Dealing with the IRS can be overwhelming for both individuals and businesses, especially if you owe back taxes or penalties for unfiled returns. Plus, these issues can mean bad news for your finances. The upside is there are remedies available to help resolve the tax debt, or you can hire a tax professional to get the assistance you need.
The Basics of Tax Debt
Failure To Pay
A Failure to Pay Penalty applies when you miss the deadline for tax payments, even if you filed your return on time. It equals 0.5 percent of your unpaid tax balance on a monthly basis, limited to 25 percent.
Failure To File
The IRS assesses a Failure to File penalty if you don’t file your federal tax return by the due date. You’ll pay 5 percent of the outstanding balance per month as long as the return remains outstanding – capped at 25 percent.
Quick note: If the IRS also assesses a Failure to Pay Penalty in the same month, you’ll pay no more than 5 percent for the Failure to File and Failure to Pay Penalty each month.
What Happens If You Can’t Pay Your Tax Debt?
Unfortunately, you can face serious financial consequences if you’re unable to pay your tax debt and don’t enter into a short-term payment plan or installment agreement with the IRS.
Bank Account Levies and Wage Garnishments
The IRS may seize funds from your bank account to collect back taxes. You could also be the subject of a wage garnishment, which means a portion of your paycheck will be withheld and applied to the amount you owe.
Tax Liens
A federal tax lien could also be placed against your property, which gives the federal government rights to your property if the balance for back taxes remains unpaid and you don’t take action to reach a resolution.
Inaccurate Assessments
If you’re overwhelmed by tax debt and IRS notices that have arrived in the mail, tossing them in the nearest trash receptacle can be tempting. However, the reality is that you may not owe the actual amount included on the notice, particularly if it was determined by an estimate generated by the IRS.
Unaffordable Payment Plans
Even though the IRS also has installment agreements or long-term payment plans, the monthly payment could still be unaffordable, depending on how much you owe. And unfortunately, not making the minimum payment each month could lead to accelerated collection action.
Revenue Officers/Agents
You’ll also have to deal with revenue officers or agents if you fail to pay back taxes.
Tax Audits
Tax audits are another unfortunate outcome that could arise from not paying your tax bill on time.
