores. So apply prudently: Don't fill out more than one credit card application at a time.

5. I'm Worried That I'll End Up in Jail if I Can't Pay

There is no such thing as debtor's prison in the United States. Even so, consumers might fear that if they can't pay their credit card bills, they'll end up in jail. This simply isn't true.

The Truth

The only way credit card debt can send you to jail is if you willingly commit fraud. Otherwise, no matter how much you owe, you won't spend time behind bars. No matter what creditors say, you can't be jailed for credit card debt. That doesn't mean, however, that you won't face consequences if you can't pay your credit card bills. For instance, your credit card company might be able to garnish your wages as a way to force you to pay up.

Do you harbor any of these — or other — credit card fears?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: