Tax debt is the amount of money due to the IRS for taxes, penalties, and interest that have not been paid. Common types of taxes that you can owe include income tax, payroll tax, gift tax, estate tax, corporate tax, and excise tax.
Many people may find themselves owing more taxes than they can pay for various reasons. These include failing to file a return or filing late; overestimating deductions; underestimating taxable income; taking incorrect deductions or credits; having expenses that exceed deductions such as gambling losses or medical expenses; and being hit with an unexpected change in taxable status such as getting married.
If someone cannot pay their tax debt, there are several potential consequences that the IRS may take in order to collect unpaid taxes. These include garnishing wages from an employer’s payroll checks, levying bank accounts to collect unpaid taxes, filing liens against property such as a house, boat, or car, and taking other aggressive measures. Additionally, there could be significant interest and penalty charges accrued on unpaid taxes.
Fortunately, there are solutions available to resolve unpaid tax debts including repayment plans with the IRS like a short-term extension or an installment agreement to make smaller payments over a longer period of time; offer in compromise (OIC); and currently not collectible status if you can prove an inability to make payments towards the debt.
Causes Of Tax Debt
In order to avoid the possibility of owing more taxes than you can pay, it is important to be aware of some common causes of tax debt.
- Failing to file your return or filing late: If you do not file a return or submit one late, the IRS may impose additional penalties and interest on the amount owed. This could drastically increase the amount of tax debt you owe.
- Failure to Pay Estimated Taxes: Being a self-employed taxpayer can make it effortless to fall behind on taxes, as they are in charge of making their own estimated payments. Failure to pay or utilize the tax money for some other purpose will lead to immense taxes due when filing your return, accompanied by heavy penalty fees and interest.
- Underestimating taxable income: If someone does not report all of their income, they could be setting themselves up for a bigger bill when taxes are due. This can include things like unreported investment income, untaxed social security benefits, or freelance work.
- Taking incorrect deductions and credits: Taking the wrong deductions or credits can often result in owing more than you expect. Additionally, if someone knowingly takes an improper deduction or credit, they could be subject to criminal penalties.
- The unexpected change in taxable status: Taxable statuses such as filing single or married can affect a person’s taxes. If someone gets married during the year, they may need to adjust their withholdings and update their filing status accordingly in order to avoid owing taxes.
It is important to be aware of common causes of tax debt and the potential consequences that may occur if the debt is not paid. Taking the time to accurately file taxes and understand withholdings can help prevent owing more than you can pay in taxes.
Interest & Penalties on Tax Debt
The IRS charges interest and penalties on tax debts that are unpaid or paid late. The amount of the interest and penalty charges can be significant, depending on how much is owed and how long it remains unpaid.
Failure-to-pay Penalty
Generally, if you make a payment late, you will owe a failure-to-pay penalty of 0.5% of your unpaid taxes for each month or part of a month that the tax remains unpaid. This penalty can increase up to 25%.
Failure-to-file Penalty
Additionally, there is an extra penalty known as the failure-to-file penalty which is 5% per month of any unpaid taxes for each month or part of a month your return is late, but not more than 25% total.
Any payments that are made towards a tax debt may also incur additional interest charges on top of the penalties attached to unpaid taxes.
Actions The IRS May Take To Collect Unpaid Tax Debts
The Internal Revenue Service (IRS) takes tax collection seriously and has the authority to take various actions against taxpayers who fail to pay their tax debts on time. These actions can range from relatively mild enforcement measures such as sending notices and warnings to taxpayers, all the way up to more aggressive tactics such as bank levies, wage garnishments, and tax property liens.
Wage Garnishment
The Internal Revenue Service often resorts to wage garnishment as a means of collecting unpaid taxes. This occurs when the IRS contacts an employer and requests that a portion of the employee’s wages be withheld to cover their tax debt. This can be a devastating blow to the taxpayer, as it can impact their ability to pay rent, buy groceries, and other important expenses.
Bank Levy
Another enforcement tactic the IRS may use is bank levies. This occurs when the IRS contacts a taxpayer’s financial institution and seizes any funds in their account to cover their tax debt. This can be a significant financial blow to the taxpayer, as they may suddenly find themselves without access to the money they need to pay bills and other expenses.
Tax Lien
The IRS may also file a lien against a taxpayer’s property, such as their house, boat, or car, to secure payment of unpaid taxes. This can make it difficult for the taxpayer to sell the property or obtain financing, as the lien must be resolved in order to clear the title to the property.
In all of these cases, a taxpayer can challenge the IRS’s actions by requesting a hearing, negotiating a payment plan or an offer in compromise, or taking legal action. Nevertheless, it is essential to comprehend that the IRS possesses extensive authority when collecting unpaid taxes. Consequently, taxpayers who disregard their duties may have to face serious consequences.
Solutions To Resolve Unpaid Tax Debts With The IRS Fresh Start Program
There are several solutions to resolve unpaid tax debts, including Fresh Start Programs with the IRS such as a short-term extension or an installment agreement. This allows taxpayers to make smaller payments over a longer period of time. Companies such as Ideal Tax offer power of attorney services on the behalf of taxpayers.
Taxpayers may also qualify for an Offer in Compromise (OIC) which reduces their total amount owed if they cannot afford to pay the full amount. This requires submitting financial information and getting approval from the IRS beforehand.
Alternatively, taxpayers may be eligible for Currently Not Collectible status if they can prove that they do not have enough income left after necessary living expenses which would allow them to make payments towards their tax debt.
Final Thoughts
Paying taxes on time is essential to avoid incurring penalties and possible enforcement action by the IRS. However, taxpayers who are facing difficulty in paying their tax debts should seek professional help to find the best solution for their situation. With the right approach, it is often possible to resolve unpaid taxes without suffering detrimental financial consequences.
Always remember that the sooner action is taken, the better the chances of a successful outcome. By taking proactive steps and seeking help from experienced professionals, taxpayers can often minimize or even eliminate their tax debts. So don’t delay – take action today and get back on track with your taxes!
