The federal government largely operates on revenues from personal income taxes. For the government’s 2010 fiscal year (ending September 30, 2010), personal income taxes accounted for 26% of federal revenue (the largest source of revenue—37%—was borrowing). Here are 4 compelling reasons to pay what you owe:
1. It’s the legal thing to do.
Most personal income taxes are collected through withholding, so you may not feel the pinch as much as if you had to write a check. If withholding is not expected to cover what you anticipate owing, you need to make quarterly estimated tax payments.
If your completed your tax return shows you owe taxes in excess of withholding and estimated taxes, it’s your obligation to pay them. Paying your taxes is more than just being patriotic. Federal law requires you to pay the income taxes shown on your return.
2. You’ll save interest and penalties.
If you fail to pay what you owe on time (e.g., by April 17 for 2011 taxes), you’ll start to accrue interest on the outstanding debt. While interest rates are low (e.g., only 3% for the second quarter of 2012), it is still a cost you can avoid by paying your taxes as quickly as possible. You can’t deduct any interest paid on your federal income taxes.
If you underpay your taxes too much, you may incur an underpayment penalty. The penalty is one-half of 1% of the unpaid taxes for each month they are past due, up to a maximum penalty of 25% of the unpaid tax. The penalty is in addition to the interest you owe.
3. You can lose your property.
If you remain delinquent and do not work out any payment arrangements with the IRS, such as an installment payment agreement, you can get in even deeper than merely interest and penalties. The IRS can assess you for the unpaid tax, which means that if you fail to pay when you receive the assessment notice, the IRS can levy on your bank or other financial accounts. In some cases, the IRS can even foreclose on your home to pay off an outstanding tax debt.
4. You can’t get a passport.
If a bill that has already passed the Senate becomes law, you won’t be eligible to obtain a U.S. passport if you owe federal income taxes. Anyone who is seriously delinquent—which is someone who owes more than $50,000—can have his or her passport revoked.
If you owe taxes but lack the cash to pay your bill, explore your payment options, such as charging the tax to a credit card, obtaining an installment agreement, or requesting an offer in compromise.
An estimated 16,500 IRS auditors, agents, and other employees could be needed to collect the new taxes that will levied on taxpayers under the new health care law starting in 2014.View all factoids