What is tax debt?
If you’ve forgotten to file your taxes, if there’s a mistake on your tax return, or if the IRS wants to change something on your return – and you owe money to the IRS, you have tax debt. It doesn’t matter how you got this debt; it is your job to resolve any errors, file any missing returns, and pay off any remaining debt.
Each year, countless taxpayers incur tax debt and associated penalties. But if you’re in debt to the IRS, don’t give up hope – there are solutions you can use to get yourself out of debt, and often, the right tax preparer can really help.
How can you settle your tax debt?
There are several common ways for you to get out of debt with the IRS:
Filing missing returns and/or adding missed credits and deductions by amending the original return is one of the most overlooked ways to reduce or eliminate a tax debt.
Payment in full is, in essence, just what it sounds like – you pay your tax bill right away. Use this option when the IRS notice of taxes due is correct. This pays the debt immediately and stops any additional penalty and interest accruing.
Installment agreements and an OIC are other ways of paying down your debt.
You can request an installment agreement if you are up-to-date on all your tax returns and your debt is manageable, but you just need a little more time to pay it. With an installment agreement, you pay off your bill little by little – in installments – each month, till you’re out of debt. You are still responsible for all interest and any additional penalties assessed while you are paying the bill.
An OIC is an agreement with you and the IRS to let you settle your tax bill for less than the original amount. However, you have to meet certain requirements for an OIC:
All these things would help you get an OIC with the IRS.
And one more thing: If none of the above options work, and if paying your tax debt would create a hardship so severe you would be unable to pay essential living expenses, then the IRS might consider your debt “Currently Not Collectible,” meaning they’d stop trying to collect for some time – but not forever. Your debt will still be there, and the IRS can penalize you if you don’t pay it or at least make progress with it. Interest is always assessed and done so monthly, so you want to clear up your debt as soon as possible.
What sorts of penalties are there if you don’t settle your tax debt?
There are underpayment penalties for not paying the IRS enough initially or filing your return late. This can be kind of frightening: The late-filing penalty can be as much as 25% of your tax bill. In all cases, interest is compounded daily on any taxes owed to the IRS. Simply put, this means today’s interest and penalty calculations are part of tomorrow’s bill subject to interest.
Tax debt can increase rapidly if not taken care of. If you owe IRS money and haven’t been paying or are ignoring IRS, don’t. The IRS can actually take money from your paycheck, or make claims on your property and assets.
The government can also put liens and levies on your assets. A lien is like a shadow of debt hanging over you and your assets: It’s not an outright seizure of property or assets, but if you make money from your property or assets on which the IRS has a lien, the government is allowed to take your profits.
A tax levy is a last resort for the IRS when people owe the government money, and it represents an outright seizure of assets or property to cover the debt.
So it’s important, foremost, to make sure you pay the right amount of taxes on time. If you can’t do that, contact the IRS. Or, alternatively, reach out to a Tax Pro for help – we’ve got the answers you need about tax debt.