If you don’t pay capital gains tax, the IRS starts charging a monthly penalty of 0.5% of the unpaid balance plus daily-compounding interest, and if you keep ignoring it the agency can file a public lien against your property, garnish your wages, drain your bank accounts, take 15% of your Social Security, block your passport, and in cases of deliberate evasion pursue criminal charges. How far it goes depends mostly on whether you made a mistake, fell behind, or actively tried to hide the income. The IRS receives the same 1099 forms you do and matches them by computer, so unreported sales rarely stay unnoticed for long.
What the Penalties and Interest Cost
Two penalties can apply, and they stack. The failure-to-pay penalty is 0.5% of the unpaid tax for each month or partial month the balance sits, up to a 25% cap.1Internal Revenue Service. Failure to Pay Penalty On a $10,000 bill, that’s $50 a month before interest.
The failure-to-file penalty is much steeper: 5% of the unpaid tax per month, same 25% cap. When both apply in the same month, the filing penalty is reduced by the payment penalty, so the combined charge is 5% rather than 5.5%. A return more than 60 days late carries a minimum filing penalty of $525 or 100% of the unpaid tax, whichever is less.2Internal Revenue Service. Failure to File Penalty
Interest runs on top of everything, including the penalties themselves. The rate is the federal short-term rate plus three points, reset quarterly, and it compounds daily. That daily compounding is what turns a manageable bill into a serious one over a year or two.
The practical takeaway: if you can’t pay, file anyway. Filing on time eliminates the 5%-per-month filing penalty entirely and leaves you with the 0.5% payment penalty, cutting the damage roughly in tenth.
How the IRS Finds Out
People sometimes assume an unreported stock sale or property flip will slip through. It usually won’t. Your broker files a Form 1099-B showing the proceeds and, in most cases, your cost basis, and the IRS matches that against the Schedule D on your return.3Internal Revenue Service. About Form 1099-B, Proceeds from Broker and Barter Exchange Transactions4Internal Revenue Service. Instructions for Form 1099-B (2026) When the numbers don’t line up, the system flags the account automatically.
Real estate closings generate a Form 1099-S filed by the closing agent or title company. There’s a narrow exception for a principal residence sold for $250,000 or less ($500,000 for married couples) when the seller certifies the gain is fully excludable, but rentals, investment property, and vacation homes don’t qualify.5Internal Revenue Service. Instructions for Form 1099-S Proceeds From Real Estate Transactions
Crypto used to be a gap. That’s closing. Digital asset brokers must file Form 1099-DA reporting gross proceeds starting with 2025 transactions, and cost basis reporting begins with 2026 transactions.6Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets The same automated matching that has caught unreported stock sales for decades is coming to crypto.
When the matching system finds a discrepancy, you get a CP2000 notice. It isn’t an audit. It’s a letter proposing changes based on the 1099s the IRS has on file.7Internal Revenue Service. Topic No. 652, Notice of Underreported Income – CP2000 You can agree, disagree, or partially agree, but ignoring it means the IRS assesses the tax and starts collecting.
How Collection Escalates
Once there’s an assessed balance, the IRS follows a defined path. Each step gives you a chance to pay or make arrangements, and each step gets harder to unwind.
The first letter is usually a CP14 stating the balance and asking for payment within 21 days.8Internal Revenue Service. Understanding Your CP14 Notice More notices follow over several months. The CP504 is the important one to recognize: it’s a formal Notice of Intent to Levy warning that the IRS is preparing to seize income and accounts.9Internal Revenue Service. Understanding Your CP504 Notice
Federal Tax Liens
If the balance stays unpaid, the IRS can file a Notice of Federal Tax Lien. It’s a public record establishing the government’s legal claim against everything you own, including future property.9Internal Revenue Service. Understanding Your CP504 Notice A lien doesn’t take anything, but it makes selling or refinancing very difficult and can damage your credit for years. Lenders see it as a signal that the government has first claim on your assets.
