The High Cost of Delinquent Taxes

Property taxes assessed for a given year normally must be paid no later than January 31 of the following year in order to avoid the assessed taxes becoming delinquent. Because this is just about the time that many taxpayers also start receiving bills for charges made during the holiday season, many taxpayers believe it is more convenient to pay other bills before the government.

However, the interest and penalties assessed against delinquent property taxes can seem enormous when compared to interest and finance charges assessed on credit purchases. While a high-interest credit card might have a rate of 18 percent per year, the effective penalty-and-interest rate for delinquent taxes can be as high as 84 percent depending on when the taxes are paid.

The Texas Tax Code provides that delinquent taxes accrue interest at the rate of one percent for each month or portion of a month that the taxes remain unpaid. This means that, if the tax was due on January 31, then a tax payment made anytime in February will incur interest of one percent. It does not matter on what day of the month the tax is eventually paid; the interest applies.

And for each subsequent month (or portion of a month) of delinquency, another one percent of interest is tacked on. Thus, taxes that remain unpaid for an entire year will be assessed a total interest amount of 12 percent.

The interest imposition is not compounded for subsequent years. However, the one-percent-per-month applies regardless of how long the taxes remain unpaid. Thus, taxes delinquent for two years (24 months) would be assessed 24 percent interest.

Some taxpayers may believe that 12 percent per year is not that bad a deal, considering the rates charged to some credit or charge cards.

However, the real financial burden for delinquent taxes is the penalties that are imposed on top of the interest.

In addition to the interest, delinquent taxes are assessed a penalty of six percent for the first month of delinquency. So, taxes that remain unpaid on February 1 are assessed a total of seven percent (one percent interest plus six percent penalty).

An additional penalty of one percent is charged for each subsequent month of delinquency until July. Then, on July 1, the penalty rockets to a total of 12 percent, in addition to the six percent interest that would be applied.

The only good thing about the penalty is that it tops out at the 12 percent. So, in subsequent months, while the interest rate continues to grow at a rate of one percent per month, the late payment penalty will remain at 12 percent.

However, the late payment penalty is not the only penalty for delinquency that might be assessed.

For taxes that remain delinquent as of July 1, a taxing unit might assess a collection penalty of up to 20 percent. The purported purpose of the penalty is to defray the cost of collection. This penalty may only be charged by taxing units that have entered into a contract with an attorney for that attorney to collect delinquent taxes. Most taxing units have entered into such contracts, and there are some attorneys and law firms whose primary business consists of delinquent tax collections.

The actual amount of the penalty is determined by the contract with the attorney. The rate may not exceed 20 percent. While there appear to still be a few contracts in existence at a lower rate (typically the 15 percent rate that was the limit a few years ago), most contracts have been updated to provide for the 20 percent rate.

Therefore, a tax that is delinquent in July might be imposed a total interest and penalty of 38 percent, consisting of six percent interest, 12 percent late penalty, and 20 percent collection penalty. The actual rate would be a little more than 38 percent, since the collection penalty is assessed against the base taxes, the accrued interest, and the accrued late penalty. The interest and late penalty are always assessed only on the base tax amount.

So, while a taxpayer might flinch at the 18 percent interest charged by a credit card company, he or she should shudder at the effective rate charged on delinquent taxes.

In the first month of delinquency with only a seven percent charge, the effective annual rate is 84 percent (seven times 12 months). Of course, if the delinquent taxes were paid on the first day of delinquency, when still the seven percent would apply, the effective rate is 2,555 percent (seven times 365 days). Of course, with each subsequent day, the effective rate decreases.

And, with each passing month, the effective rate would also decrease. The nine percent charged in March would equate to only 54 percent per year. The 11 percent in April would equate to 44 percent per year. The 13 percent in May would equate to 39 percent per year. The 15 percent in June would equate to 36 percent.

In July, however, when the total rate soars to as much as 38 percent, the effective rate soars back up to 76 percent. Then, again, it starts falling in subsequent months.

However, time is not on the side of the taxpayer. There have been several cases where taxpayers have delayed payment for so long that eventually the taxes, interest and penalties exceed the value of the property.

Furthermore, taxpayers should not be under any misconception that they can work out a reduced payment of delinquent taxes at a later date. While the taxing units might be willing to enter into an installment agreement, it is rare that they will enter into any agreement that provides for any waiver of interest or penalties. Most taxing units take the position that the interest and penalties (being imposed by statute) cannot be waived under any circumstances. Naturally, given their dependence on the collection penalties, the collection attorneys also champion this viewpoint.

So, if a taxpayer has to make a decision between paying off those holiday expenses charged to a high-interest credit card and paying his property taxes before delinquency, the property tax payment is likely going to be the more sound financial option.

There is an additional non-monetary penalty imposed by the government for failure to timely pay taxes. Texas tax law provides that a taxpayer who allows his taxes to become delinquent might waive any ability to obtain an appraisal roll correction for that property for the year of delinquency. Thus, failing to timely pay taxes could eliminate any current complaint (whether at the administrative or judicial level) or any future complaint (in the event that some correctable error is discovered in subsequent years).

If you have any questions about the contents of this article, please contact Dan Donovan, David Kaplan, or Ron Gray or contact the GPD Property Tax Section at propertytax@gpd.com.