Unpaid Taxes

If you don’t pay your taxes in the U.S., the IRS will charge penalties and interest, then escalate to collection actions if the debt remains unpaid. The failure-to-pay penalty is 0.5% of the unpaid tax per month (up to 25%), plus daily compounding interest.

The IRS may send multiple notices, but if ignored, they can take aggressive steps. These include filing a federal tax lien, which attaches to your property and can affect your credit and ability to sell assets. They can also issue a levy, which allows them to seize wages, bank accounts, social security benefits, and other assets.

In serious cases involving willful evasion or fraud, criminal prosecution is possible, with potential fines or imprisonment.

The IRS does offer options to help, including payment plans, Offer in Compromise (settling for less), and Currently Not Collectible status if you’re in financial hardship. You can also dispute an assessment through the IRS appeals process.

Ignoring the problem increases risk and costs. Acting early gives you more options and better outcomes.

If you don’t pay your taxes in Canada, the CRA will first issue a Notice of Assessment (NOA) confirming the amount you owe. This document triggers interest, penalties, and the 90-day deadline to file an objection if you disagree. A 5% late-filing penalty applies immediately, plus 1% for each full month the return is late (up to 12 months), along with daily compound interest on the unpaid amount.

If the balance remains unpaid, the CRA can take serious enforcement actions without a court order. These include garnishing your wages, freezing or seizing bank accounts, intercepting tax refunds or benefits, and placing liens on or even seizing property.

While CRA debt typically doesn’t appear on your credit report, enforcement actions such as liens or bankruptcy can still impact your creditworthiness. In extreme or willful cases, such as tax evasion, the CRA can pursue criminal charges, which may result in fines or jail time.

You may qualify for payment arrangements or taxpayer relief if you’re experiencing financial hardship. If you haven’t filed taxes in several years, the CRA’s Voluntary Disclosures Program can help you come forward and reduce penalties.

The IRS charges interest on unpaid taxes starting from the original due date of the return, regardless of when you receive a notice. The interest rate is based on the federal short-term rate plus 3%, and it is adjusted quarterly. As of mid-2025, the interest rate for individuals is around 8% annually, and it compounds daily.

This means if you owe $10,000, you’ll be charged roughly $2.19 in interest per day at that rate. The longer you delay, the faster the balance grows – not just on the tax owed, but also on any penalties and previously accrued interest.

Unlike penalties, IRS interest charges cannot be waived or reduced, even under hardship or relief programs. To stop interest from accruing, you must pay your full balance or enter into an agreement that halts further accumulation, like an Offer in Compromise or full payment.

Here’s how to calculate IRS interest on unpaid taxes:

1. Find the IRS interest rate for the time you owe. This rate changes every three months. As of mid-2025, it’s about 8% per year.
2. Turn that yearly rate into a daily rate by dividing it by 365. For 8%, that’s about 0.0219% per day.
3. Because the IRS compounds interest daily, you don’t just multiply the daily rate by the number of days. Instead, you let the interest grow a little more each day.
4. Use this formula (or a calculator):
   What you owe × (1 + daily rate) to the power of the number of days late

Example:
You owe $10,000, unpaid for 60 days.
Daily rate = 0.000219
Interest = $10,000 × (1 + 0.000219)⁶⁰ ≈ $113.86
Total balance = $10,113.86

To make things easier, you can use IRS interest calculators online or let tax software do it for you. Interest is added daily, so it grows the longer you wait. It’s crucial to pay your taxes on time to avoid these extra costs. Always consult a tax professional such as those at taxlawyer.com for instant support.

To calculate CRA interest on unpaid taxes, follow these steps:

1. Find the annual interest rate: The CRA updates this every quarter. For example, it’s 8% annually from April to June 2025. Rates can change, so check the CRA website for the current one.

2. Convert to a daily rate

Divide the annual rate by 365.
For 8%:
8 ÷ 365 = 0.0219% per day

3. Apply daily compounding: The CRA compounds interest daily, which means the balance grows a bit more each day. Use this formula:

Interest = Amount Owed × (1 + daily rate)ⁿ – Amount Owed
Where n = number of days the tax is overdue.

Example

You owe $10,000, interest rate is 8%, and it’s 60 days late:
Daily rate = 0.000219
Interest ≈ $10,000 × (1 + 0.000219) ^60 – $10,000
Total interest ≈ $113.86

You can also use CRA-approved calculators or accounting software for precise results.

The Canada Revenue Agency (CRA) charges interest on unpaid taxes starting the day after your payment is due. Interest is compounded daily and applies not just to the unpaid tax but also to any penalties already assessed. The interest rate is updated quarterly; for the first half of 2025, it’s 8% annually, and for the third quarter of 2025, it’s 7% annually.

In addition to interest, late filing or late payment triggers penalties. For instance, if you file your return late, the CRA may charge 5% of the amount owing, plus 1% for each full month it’s late, up to a maximum of 12 months. If you’ve been late before, the penalty may increase.

