You just received a notice in the mail from the Internal Revenue Service (IRS) saying your taxes are late or you didn’t file. To make matters worse, the notice says you not only owe the taxes, but they include penalties and interest as well. 

(Keep in mind, too, that the IRS only communicates this information by mail. Any such inquiry by phone or e-mail is a scam).

Do You Have to Pay Quarterly Taxes?

The United States tax system is “pay-as-you-go.” For most taxpayers, employers withhold taxes from employee income. The burden of being a “tax collector” falls on the business. They withhold all payroll taxes and remit them quarterly to the IRS (and possibly state tax agencies). 

Employees have very little responsibility other than filing a tax return at the end of the year. However, some people are self-employed and therefore not employees.

The “pay-as-you-go” principle still applies to them. 

Instead of withholding, though, they must make periodic estimated payments.

What Happens if I Pay My Quarterly Taxes Late?

If you pay your quarterly taxes late, or not at all, you will incur a penalty. The penalty starts at 0.5% of the unpaid taxes.

Quarterly taxes usually refer to one of two types of taxes: estimated income taxes or payroll taxes. Both businesses (depending on their structure) and individuals make estimated income tax payments quarterly. 

While it is best practice to make payments quarterly, there are no real consequences for not filing an estimated tax form itself.

Only businesses are subject to payroll taxes. Those can be paid monthly, quarterly,

or annually, depending on the business’s size. Regardless of when the business makes the payment, they file payroll tax returns quarterly or annually.

Penalties for Not Filing or Paying Taxes

The penalties for not filing a tax return are almost always more severe than those

for not paying the tax. 

However, the federal government and various state and local jurisdictions have different, specific rules. For this discussion, we will focus on the IRS. 

In general, the IRS penalties (subject to certain conditions that may affect the amount and their assessment) are:

• Failure to file a tax return can result in a penalty of 5% of the unpaid tax for each month or part of a month that the return is late (up to a maximum of 25%). If there is fraud, the penalty is more severe.
• Failure to pay the tax (or paying late) can result in a penalty of 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid (up to a maximum of 25%). Again, fraud is more severe.
• There is no penalty for not filing or paying an estimated tax payment. However, when you file a tax return, and the IRS establishes there has been an underpayment of taxes because of insufficient tax withholdings or estimated payments, the IRS can assess interest penalties (recently in the range of 3-4%) on the amount of the underpayment.

These are general rules. A competent tax professional can advise on specific situations. If you don’t pay your taxes on time, the taxing agency can charge penalties or interest on the amount you owe until you pay the taxes.

Payroll Taxes Are Particularly Important

The type of tax can result in different responses from taxing agencies. 

For example, the IRS takes a dim view of businesses that don’t pay and file their quarterly payroll taxes and are far more aggressive than with the average taxpayer who forgot to make an estimated tax payment.

The IRS is more aggressive regarding payroll taxes. They view that money as not belonging to the business but, instead, as cash being held by the business for the IRS. In other words, it has been withheld from the employees on behalf of the IRS through payroll deductions and withholdings (FICA, FUTA, Federal Withholding). 

In effect, businesses are the IRS’s tax collectors. They hold payroll tax funds in trust until paid to the IRS. 

As a side note, one of the worst things a business can do is withhold payroll funds and use them for “cash flow” because they don’t always have to be remitted to the IRS immediately. 

You should always withhold, set aside, and not use the funds for any other purpose than to be remitted to the IRS on time as prescribed by law.

What Happens If You Ignore Tax Payments and Notices?

If you continue not to pay taxes, you run the risk of more severe actions, such as levying bank accounts and tax liens on property. Dealing with these matters is far more costly and time-consuming than simply paying the taxes on time.

Can You Take Care of It Yourself?

The more serious the problem becomes, the more likely you’ll need professional representation. No taxpayer should take on the IRS alone, although they are allowed to. 

Instead, they should engage a Certified Public Accountant, Enrolled Agent, or Attorney and provide them with a Form 2848, Power of Attorney, and Declaration of Representative. Why one of those three professionals? They are the only ones the IRS will allow to represent a taxpayer in any of these matters, provided the taxpayer designates them on that form.

The IRS and most other tax agencies will work with a taxpayer to resolve the issue, but there is a process, and the taxpayer needs to face the problem and deal with the consequences promptly. Installment payment plans may be available, and in infrequent instances, the agency may adjust the amount owed. Ignoring the problem, however, will only make matters worse. Tax notices are unpleasant and worrisome. The simple solution is to avoid them by understanding, planning for, filing, and paying your taxes on time.