Consequences of Not Filing or Paying State Taxes
States can assess penalties and take enforcement collection actions against taxpayers who have not filed a required tax return or paid state taxes owed. In addition to some of the same options the IRS has for unfiled or delinquent federal tax returns, states can revoke, suspend, or not renew specific licenses granted to taxpayers who owe state taxes. The unfiled return consequences can also vary depending on how long it's been since you have filed a return.
Below are a few negative consequences of unfiled and unpaid state taxes. It is always best to go directly to your State’s website or to call your state’s DOR or tax collection department as laws continuously change. Some U.S. states do not have an individual income tax. For example, Alaska, Florida, Nevada, Tennessee, Texas, Washington, Wyoming, South Dakota, and New Hampshire. However, many of these states tax capital gains, business profits, sales taxes, corporate taxes, and other types of income.
State Failure to File Penalties
Many states have tax penalties that are similar to the IRS’s. Most states have civil tax penalties for failing to file (FTF) an individual tax return. For example, in similarity to the IRS, NY state, CA (FTB), and PA charge 5% per month on a tax balance when you fail to file a tax return. Virginia‘s FTF penalty is 6% per month, but only if your tax return is more than six months late. Some states charge a failure to file penalty even if you do not owe anything. At any rate, failing to file a state tax return will lead to FTF penalties in most cases whether it is individual, corporate, sales, or capital gains tax.
State Failure to Pay Penalties
States also have civil penalties for underpaying or failing to pay a tax balance. For most U.S. states, the failure to pay penalty is much lower than the failure to file penalty. For example, just like the IRS, CA’s franchise tax board and NY state charge .5% percent per month on an income tax balance up to a maximum of 25%. State failure to pay penalties differ in the amounts they charge depending on what type of tax and the lateness of the payment.
Besides civil tax penalties, unpaid state taxes usually carry interest. It is essential to check with your state tax laws to find out current interest rates.
State Tax Liens
Just like the IRS, most states will eventually file a tax lien if you fail to pay taxes owed. A tax lien is a public record, generally filed with your county clerk’s office that acknowledges your state taxes owed. Consequently, this has a negative effect on your credit.
Wage Garnishment and Other Tax Levies
As in the case with the IRS, if you fail to pay state taxes owed, many states will levy or garnish your wages. If they levy or garnish your wages, your employer must comply. Some states may also contact your bank to have funds taken from your bank account to pay down a balance.
Drivers License Suspension or Not-Renewed
If you do not pay your taxes in some states, you could lose your driver's license. In fact, Maryland, Kentucky, New York, California, Massachusetts, Louisiana, South Dakota, Rhode Island, Iowa, and the District of Columbia, all have programs that lead to driver’s license suspensions for unpaid taxes. Many states will reinstate your license for paying a certain percentage of your balance, while others have different requirements to get it back.
Occupational and Professional Licenses Suspended or Non-Renewal
Some states also suspend your professional license for not paying taxes. For example, realtors, attorneys, dentists, chiropractors, architects, barbers, and other professional licenses may not have their license renewed in the state of Oklahoma or Iowa. California will suspend occupational and professional licenses if your name shows up on their “Top 500 Delinquent Taxpayers” list. Other U.S. states may not renew your license until you meet certain conditions.
Hunting and Fishing Licenses Suspended
Some states in the US have gone to extreme lengths to coerce individuals or businesses into paying. Hunting and fishing licenses can be suspended or denied if you owe the state of Louisiana ($500) or the State of Iowa back taxes. In most cases, if you set up and comply with a state payment plan, your license will not be suspended.
Business Licenses Revocation or Non-Renewal
States will also seize and sell certain business licenses. For example, California’s Board of Equalization may seize and sell a liquor license if sales and use tax, corporate taxes, or personal income taxes are unpaid. The state of Illinois will revoke a sales tax business certificate if you have delinquent sales taxes.
Placement on a Public Shame List
Many states have created a webpage that lists taxpayers (businesses and individuals) who owe the state back taxes. For example, the Wisconsin Department of Revenue lists taxpayers who owe more than $5,000 for 90 days after appeal rights have expired. California’s Franchise Tax Board website has a list of the top 500 delinquent taxpayers. Some U.S. states allow anyone to search for delinquent taxpayers with tax liens. The Georgia Department of Revenue used to allow you to search for delinquent taxpayers who have had a tax lien filed in their name.
In rare situations, some states may lock you up if you fail to file or pay taxes. As with the IRS, a state would have to prove your willful intent to defraud or evade paying taxes. For example, filing a false tax return, or concealing taxable property or income. Tax evasion and fraud are serious criminal offenses.
Regardless of your financial situation, file a tax return–even if you can’t pay what is due. The reason is the failure to pay state tax penalties are much higher than failure to pay penalties. Most importantly, if you cannot pay in full, work with a licensed tax professional. He or she can explore your options as many states offer payment plans, hardship, settlements, and more.
Getting Help With State Filing Issues
Each state is different with its enforcement of tax laws and each state has their own set of resolutions to resolve problems. It is best to consult with a tax professional that has experience with that particular state taxation agency. Most companies are only familiar with IRS issues, it is important if you have a state issue that the professional you work with has state experience as well. To find top tax professionals for the state agency you have a problem with, start your search below and filter by the applicable tax agencies.
Disclaimer: This article should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.