Owing money to the IRS can be devastating, especially if you are unsure how you will ever be able to pay it back. However, if you try to run and hide from your tax liability, you may face larger problems in the future. The IRS typically does not take court action for federal tax debt unless there is fraud involved, so you probably do not have to worry about ending up in jail. However, the IRS is still the country’s largest collection agency. As such, it can take action to claim the monies owed without a court order.
One common collection action taken is wage garnishment. This is a special type of levy where the IRS takes most of your paycheck, just leaving a small amount they have determined is what you need for the bare necessities. If you let your tax problems reach this point, then you may end up with more than just overwhelming debt on your hands; you might also find yourself in a situation that damages your ability to meet your goals for the future, such as buying a house or having the money for raising children.
Lose your Job
By law, your employer has to comply with the IRS when they have enacted a tax garnishment. You are protected by the Consumer Credit Protection Act Title 3 against losing your job for one count of wage garnishment. However, many people who are unable to pay their IRS tax debt find themselves hunted by more creditors than just the IRS. If you have two or more counts of wage garnishment, then you are no longer protected, and you may just lose your job, putting yourself into an even worse financial situation.
Another negative effect of an IRS wage garnishment is that it can lead to poor credit scores. Once you enter into collection action with the IRS, it will harm your credit and hurt your ability to get a loan in the future, including for a car, or a mortgage for your home. As part of the loan or mortgage application process, most lenders will check your credit score and history. When they see you have a lien or levy from the IRS, then they will not have the faith in your ability to pay. This will lead to a rejection or a very high-interest rate.
Finding Yourself in a Debt Spiral
Another common consequence of IRS tax garnishment is finding yourself in such a terrible financial situation that you are unable to pay the rest of your bills. The IRS can take all of your wages, other than an amount that is exempt determined by the IRS based upon your filing status and number of declarations. The number is very low, which could cause you to no longer have the funds to pay for anything beyond food. You could be forced to take out loans or default on other debt. This could lead to other agencies taking collection action, and you could end up losing your house, car, and other belongings. You may even find yourself forced to declare bankruptcy.
How to Avoid This From Happening
You can stop these negative consequences from occurring. If you owe the IRS, then pay your tax debt. If you are unable to pay the total amount, you have choices. You can apply for Installment Agreements or an Offer in Compromise. As soon as you have been given a bill by the IRS or receive an Intent to Levy letter, take action to prevent any IRS wage garnishment. Even if you already are in a tax garnishment, you can stop it by negotiating a tax relief settlement.