Importantly, interest and penalties continue to accrue until the full balance is paid. However, if you’re experiencing financial hardship, you may apply for taxpayer relief to request cancellation of some interest or penalties. The CRA also offers payment arrangements if you can’t pay in full right away.

The IRS can typically reassess or audit tax returns up to 3 years after filing. This extends to 6 years if you underreport income by 25% or more. However, if you never file a return or commit tax fraud, there’s no time limit, the IRS can pursue you indefinitely.

The CRA generally has 3 years from the date of the Notice of Assessment to reassess individuals and small businesses, or 4 years for large corporations. But similar to the IRS, if the CRA can prove gross negligence, misrepresentation, or fraud, there’s no statute of limitations.

In both countries, not filing or filing dishonestly can leave you permanently exposed to tax audits, penalties, and prosecution. Keeping accurate records and filing properly is the best protection.

If you don’t pay your taxes, both the IRS and CRA have powerful tools to force collection – often without needing a court order.

IRS (United States):

• Tax lien: The IRS can file a public lien on your property, affecting your credit and ability to sell assets.
• Levy: They can seize wages, bank accounts, Social Security benefits, and other assets.
• Passport restrictions: For tax debts over $62,000 (2025 threshold), the IRS can have your passport revoked or denied.
• Asset seizure: In serious cases, the IRS may seize and sell your property.

CRA (Canada):

• Wage garnishment: CRA can order your employer to withhold part of your pay.
• Bank account freeze: They can direct your bank to freeze and send funds.
• Property lien or seizure: CRA may place a lien on, or seize and sell, your property.
• Refund offset: Any GST/HST credits or tax refunds can be withheld.

Both agencies may also escalate enforcement if you ignore repeated notices.

Your physical presence in the U.S. doesn’t directly determine if you owe taxes. It depends on factors such as your income sources and residence status. If you earn income while in the U.S. or are considered a US resident for tax purposes, you are obligated to pay taxes, regardless of how long you stay. There’s no specific time limit that lets you off the hook for tax obligations if they exist.

However, if you’re a U.S. citizen or green card holder, you must file and pay U.S. taxes every year on your worldwide income, no matter where you live. There’s no grace period, you’re always required to comply.

Avoiding taxes beyond the allowed time can trigger penalties, interest, and enforcement.

In Canada, you must pay taxes once you’re considered a resident for tax purposes, which is based on your ties to Canada, not just how long you stay. Strong ties include having a home, spouse, or dependents in Canada. You can also become a tax resident by staying in Canada for 183 days or more in a calendar year.

If you’re a non-resident but earn Canadian-sourced income (such as from employment, business, or rental property), you’re still required to pay tax on that income. There’s no fixed grace period, your tax obligations begin as soon as you meet these criteria.

If you don’t pay your taxes while living abroad, both the IRS (U.S.) and CRA (Canada) can still pursue you. Tax obligations don’t end just because you leave the country.

In the U.S.:

U.S. citizens and green card holders must file and pay taxes on their worldwide income, even while living abroad. Failure to pay may lead to penalties, interest, tax liens, and even passport restrictions if your debt exceeds certain thresholds. The IRS can also work with foreign governments to collect through international tax treaties.

In Canada:

If you’re still a Canadian tax resident while abroad, you must report and pay tax on your worldwide income. If you don’t, the CRA can charge interest, late penalties, and take legal action. If you’ve officially emigrated, you may still owe tax on Canadian-sourced income, and the CRA can collect through international agreements. In both cases, ignoring taxes abroad doesn’t make the debt disappear – it can grow over time and follow you globally.

Yes, in some cases, you can request the CRA or IRS to cancel or waive penalties and interest. This is usually considered if there were circumstances beyond your control that prevented you from paying on time, like a serious illness or a natural disaster.

In Canada, you can apply for Taxpayer Relief to reduce or cancel interest or penalties.

In the U.S., you can ask for Penalty Abatement or an Offer in Compromise if you have a good reason (like illness or natural disasters), or if you qualify for First-Time Penalty Abatement – available to taxpayers with a clean filing and payment history for the past three years.

You’ll typically need to explain your situation and provide supporting documents.

NOTE: In both countries, you must file a formal request and provide detailed supporting documentation. Approval is discretionary, not automatic.

Tax laws can be complex, and getting expert help can save you a lot of stress and potential problems down the road.

Contact us today at taxlawyer.com

At TaxLawyer.com, we match individuals and businesses with trusted tax lawyers who understand how to deal with the IRS and CRA. Whether you’re behind on taxes, dealing with aggressive collection actions, or need help disputing a reassessment, our dedicated legal team will step in to:

• Negotiate tax settlements
• Apply for interest and penalty relief
• Set up payment arrangements
• Represent you in audits and disputes

We serve clients across both countries and bring years of experience navigating complex tax systems. No matter where you are, we ensure your rights are protected and your case is handled with professionalism.

Select your state or province below to connect with an experienced tax attorney today

Get the right help – right where you are at taxlawyer.com. Send us a message today!