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Owe Back Taxes And Don’t Pay?

Every year, millions of Americans owe the IRS money. In 2020 alone, the IRS reported that more than $114 billion was owed to the Treasury from Americans due to unpaid taxes and the various fees, penalties, and interest that were applied. 

Depending on your specific financial situation, it can be easy to make a mistake or end up owing the IRS much more money than you thought. If you have received a notice from the IRS stating that you owe money, you may want to consider consulting with a tax resolution firm about your options as soon as you can. 

It’s important to resolve your back tax as soon as possible as the IRS has several different collection methods to otherwise force you to pay the amount of money the IRS claims that you owe. 

Why Do You Owe the IRS?

The first thing you need to do is to determine why you owe taxes to the IRS. There are several possible reasons why people fall behind on their taxes. You might be able to resolve the discrepancy pretty easily if you are able to figure out why you owe.  However, due to the complexity of our tax system, chances are most likely that consulting with a tax professional will be necessary in order to figure out why you owe the tax. 

These are a few of the most common reasons that someone might fall behind on their taxes:

You Didn’t File a Return

Sometimes, life can be hectic and people might legitimately just forget about filing their tax returns or have reasonable cause for not filing the required annual tax returns. However, the IRS nevertheless requires you to file an annual tax return by the filing deadline on Tax Day if you meet the following tax filing requirements:

  • Under the age of 65 and have an annual income that is more than:
    • $12,400 as a single filer
    • $18,650 as a head of the household filer
    • $24,800 as a joint filer

  • Over the age of 65 and have an annual income that is more than:
    • $14,050 as single filer
    • $20,300 as head of the household filer
    • $26,100 as joint filer where only one individual over 65
    • $27,400 as joint filer with both people over 65

If you meet these requirements and do not file a return, the IRS could assess you with a “failure-to-file” penalty. The penalty will be a charge equal to 5% of your total unpaid taxes for every month that your tax return is late. This penalty will be charged for up to five months, so the maximum charge could be 25% of your unpaid taxes. 

You Didn’t Pay Enough During The Year

Most Americans will have their taxes taken out of their paycheck by their employer before they receive it. Because you will be paying taxes throughout the year, you will most likely be close to having paid your tax burden in full and owe very little in tax by the end of the year, or, if you have overpaid you may receive a refund. 

However, if you claim a high number of exemptions on Form W-4 for which you are not entitled to claim, you may have been under-withholding. If you were under-withholding taxes throughout the year, this means that not enough taxes were being taken out of your check throughout the year, and you will need to pay the difference. 

You Didn’t Pay An Estimated Tax

This is a common issue for business owners, independent contractors, or freelancers. Unlike most Americans who have their taxes automatically taken from their paychecks by their employer to send to the IRS on behalf of their employee, these individuals will be responsible for paying their own taxes directly to the IRS by the end of each quarter. 

If you are self-employed and have not been making estimated quarterly tax payments, it could result in substantial tax liability when you file your annual return.

What Will The IRS Do If You Don’t Pay?

The IRS will primarily use financial penalties to encourage you to pay your balance, but they have more extreme measures at their disposal. 

It’s best to resolve these issues as soon as you become aware of them because the penalties and interest can quickly compound. Similar to the “failure-to-file” penalty mentioned above, these charges can quickly add up and create a much higher amount that must be paid on top of your outstanding balance. 

There is no exact set of steps that the IRS will take if you don’t pay what you owe, but these are some of the most common ones. 

A Failure To Pay Penalty

If you have filed a return, owe taxes, and have not made any attempt to make payments, the IRS will typically assess a “failure-to-pay” penalty

This charge will be calculated at a rate of 0.5% for your outstanding tax liability and will be applied for every month that the amount remains unpaid. This penalty’s maximum percentage is 25% and will require 50 months of delinquency to reach. 

Liens

On top of recurring interest charges that will continue to accumulate, the IRS might also put liens on your assets. A tax lien is an official and legal claim to your assets, which can affect you differently. 

For example, if you were to sell any of the assets that have a lien on them, resulting in a profit, the IRS could legally take proceeds from the sale up to the amount of tax that is owed. A lien might also affect your credit and make it more difficult to refinance existing loans or take out loans or credit lines in the future. 

Even if you file for bankruptcy, a tax lien could survive the bankruptcy and continue even after settled bankruptcy. 

Garnished Wages

Unlike other creditors who must first sue you and obtain a court order for wage garnishment, the IRS does not require a court order. However, prior to issuing a wage garnishment order to your employer, the IRS must notify you as to the tax that you owe and provide you with an opportunity to resolve your tax issue with the IRS, and the IRS will send you several notices of the IRS Intent to Levy or Garnish your assets and wages.  If you do not respond appropriately to the IRS LT11 and/or CP90 Notice, which is the last notice the IRS will send to you, then the IRS could proceed with the issuing of a wage garnishment order to your employer.  The IRS will not notify you as to the enactment of the wage garnishment, but your employer is required to notify you that your wages have been garnished by the IRS. 

