Every year, most taxpayers face a double-whammy on Tax Day. Federal income taxes must be paid to the Internal Revenue Service, and all but nine states have their own income taxes which must also be paid. In addition, some local municipalities also charge personal income tax. Once the state tax agency receives your W-2s, 1099s or other applicable tax documents, it is aware that you owe taxes.
If you don't pay your taxes upfront, state tax agencies can charge penalties, personally contact you or even place a lien on your property. If you're a contractor who is required to pay taxes each quarter, that increases problems if you miss multiple deadlines.
Penalties and Interest
When state taxes are not paid to the state taxation board by April 15, penalties and interest are immediately added to the overall cost of taxes. In the state of Iowa, an individual who has filed his taxes but has not paid the full amount due is assessed a tax penalty of five percent of the outstanding taxes still owed.
The same applies to state sales taxes if you are someone who sells things for a living, such as items on Amazon or eBay that require you to pay sales tax. If you have a freelance business selling items locally (not on the internet), you might have to pay sales tax. This is usually not true when you provide a service, such as yard care, pet sitting, graphic design or baby sitting.
Consider also: How to Fill Out State Income Tax Form
You Might Be Contacted
Taxpayers will be contacted via mail by state tax collection agencies under a few different circumstances: if the taxpayer hasn't paid the full amount by Tax Day, if the taxpayer hasn't paid the correct amount or if there are discrepancies between the individual's state and federal tax returns. If the taxpayer does not respond to the mailed notice, a state tax representative will contact in an attempt to set up a payment plan.
Consider also: E-Filing: How to File Your Taxes Electronically, IRS Free File & More
Legal Action Might Proceed
If a taxpayer doesn't respond to communication from state tax representatives, the state often will take legal action to recoup the debt. State tax agencies can refer the debt to a collection agency or take legal action to have assets seized or wages garnished. States also use tax liens in order to collect back taxes.
By filing a tax lien notice with the appropriate agency, the state tax board can attach the back taxes to the taxpayer's real property. If the taxpayer wants to sell that property at any point, the tax lien must be legally satisfied with the state first.
Consider also: Why Would My State Income Tax Be Reviewed?
Statute of Limitations
An individual who has not paid their state taxes has to wait 10 years for the statute of limitations on the unpaid tax debt to run out. The statute of limitations is intentionally left this long to give state tax agencies the longest time possible to find tax evaders and collect the debt. In contrast, state tax agencies have a maximum of six years to audit a tax return which may be incorrect.
If you are determined to have filed a fraudulent tax return in any year, there's no statute of limitations on tax fraud at the federal level (with the IRS), explains legal firm Golding & Golding. The same is most likely true with your state tax returns.
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