Levies and Wage Garnishment
A levy is the actual seizure. Before issuing one, the IRS must send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, giving you 30 days to resolve the debt or request a hearing with the IRS Independent Office of Appeals.10Taxpayer Advocate Service. Notice of Intent to Levy Once that window closes, the IRS can freeze and drain bank accounts, direct your employer to withhold part of every paycheck, and seize vehicles and real estate. The failure-to-pay penalty also doubles from 0.5% to 1% per month if you don’t pay within 10 days of the levy notice.1Internal Revenue Service. Failure to Pay Penalty
Social Security
Retirement income isn’t off limits. Through the Federal Payment Levy Program, the IRS can take 15% of each monthly Social Security check. There’s no minimum floor for tax debt, unlike the protections that apply to other kinds of creditors.11Internal Revenue Service. Social Security Benefits Eligible for the Federal Payment Levy Program
Passport Restrictions
If your seriously delinquent tax debt exceeds $64,000 (adjusted annually for inflation) and you haven’t set up a payment arrangement, the IRS certifies the debt to the State Department, which can then deny a new passport application or revoke the one you have.12Taxpayer Advocate Service. Don’t Let a Passport Revocation Ruin Your International Travel Plans Many people learn about this at the airport. Entering an installment agreement or a pending Offer in Compromise generally clears the certification.
When It Becomes Criminal
Most unpaid capital gains cases stay civil: you owe money, penalties, and interest, and the IRS pursues collection. Criminal prosecution is reserved for deliberate evasion. The dividing line is intent.
The main statute is 26 U.S.C. § 7201, which makes it a felony to willfully attempt to evade federal tax. Prosecutors have to prove you knew the tax was owed and took deliberate steps to avoid paying, not just that you were careless or disorganized. The cases that draw criminal attention tend to involve hiding sales through shell companies, keeping secret accounts, or destroying records.13Office of the Law Revision Counsel. 26 U.S.C. 7201 – Attempt to Evade or Defeat Tax
Conviction carries up to five years in prison and a fine of up to $250,000 for individuals, plus the costs of prosecution.13Office of the Law Revision Counsel. 26 U.S.C. 7201 – Attempt to Evade or Defeat Tax14Office of the Law Revision Counsel. 18 U.S. Code 3571 – Sentence of Fine The $250,000 figure comes from the general federal sentencing statute for felonies, which overrides the $100,000 cap written into the tax code itself. Criminal cases are rare and pursued selectively, but they happen.
How Long the IRS Has
Two clocks matter. The IRS generally has three years from the date you file to assess additional tax on unreported gains.15Office of the Law Revision Counsel. 26 U.S. Code 6501 – Limitations on Assessment and Collection That window extends to six years if you omit more than 25% of your gross income, a threshold a single large unreported capital gain can easily cross. If you never file at all, or file a fraudulent return, there’s no time limit — the IRS can come after the tax whenever it wants.
Once tax is assessed, the IRS has 10 years to collect it. That’s the Collection Statute Expiration Date.16Internal Revenue Service. Time IRS Can Collect Tax After 10 years the debt expires. Certain actions, including bankruptcy and a pending Offer in Compromise, pause and extend that clock.
How to Fix It
If you know you have unreported or unpaid capital gains, acting before the IRS contacts you generally leads to a better outcome than waiting for a CP2000 or a levy notice.
File an Amended Return
The most direct fix is Form 1040-X, which lets you correct a prior return by adding the missing gain and paying the tax.17Internal Revenue Service. File an Amended Return You can file electronically. Penalties and interest still apply from the original due date, but coming forward voluntarily tends to keep those at the standard rates rather than escalating to fraud-related penalties.
Set Up an Installment Agreement
If you can’t pay all at once, request a monthly payment plan with Form 9465. The IRS allows up to 72 months, provided the plan pays off the balance within that window or before the collection statute expires, whichever comes first.18Internal Revenue Service. Instructions for Form 9465 (07/2024) Interest and the payment penalty keep running during the plan, but the penalty rate drops from 0.5% to 0.25% per month while the agreement is active.1Internal Revenue Service. Failure to Pay Penalty An active agreement also blocks new levies and keeps your passport safe.
Submit an Offer in Compromise
For genuine hardship, the IRS may accept less than the full balance through an Offer in Compromise. You submit Form 656 with detailed financial statements, a $205 application fee, and an initial payment. Both the fee and initial payment are waived for low-income taxpayers.19Internal Revenue Service. Form 656 Booklet The IRS evaluates whether your offer represents the most it could reasonably collect from you. The agency rejects most applications, but for people who genuinely cannot pay, it’s the clearest way to settle for good.