Once a wage garnishment is enacted, the IRS will instruct your employer to withhold a specific percentage of your paycheck and send it directly to the IRS. These garnishments will typically continue until the balance is fully repaid.

Forfeitures

In most cases, the IRS won’t resort to such an extreme option as forfeiture of your assets, but it is a collection method the IRS has at its disposal. The process can be time-consuming and expensive for the IRS, so the IRS usually will only choose this method if the tax obligation is in the tens of thousands of dollars or more. 

After the IRS has placed a lien on your assets, the IRS can legally seize assets once acquiring a court order. These assets will then be sold and liquidated into cash that will be applied toward your arrears. The IRS can seize and sell the following assets:

  • Houses
  • Real estate 
  • Motor vehicles
  • Jewelry
  • Life insurance policies
  • Savings accounts
  • Retirement accounts
  • Investment accounts

Prison

It’s extremely unlikely that the IRS will threaten someone with legal action over unpaid taxes, but it has happened in the past. The IRS could bring three different charges against you depending on the exact circumstances of your deficiency:

  • Failure to file is when you either forgot to file a tax return or deliberately refused to do so and have made no attempt to file the delinquent return or delinquent returns.
  • Tax fraud is when you file a false return or provide falsified documents whenever you have submitted a tax return.
  • Tax evasion is when you have employed illegal means to avoid paying taxes. This may include intentionally misrepresenting your total earnings or inflating your annual deductions. 

The overall prison sentence that you receive will depend on the charge. The prison sentence is measured in months and will not exceed five years in most cases.

What Are Your Options For Repaying Your Deficiency?

The IRS has become much more willing to negotiate tax obligations over the years. Since the “tax gap” between what is owed in taxes and what the IRS actually collects in taxes is often in the hundreds of billions of dollars every year, the IRS is eager to offer programs that will help you make payments on your taxes. 

These are a few of the payment options that can help you pay off your liabilities:

Installment agreements can be used if you owe less than $10,000 and work like repaying a loan. Your total tax obligation will be added up, including any applicable penalties, fees, and interest. The new total will be divided into monthly payments that will be paid off until the tax balance is zero.

An offer in compromise is an attempt to lower your overall tax obligation by offering to pay a lump sum payment that is significantly less than the amount of the tax that is owed. These offers are usually rejected and require a tremendous amount of proof that you really cannot repay your total taxes, and a great deal of skill by the Attorney, CPA, accountant, or Enrolled Agent.

An IRS Economic Hardship Partial Payment Plan.  This is sometimes referred to as a Back Door Offer in Compromise, because rather than paying a lump sum settlement payment upfront, instead, the taxpayer enters into an IRS Installment Agreement under which the monthly payment will not pay off the tax balance in full before the collection statute of limitations (the CSED Date) for the IRS to be able to collect the tax will expire. Due to the taxpayer being unable to make the normally larger required monthly payment or due to the taxpayer being in economic hardship, after which the IRS will reduce any remaining tax, penalties, and interest to zero.  Hence, although the taxpayer is making smaller monthly payments, the taxpayer will end up not paying the entire tax balance that is owed in full.  The IRS Economic Hardship Partial Payment Plan is second best to the Offer in Compromise as a resolution to a taxpayer’s federal income tax case, and like an IRS Offer in Compromise requires a tremendous amount of proof that you really cannot repay your total taxes, and a great deal of skill by the Attorney, CPA, accountant, or Enrolled Agent to push it through the IRS.

The Offer in Compromise and the Economic Hardship Partial Payment Plan work similarly to a light bankruptcy and you can only use them if you can’t reasonably repay your balance in full.

The currently not collectible program is designed for anyone who cannot afford to pay any of their tax obligations without experiencing financial hardship as a result. This program will not lower the overall amount that you owe, but it will temporarily stop all collection attempts until it’s determined that you can resume payments. 

The Takeaway

Owing taxes to the IRS is a fairly common experience by most American taxpayers. There are plenty of reasons that you can end up owing money to the IRS, and it’s important to resolve the issue as soon as you can. 

The IRS can apply various penalties to your account that can lead to a much higher total tax balance. They may also apply liens on your assets, garnish your wages, levy your bank account, seize your assets, and in cases of fraud or tax evasion result in criminal charges against you. The IRS offers a few programs that can help you to repay your taxes. 

It might be best to talk with a tax professional like the ones at Coast One Tax Group. The tax professional will review your specific financial circumstances and determine the best tax resolution under your particular circumstances to help you resolve your obligation as quickly and cheaply as possible.  

Sources:

SOI Tax Stats | Internal Revenue Service 

2020 Federal Income Tax Filing Requirements | Yale

Collection Procedural Questions 3 | Internal Revenue Service.

Underwithholding | Investopedia

Failure to Pay Penalty | Internal Revenue Service.

Understanding a Federal Tax Lien | Internal Revenue Service

Garnishment | Dol

9.7.13 Title 26 Seizures for Forfeiture | Internal Revenue Service

Tax Gap | Fiscal Treasury 

Topic No. 202 Tax Payment Options | Internal Revenue Service