What Tax Evasion Will Cost YouPublished:
Even more reason to pay your taxes or get a tax extension!
The IRS may be ridiculed and railed on, but it is still one of the most effective collection agencies in the world.
Last year, the agency processed nearly 180 million Federal returns. Of these, over 146 million were individual income returns. Roughly $2.5 trillion was collected in gross, with almost $1.4 trillion coming from individuals. See the 2013 IRS Tax Stats Card.
By comparison, Exxon Mobil Corporation pulled in $32.6 billion last year, less than 15% of what the IRS collected.
READ: The IRS Owes You Money – And You Don't Even Know It
The IRS is also one of the most powerful collection agencies because of its special powers and access to your sensitive information.
Through your Social Security Number, the IRS can find information about your bank accounts, employers, estates, and special funds. This data empowers the agency to lien property, garnish wages directly from employers, levy bank accounts, and automatically take tax refunds.
“Taxation in essence establishes a legal right on the part of the government to your property and the product of your labor, a right which precedes and trumps your own,” says Judge Andrew P. Napolitano, a Superior Court judge for the State of New Jersey. “The government’s claim of right, however, extends to all of your property, not just what it actually takes; otherwise, it would not be able to raise taxes whenever it chooses.”
READ: How to Get Copies of Past Tax Returns
What Is the Difference Between a Tax Lien and Levy?
A Federal tax lien is a claim to your property, which can lead to the liquidation of the asset to satisfy your overdue tax obligation. If enacted, the tax lien also sends a direct notification to creditors that a Federal lien has been served to you, and the mark against your record lasts for 7 years before it’s removed.
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Once a tax lien is enacted, it typically cannot be removed until the total balance due has been paid in full. However, filing for bankruptcy can put lien proceedings on hold temporarily.
Conversely, a tax levy gathers funds from your sources of income or your assets — such as wages, bank accounts, real estate, Social Security benefits, and retirement funds. These methods of collection limit your ability to live until you can meet the obligation.
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The Cost of Non-Payment & How to Reduce Your Back Taxes Ahead of Time
For those who are unable to fulfill their tax obligations, the IRS has a harsh penalty system. If you cannot pay on time, it’s in your best interest to at least file your tax return as soon as you can. The penalty for not filing is 10 times higher than the penalty for not paying (5% of your unpaid tax versus 0.5%).
READ: IRS Interest, Late Fees, and Penalties
If you fail to file, the IRS will prepare and file your tax return for you — which typically results in unfavorable representation. You will most likely miss out on any tax credits or deductions that you were eligible for.
On top of the late filing penalty and late payment penalty, you will also be subject to compounding interest on your outstanding tax balance. The interest rate is the Federal short-term rate plus 3%.
If you cannot pay your taxes, then you might consider pursuing a payment plan option such as an Offer in Compromise (OIC) to reduce what you owe. The catch is: you can typically only ask for an OIC as long as you are fully up-to-date on past tax years.
READ: What to Do If You Don't Have Money to Pay the IRS for Back Taxes