Tax debt is one of the worst kinds of debt to owe. The IRS and state tax offices can pursue you to aggressively within the letter of the law. They can garnish your wages, place property liens, and levy your bank accounts – all without a court order. This kind of debt can easily drive you into financial hardship and bankruptcy. So, it’s crucial to understand how this debt affects you and what you can do to resolve it. The articles in this section keep you up-to-date on the latest trends and regulations that affect tax repayment. You can find more information about tax debt, in general, at the bottom of this page. If you owe back taxes, we also recommend heading over to the
5 Key Facts about Tax Debt
#1: Penalty interest charges can go up to 25%
If you think credit card interest charges are high, then you may be surprised to learn that IRS interest charges can be higher. Each month, the IRS charges a penalty of a particular percentage on your unpaid tax debt. In most cases, it’s relatively small – about 0.50%. However, by law penalties can go up to 25%.
The IRS adds penalties, often based on how uncooperative you are. For example, if you didn’t file your return to try and avoid collection, that’s an extra penalty. It’s called “failure to file.” There are tons of penalties like this that drive up the percentage you pay. It caps out at 25%, but that’s still higher than most credit card interest charges. Penalties can turn bad tax problem into one that’s almost insurmountable.
#2: Almost nothing stops penalties from stacking up
You might think that filing a tax extension or filing for Currently Not Collectible status can stop penalty accrual. You’d be wrong. Penalties add up regardless of what you do to try and stop them.
If you owe taxes on April 15 (or the filing date for that year) and you file an extension, penalties still accrue. The penalties won’t be as high as they would if you fail to file. However, the extension doesn’t delay the application of penalty interest charges. Penalties still apply through the October deadline.
Even if you file for Currently Not Collectible (CNC), which stops all collection actions, the penalties continue to accrue. CNC will stop phone calls, garnishment and liens, but your tax debt will still grow each month.
#3: Seeking tax debt forgiveness is a little like a chasing unicorn
Debt forgiveness means the entity you owe forgives a debt balance without penalties once you meet certain criteria. For example, once you serve a year in AmeriCorps, you qualify for up to $4,725 in student loan forgiveness.
There is nothing comparable in the world of tax debt. There are two options that are kind of close to forgiveness, but not really:
- Innocent Spouse Relief
- Offer in Compromise
Innocent Spouse Relief doesn’t forgive the debt, but it removes your obligation to pay it. Basically, you must prove that your spouse incurred back taxes entirely without your knowledge. If you can show proof that, then you aren’t on the hook for the debt, but your spouse still is.
The other option, an Offer in Compromise (OIC), is more like debt settlement than forgiveness. You agree to pay back a percentage of what you owe, then the IRS discharges the remaining balance. It’s essentially like partial debt forgiveness, but in order to get it you must repay part of the debt.
Outside of these two options, there is no such thing as tax debt forgiveness. If you encounter a company that tells you they can guarantee tax forgiveness, it’s probably a scam!
#4: The IRS is willing to wait
When you talk about collection actions on debt, there’s usually a statute of limitations. For instance, in most states, a credit card collection action can only continue for six years from the date the debt became delinquent.
By contrast, tax debt has no limitations. They can pursue you for as long as they need to in order to collect what you owe. There’s no discharge through bankruptcy and as we mention above, forgiveness doesn’t really exist.
This means the IRS is usually willing to wait it out until your situation improves for you to pay them. They’re more than happy to put you on CNC, which stops collection actions but continues to accrue penalties. But this also means that getting an Offer in Compromise takes work. The IRS won’t accept a settlement offer easily. You must prove that they can have no reasonable expectation for full repayment. Unless you can prove that, they’ll put you on an Installment Agreement.
#5: Don’t break an agreement you make or things will get worse
Whether you make an Offer in Compromise or an Installment agreement, make sure you can meet the obligation! It’s crucial that once you make arrangements with the IRS that you stick to the agreement. Otherwise, you can face more penalties and they’ll be less likely to work with you in the future. As you go through negotiation, make sure that whatever payments are set are something you can meet. Otherwise, you’re just making a bad situation worse.
If you’re negotiating with the IRS and you don’t feel confident in the repayment plan, don’t sign anything! Ask for CNC until your situation improves and you can pay more. Again, the IRS is absolutely willing to wait, so there’s no need to rush into a repayment obligation that you can’t meet.
This is also a good reason why you need a tax resolution specialist to help you negotiate. They can help you get the right arrangement for your needs. They can also effectively make the case for why you can’t pay more. Going through professional channels will often deliver better results when it comes to tax debt.