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Everything You Need to Know About Tax Debt

Everything You Need to Know About Tax Debt
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If you find that you are in an increasing amount of tax debt due to the most recent Tax Day or from a buildup of previous years’ debt, you may be feeling stressed, overwhelmed, and even defeated. It can be easy to ignore your increasing tax debt and bury your head in the sand.

However, it is important to address these problems as soon as possible. Throughout the process, keep in mind that you have options to relieve tax debt. Read on to learn how you can pay back the Internal Revenue Service (IRS).

How Does Tax Debt Happen?

You incur debt when you don’t pay taxes to the IRS on all of your earned income. Even if you file your tax return before the deadline and pay a partial amount of what you owe, the remaining balance is still considered tax debt.w

What Happens If You Don’t Pay Off Tax Debt?

There are can be a variety of consequences for not paying off your tax debt. For one, the IRS can charge anywhere from a 0.5%-25% on your owed tax amount. In addition to these penalties, the IRS will also charge interest every month. Especially over a long period of time, you will be faced with a bill much greater than what you originally owed.

In some cases, unpaid debt can lead to jail time. The IRS might also levy your assets and/or deduct from your wages until you pay everything owed. Unpaid tax debts can also lead to a poor credit score. These infractions last for 15 years, making them the longest credit penalty you can get.

Debt Forgiveness

It’s important to realize that there is no case in which the IRS will remove or reduce interest. They might, however, offer penalty abatement where they reduce the penalties owed on your tax debt. You have to prove that you had a “reasonable cause” for not paying.

The IRS will likely forgive or reduce penalties if your circumstances were unpredictable and beyond your control. Some examples of situations that might award you a penalty abatement include:

  • Death in the family
  • Divorce
  • Natural disaster
  • Loss of income

How to Pay the IRS What You Owe

After the IRS discovers that you have debt, they will file a substitute tax return for you. They’ll estimate how much you owe and notify you accordingly.

Before you respond to their notices, it is important to prepare your case. The IRS won’t provide information on how to reduce the amount owed, so you should talk to a tax professional before taking action.

Sometimes, the IRS will allow debtors to be put on a payment plan. The agreement outlines a timeframe in which the debtor can pay off what they owe. To help prevent future debt incurrences, you can apply for Low Income Taxpayer Status if you feel you qualify.

Methods of paying off your tax debt include:

  • Credit card. This option is normally best if it’s a timing issue rather than an instance of you not having the funds available.
  • Apply for an Offer-in-Compromise. These are hard to qualify for but can greatly help your situation.
  • Submit application for “Currently Not Collectible” Status. This is usually a last resort option for debtors.

Seek Professional Help

At the end of the day, it’s best to file and pay your taxes on time. But if you find yourself dealing with tax debt, remember that you have options available to you.

It is possible to relieve your tax debt on your own with a payment plan, or you can choose to talk with a knowledgeable financial officer to help you through the process.