What You Should Know About Tax Debt

With every passing year, more Americans find themselves indebted to the IRS. Typically, this is due to previously underreporting or underpaying their taxes. When you owe money to the IRS, it can be incredibly stressful. You are not alone in this. So many others suffer from the same struggles, so there are tax debt resolution services in place that can help you.

What Exactly Does Tax Debt Entail?

Anything you owe to the IRS is considered a tax debt. This can be due to forgetting to pay or file taxes or any mistakes on your tax returns.

If you have incurred a tax debt and are concerned about owing money to the IRS, you’re not the only one. In 2017, approximately 858,000 American taxpayers had delinquent accounts. Luckily, the IRS provides several options to assist taxpayers in resolving their debt. Firstly, there are several ways to determine how much you owe the IRS. You can check online, by phone, in person at an IRS office, or via mail. 

It is worth noting that tax debt has a statute of limitations of ten years from the time the penalty was initially assessed. However, if you have outstanding debt, there are penalties for underpayment. There are two main types of underpayment penalties. The first happens when you do not prepay enough taxes throughout the year, so you wind up owing when you file. The second type is a penalty due when you don’t pay what you owe by your tax return’s due date. 

If you owe money to the IRS, you may be subject to the following:

• Your total bill continues to grow since the penalties are continuously assessed on a monthly basis while interest is compounded daily.

• Your job can be jeopardized if you are not actively working on a resolution with a timely repayment plan.

• The IRS can keep and apply your tax refund to any outstanding debts.

• In the worst cases, the IRS can put a levy on your paycheck and keep a portion of it.

The IRS does not wish to cause harm. They aim to work alongside you to resolve your debt before succumbing to collection. 

What Happens if This is the First Time You Owed Money to the IRS?

You may be eligible to request a first-time abatement (FTA) if you can prove to the IRS that you have never been in a non-payment status on taxes before. If approved, you can request an abatement of tax-related penalties for a singular tax period. 

In order to qualify, you must first show you previously didn’t have to file a tax return, or you paid your previous taxes with a positive three-year history with no penalties. You cannot have any outstanding requests from the IRS for a return that went unfiled. In addition, you must agree to payment compliance.

There are many reasonable causes to request an FTA, including but not limited to:

• Fire, casualty, or other natural disasters

• Death, illness, or an unavoidable absence

• Inability to get records

• Flawed IRS advice

Tax Levy VS Tax Lien

Should you fail to pay the IRS what you owe, they may choose to file a Notice of Federal Tax Lien or place a levy on your property to protect its interests. You may be asking yourself, what are the differences between the two?

While a tax lien affects your current and future property, credit, and business assets, it does not represent an outright seizure. A tax levy, however, is the outright seizure of property to satisfy your tax debt. 

A lien means that any income generated from selling your assets will be given to the IRS until your debts are paid. It can affect your credit when attempting to buy a house, car, or credit card and can be removed once the tax debt is reasonably satisfied. 

On the other hand, a tax levy represents a solid claim on your property in the event you have not paid your tax bill. The IRS can place said levy on any of your property, including your house, car, bank account, retirement funds, and current wages. Typically, the most common form of a tax levy is wage garnishment until the debt is paid. 

You can request a levy release if it is causing you immediate and extreme economic hardship. In these cases, the IRS will consider all aspects of your circumstances to determine if the levy should be rightfully released. Typically, if the release is approved, a reasonable payment plan must take its place. You may be able to reduce your tax debt, but you will still owe regardless. Only under certain unique circumstances, such as regularly scheduled medical expenses, the IRS may consider that and reduce or eliminate the amount of the levy. 

Will the IRS Ever Forgive My Debt?

The IRS serves its best interests by collecting tax on behalf of the government in an efficient manner. They must aim to encourage voluntary compliance and promote consistency and fairness in the system. Therefore, the IRS offers some relief options for taxpayers to negotiate their debt.

These are the options to help you pay down, reduce, or discharge your tax debt:

• Reduce the debt by filing or correcting a previously filed tax return

• Seek help from a professional tax relief service

• File for bankruptcy

• Offer an installment payment plan

• Pay down your debt via an Offer in Compromise

• Obtain a Currently Not Collectible status

If you are ultimately unable to qualify for one of the options above, the IRS will not garnish your entire paycheck to pay themselves back. Instead, the amount you keep from your paycheck is based on how often you get paid, your tax filing status, and how many dependents you are able to claim. By law, the IRS is required to allow you to keep enough from your paycheck to pay your household expenses. Therefore, regardless of your ability to qualify for debt relief, all hope is not lost.