Having unpaid tax debt is a situation taxpayers want to resolve as soon as possible, as the problems that can arise otherwise can be complicated and stressful. If you’re in this particular scenario and asking yourself: What happens if I have unpaid tax debt? Read on to learn more about what could happen if your tax debt remains unpaid and how to prevent escalation.
What Is Unpaid Tax Debt?
Understanding Tax Debt
Tax debt refers to money owed to the government. This can occur for a variety of reasons, including when the amount of tax owed exceeds the amount already paid via withholding, estimated tax payments, or other payments and credits. It can also be caused by unpaid IRS assessments or other tax liabilities.
Common Reasons People Owe Taxes
Incorrect withholding: Occurs when an employer deducts an insufficient amount of federal tax from your paycheck. This issue typically stems from claiming too many allowances or selecting an inaccurate filing status on your W-4 form.
Unreported side income: Failure to include income from side gigs, investments, or bank interest.
Underpaying estimated taxes: Failing to pay quarterly payments throughout the year, often with self-employed workers.
Life changes: Getting married and having kids can move you into a higher tax bracket, change your taxable income, and affect certain tax benefits. These changes may result in a higher tax bill.
What Happens If You Don’t Pay Your Tax Debt?
Interest Continues to Accrue
When you have an unpaid tax debt, interest will be added to the total amount of tax debt, beginning from the original due date. Interest will continue to accrue on the balance and penalties as long as the debt remains unsettled.
Penalties May Increase
Failing to pay taxes on time may result in a failure-to-pay penalty of 0.5% on your unpaid taxes for each month or part of the month the bill remains unpaid. The penalty can continue to be added at a maximum of 25% of the total unpaid amount. It is also important to note that failing to file your tax return on time may result in a separate penalty, known as a failure-to-file penalty, which is generally 5% of the unpaid tax for each or part of the month the return is late, up to 25%.
IRS Collection Notices
When tax debt remains unpaid, the IRS can send several notices in the form of formal letters informing taxpayers of the issue, the amount owed, and explaining the rights you have. If you don’t respond to these letters, the IRS may take more aggressive collection action.
How Does the IRS Collect Unpaid Tax Debt?
Federal Tax Liens
A federal tax lien is a legal claim against your property by the government to satisfy tax debt. The issuance of a federal tax lien is usually accompanied by a document called the Notice of Federal Tax Lien, which informs creditors that the government has the right to claim taxpayers’ property, making it harder for individuals to obtain a loan or sell a home.
Tax Levies
A levy is the actual action of asset seizure to satisfy tax debts. As one of the most serious tax issues, the IRS can legally levy your bank account, weekly paychecks, and physical property, such as homes and vehicles.
Refund Offsets
The authorities can take refunds from future federal tax refunds and state income tax refunds to help pay tax debts. It can also offset other federal payments, such as certain Social Security benefits, until the debt balance hits zero.
Collection Due Process Rights
Taxpayers are entitled to a Collection Due Process hearing, and the IRS must inform them of this right through its formal notices. Before the authorities can execute a major levy or certain lien notices, you have the legal options to appeal the actions or propose alternative payment options, or prove that the tax bill itself is incorrect.
What Are Your Options for Resolving Unpaid Tax Debt?
Paying the Balance in Full
The fastest way to resolve tax debt is to pay in full immediately. This will stop penalties, interest, and any further actions by the IRS. Make your payments securely through the IRS website using the available payment options.
IRS Payment Plans
If you can’t afford to pay your tax bill all at once, the IRS lets you break it down into monthly installments. Setting up a payment plan is designed to give you some breathing room when you owe more than you can handle. Even though interest will keep adding up on the balance, locking in an official agreement stops the government from taking aggressive steps like seizing your wages or freezing your bank account as long as the monthly payment is paid on time.
Offer in Compromise
An Offer in Compromise (OIC) allows taxpayers to pay off their tax debt for less than the full amount owed. The IRS typically approves these settlements only when full collection would cause severe economic hardship or deplete the taxpayer’s essential means of financial survival.
Currently Not Collectible Status
If a taxpayer’s income is sufficient only to meet basic needs such as food, housing, and medicine, the taxpayer may be granted a Currently Not Collectible (CNC) Status. It’s important to note that CNC status does not erase tax debt. It is simply a pause until the taxpayer can pay.
Penalty Relief
Taxpayers who can show a reasonable cause for being unable to pay their debts on time can apply for a penalty abatement to eliminate the penalty. Cases such as natural disasters, unavoidable hardship, serious illness, and death in the family are some examples of situations that have kept you from paying on time.
When Should You Contact a Tax Attorney?
You Owe More Than You Can Afford to Pay
If you are in a situation where your debt exceeds what you can afford to pay, seeking professional help is critical. Tax attorneys can help analyze and structure your finances, find the right option, and negotiate with the authority on your behalf to help solve the issue effectively.
You’ve Received Multiple IRS Collection Notices
One of the gravest mistakes people make when dealing with tax issues is ignoring IRS letters. These notices serve as both a warning and an opportunity for taxpayers to resolve issues and prevent escalation. A tax attorney can help you understand the letters meticulously and respond appropriately based on your unique circumstances.
The IRS Has Filed a Tax Lien or Issued a Levy
A tax lien or a levy is a serious tax matter that requires immediate response. A tax attorney can help fight for you to reverse these actions and help protect your assets and income. Choosing the right course of action promptly when a levy or lien is issued is paramount to preventing the worst-case scenario from happening to you.
You Need Help Negotiating With the IRS
Negotiation with the IRS is not a simple task. It requires time and effort. Even a seemingly simple mistake, such as the wrong language, can get you in more trouble. An experienced tax attorney understands the strict requirements and what exactly needs to be said when talking with the IRS to help clients achieve the most desirable outcome.
You Have Unfiled Tax Returns
Unfiled tax returns can lead to enforcement activity. Therefore, if you have unfiled tax returns, you want to resolve them as soon as possible. Hiring a tax professional can help with organizing documents and ensure your tax return is filed accurately to minimize potential complex tax problems.
When it comes to tax issues, you don’t want to wait. Prompt and accurate action is needed to resolve the problem and prevent escalation. Contact Greenberg Law Group for all your tax needs. As an experienced and skilled tax attorney, any tax-related concern will be handled professionally, with a commitment to providing the best possible outcome.
Frequently Asked Questions About Unpaid Tax Debt
What happens if I have unpaid tax debt?
The IRS may assess penalties and interest, send collection notices, file a federal tax lien, issue a levy, or garnish wages if the debt remains unresolved.
Can I make payments on unpaid tax debt?
Yes. The IRS offers several payment options, including installment agreements for taxpayers who qualify.
Will the IRS forgive unpaid tax debt?
Depending on the financial situation and eligibility, taxpayers may be eligible for programs such as an Offer in Compromise or penalty relief.
Should I respond to IRS collection notices?
Yes. Responding promptly may help you preserve more resolution options and potentially avoid additional enforcement actions.
When should I contact a tax attorney about unpaid tax debt?
If you owe a significant balance, have received collection notices, are facing liens or levies, or are unsure how to resolve your tax situation, speaking with a tax attorney can help you understand your options.