Dealing with taxes is an inevitable part of adult life. As the tax deadline approaches, many individuals find themselves facing a challenging situation: owing taxes they can’t afford to pay. This predicament can lead to anxiety and stress, but it’s essential to understand that there are options available to resolve tax debt. In this article, we will explore what happens if you owe taxes and can’t pay, the consequences of unpaid taxes, and various solutions to manage tax debt.
When you owe taxes to the Internal Revenue Service (IRS) or your local tax authority, it’s crucial to address the situation promptly. Ignoring or delaying the payment of taxes can result in severe consequences, including penalties, interest, and collection actions by the IRS. By understanding your options and taking appropriate steps, you can navigate through this challenging situation.
Understanding Tax Debt
Tax debt occurs when you owe money to the IRS or your state tax authority after filing your tax return. This can happen for several reasons, such as under-withholding taxes from your paycheck, receiving income from sources that aren’t subject to automatic tax withholding, or experiencing a significant life event that affects your tax situation. Regardless of the reasons, it’s important to address your tax debt proactively to prevent further complications.
Consequences of Unpaid Taxes
Penalties and Interest
When you can’t pay your tax bill on time, the IRS imposes penalties and interest on the outstanding amount. Failure to file your tax return by the deadline can result in a “failure-to-file” penalty, which is usually more significant than the penalty for “failure to pay.” Additionally, interest accrues daily on the unpaid balance, compounding the overall debt over time.
Failure to File Penalty
The IRS imposes the failure-to-file penalty when you don’t file your tax return by the due date. The amount of this penalty is typically 5% of the unpaid balance for each month (or partial month) that your return is late, up to 25% of the total unpaid taxes.
Failure to Pay Penalty
You will also be liable for the failure-to-pay penalty if you don’t pay your taxes on time. This penalty is usually 0.5% of the unpaid balance per month, up to 25% of the total amount due.
In addition to penalties, interest accrues daily on any unpaid tax debt. The current rate is 7%, compounded daily, which increases the amount of tax debt over time.
IRS Collection Actions
If your tax debt remains unpaid for an extended period, the IRS may initiate collection actions to recover the money owed. These actions can include wage garnishment, bank levies, tax liens on your property, and even legal action. The IRS has extensive powers to collect unpaid taxes, making it crucial to address the issue promptly.
A levy is a legal action whereby the IRS can seize assets such as bank accounts or property to satisfy an unpaid tax debt. This is one of the most powerful collection tools available to the IRS, and it should be avoided at all costs.
A lien is a legal claim against your property that grants the IRS priority over other creditors when you sell or transfer assets. It is typically imposed after an unsuccessful levy attempt, and it can remain in place until the entire tax debt is resolved.
Options for Dealing with Tax Debt
When you find yourself unable to pay your tax debt in full, you have several options available to manage the situation effectively. A spokesperson from Ideal Tax says it’s essential to evaluate these options based on your financial circumstances and choose the one that best suits your needs. An IRS fresh start program may be a solution for taxpayers.
An instalment agreement allows you to pay off your tax debt over time in monthly instalments. This option provides a structured repayment plan and can help alleviate the financial burden of a large tax bill. To establish an instalment agreement, you will need to submit an application to the IRS and agree to specific terms and conditions.
Offer in Compromise
An Offer in Compromise (OIC) is an option for taxpayers who are unable to pay their tax debt in full. It allows you to settle your tax liability for less than the total amount owed. However, qualifying for an OIC is challenging, and the IRS carefully evaluates your financial situation to determine if you meet the eligibility criteria.
Currently Not Collectible Status
If you are experiencing significant financial hardship and cannot afford to pay your tax debt, you may qualify for Currently Not Collectible (CNC) status. This status temporarily suspends IRS collection actions against you. However, it’s important to note that interest and penalties continue to accrue during this period, and the IRS may review your financial situation periodically.
If the penalties and interest associated with your tax debt have caused hardship, you may be eligible for a penalty abatement. This could reduce or eliminate any fees imposed by the IRS in connection with unpaid taxes.
Seeking Professional Help
Navigating the complexities of tax debt can be overwhelming, especially when considering the various options available. Seeking professional help from a tax attorney, enrolled agent, or certified public accountant (CPA) specializing in tax resolution can provide valuable guidance and representation. These professionals can assess your situation, negotiate with the IRS on your behalf, and help you find the best solution for your tax debt.
Preventing Tax Debt in the Future
The best way to avoid tax debt is by filing your taxes accurately and on time. It’s also important to pay any estimated taxes due as soon as possible each quarter in order to stay ahead of deadlines. Additionally, setting aside money for taxes throughout the year can help reduce the financial burden of a large lump-sum payment when the tax filing date rolls around. Taking these steps can help ensure that you stay in the good graces of the IRS and avoid tax debt in the future.
Finally, it’s important to regularly monitor your tax situation and address any issues promptly. Ignoring problems or procrastinating on filing taxes and payments can lead to serious consequences such as bank levies, garnishments, and hefty penalties. Taking proactive steps to stay on top of your taxes can help you avoid the pitfalls associated with tax debt.
Owing taxes and not being able to pay can create stress and uncertainty. However, it’s crucial to address the issue proactively and explore the available options to manage your tax debt effectively. By understanding the consequences of unpaid taxes, evaluating the different solutions, and seeking professional assistance if needed, you can regain control of your financial situation. Remember, it’s never too late to take action and resolve your tax debt.