Getty Images 
Tax season might be over, but for millions of Americans, the stress lingers due to having overdue tax debt with the Internal Revenue Service (IRS). Part of the issue is that sticky inflation, high borrowing rates and growing financial strain are leading many people to push their tax bills to the back burner so they can cover the necessities. But if you’re thinking that the IRS will just forget about what you owe, that approach could cost you far more than you expect.
Unfortunately, the IRS doesn’t operate on the “ignore it and it disappears” principle. The agency has some of the most powerful collection tools available to any creditor, so what may have started as a manageable tax bill can snowball into something much more damaging over time as the penalties are tacked on. And, when you owe the IRS money, it can simply send a notice and start the process of garnishing your wages or levying your bank accounts.
What many taxpayers don’t realize, though, is that there are also hidden costs that are tied to ignoring your IRS debt, which can cause the costs to compound quickly. And, understanding these hidden expenses might be the wake-up call you need to address your tax situation head-on.
Stop ignoring your tax debt; take steps to get rid of it today.
5 hidden costs of ignoring your IRS tax debt
If you’re behind on your tax debt, there are a few hidden costs that come with ignoring what you owe:
The penalties and interest add up fast
The IRS charges two types of penalties on unpaid taxes: the failure-to-file and failure-to-pay penalties. The failure-to-file penalty is the steepest at 5% of your unpaid tax balance for every month (or part of a month) that your return is late, up to a maximum of 25% of your total unpaid taxes.
The failure-to-pay penalty kicks in when you don’t pay the tax you owe by the deadline, even if you filed on time. It’s 0.5% of your unpaid tax balance per month, also up to a maximum of 25%. If both penalties apply in the same month, the IRS reduces the failure-to-file penalty to 4.5%, but still adds the 0.5% failure-to-pay penalty, so you’re still getting hit with 5% total per month until you take action.
The IRS also charges daily compounded interest on the total amount due, including any penalties. The current interest rate (as of 2025) is 8% annually, but it adjusts quarterly, so it could rise even more if rates climb.
Find out if you’re eligible to settle your tax debt for less.
You could lose your tax refund
One of the first things the IRS does when you owe back taxes is seize your future tax refunds and apply them to your unpaid balance. That means if you were expecting a few thousand dollars to help with bills, travel or savings, that refund may be gone before you ever see it. The IRS doesn’t ask permission, either. The agency simply applies the refund toward your tax debt, often without prior notice beyond a line in your account transcript.
Wage garnishment can hit without warning
If your debt continues to sit unpaid, the IRS has the legal authority to garnish your wages. That means it can take a portion of your paycheck directly from your employer before the money hits your bank account. Unlike private creditors, the IRS doesn’t need a court order to do this. And, that wage garnishment can continue until the debt is paid in full or until you take action to stop it, such as negotiating a payment plan or applying for an Offer in Compromise.
Your credit could take a hit indirectly
While the IRS doesn’t report tax debt directly to the credit bureaus, your credit isn’t necessarily safe. If your debt leads to a tax lien or you’re forced to take out a loan or rack up credit card debt to pay the IRS, your score can suffer as a result. Or, if your bank account is levied or your wages are garnished, it could lead to missed payments on other obligations, like your mortgage, car loan or utilities, which do show up on your credit report and can hurt your score quickly.
There could be legal and administrative costs
Dealing with advanced IRS collection actions often requires professional help, adding fees for attorneys, accountants and other tax experts to your mounting costs. Emergency tax resolution services can cost thousands of dollars or more, which is money you might not have needed to spend if you’d addressed the situation earlier.
Costs can also accumulate if your case escalates to tax court or if you need to challenge IRS collection actions. And, the time and expense involved in fighting the IRS can be substantial, even if you ultimately win.
The bottom line
Ignoring IRS tax debt can transform a manageable financial problem into a potential life-altering crisis. After all, the combination of relentless interest, mounting penalties, aggressive collection actions and collateral damage can end up costing you a lot more than your original debt.
The good news is that the IRS offers numerous payment plans and resolution options. However, these become harder to access and less favorable the longer you wait. If you owe taxes, the smartest financial move is to address it immediately, whether you set up a payment plan, request Currently Not Collectible (CNC) status or work with a tax relief professional to explore options.
