my two cents

‘What Happens If I Just Don’t Pay My Taxes?’

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I’m a full-time freelancer, and I’ve been pretty successful. However, when I first started, I was very financially avoidant and ended up in a situation where I, um, didn’t pay my taxes for three years. 

Getting out of the situation involved a lot of emotional and financial soul-searching, an ADHD diagnosis and subsequent Adderall prescription, and a call to IRS’s customer-service hotline — where a shockingly kind man offered me debt-management advice. He told me that I should focus on paying off my credit cards (I also had around $10,000 in credit card debt) before settling the IRS debt (which was over $30,000). He said I could do this if I was on an IRS payment plan, which could be as low as $1/month. As long as I was paying SOMETHING, he said the IRS would stop charging late fees and let me carry on without penalty indefinitely.

Is that really true? I worked hard to settle those debts over the past couple of years, but sometimes wonder if I was a chump to pay it off. (Or if, in my stress, I misunderstood the nice man on the phone.) Why should I ever pay my taxes, if the IRS would accept $12 each year and let me postpone the debt until I die? (And who cares what happens when I die? I’ll be dead, after a long life of living beyond my means!) Have I discovered the ultimate tax loophole, or am I missing something? 

There are a couple of things to remember about the IRS. First of all, they’re stretched thin. Secondly, they just want you to pay your taxes, and something is always better than nothing. “They’re like a really nice mafia,” says Rus Garofalo, the founder of Brass Taxes, a tax-preparation service that caters to artists and small-business owners. “They need their cut, but they don’t want to have to chase you, mostly because they don’t have the resources.”

In your case, it sounds like you spoke with someone from the Taxpayer Advocate Service (or TAS), an organization within the IRS that helps underwater taxpayers get back on track. I’m glad he was kind and made facing your taxes feel manageable — that’s his job! “The IRS has figured out that if they try to help people pay their taxes, they get a better response than if they try to scare people into paying them,” says Garofalo. Again, they don’t want to hunt you down, so they should treat you well if you reach out.

It is almost universally true that the reality of tackling debt is way less awful than whatever hellish nest of red tape and dollar signs you’ve anticipated. However, I’m sorry to report that the $1-a-month deal you mentioned sounds a little too good to be true, and was probably a misunderstanding. According to several tax professionals that I spoke to, the TAS can put you on a payment plan (also known as an installation agreement), but most follow a pretty standard formula that gives you up to six years to pay off what you owe. “Typically, they divide the balance of what you owe by 72 months, and that’s the lowest amount that they’ll take,” says Amy Northard, an accountant who specializes in working with freelancers. So if you owed $30,000, you’d likely need to pay about $400 a month.

If you couldn’t afford that, however, there can be some wiggle room. “The IRS wants you to pay, but they don’t want to break you, because then you’re no good to them either,” says Garofalo. “If the payments become insurmountable, and you can provide evidence of that, then usually they’re willing to compromise.” For example, one of Garofalo’s clients owed $80,000 in back taxes that she couldn’t afford, and after some paperwork, the IRS agreed to accept $12,000 instead.

Most repayment plans will require you to give the IRS access to your bank account so that it can directly withdraw what you owe each month. (If there’s not enough money in your account, then you’ll have to file another round of forms to create a new payment plan, and possibly pay more fees.) It will also probably hold onto your future tax refunds and put them toward the balance until it’s paid off. But that isn’t necessarily a bad thing, says Jo Willets, an enrolled agent for Jackson Hewitt tax services. “In a sense, it helps, because it puts a chunk of money towards the debt and gets it paid off faster.”

This might all sound like a headache, and it isn’t exactly easy. But it’s better than continuing to owe taxes, which accrue interest. Then there are late fees on top of that, which are calculated as a percentage of your compounding tax debt. So the longer you put it off, the more you will have to pay in the end. And the IRS does have a lot of ways to catch up with you, so your plan of dying before it does is not ideal. (And even if you do, the IRS will then take its money out of your estate.)

However, the TAS agent was correct that you should prioritize credit card debt over tax debt, since it almost certainly has a higher interest rate and is therefore compounding faster. (The current interest rate on tax debt is around 5 percent, which is pretty low.) If that means that you pay lower monthly installments toward your tax debt until your credit cards are paid off, so be it. Again, it’s better to pay little amounts than trying to hide.

That said, the worst-case scenario might not be as terrible as you think. Contrary to popular belief, the IRS does not send people to jail for back taxes (that only happens to people who commit major corporate tax fraud, and even then it’s pretty rare). However, it can legally seize your assets, including your home, your car, or the contents of your bank account. But no one wants to deal with that — especially the IRS — so it’ll always try to work with you before things get that bad.

One final piece of advice for the tax-averse: A lot of people — particularly freelancers — delay filing their taxes because they’re afraid they can’t afford them. But the penalty of late tax filing is actually much higher than the penalty for late payments, says Willets. “So even if you fall behind on payments, make sure to file on time,” she says. In case you haven’t gotten the message by now, the IRS is just like anyone — it just doesn’t want to be ignored! A little bit of acknowledgment goes a long way.

The Cut’s financial advice columnist Charlotte Cowles answers readers’ personal questions about personal finance. Email your money conundrums to mytwocents@nymag.com.

‘What Happens If I Just Don’t Pay My Taxes?’