Unpaid Taxes: IRS & State Penalities

Options & Help with Unpaid Taxes

If you have been assessed a tax bill that you cannot pay, or if you know you will not be able to pay your taxes when due, or if you have unpaid income taxes due to the IRS, then it is important to understand how the IRS works so you can avoid any unnecessary penalties and interest and most importantly to understand what options are out there. Everyone’s situation is different and there is not one solution for everyone in these types of cases.

Unable To Pay Taxes? Can’t Pay IRS Taxes? Various Options For You

Whether you have been assessed with a tax bill that you can’t pay or you have a tax filing coming up and you know you will not be able to afford the taxes due, your options are about the same. Owing the IRS and avoiding them is a big deal, but if you owe the IRS and you are willing to work with them on a resolution, then things can go smoothly. Or at least smoother. The IRS realizes that there are times when taxpayers cannot pay their taxes and the IRS is willing to work with you. The IRS has their own programs, rules, and payment plans for taxpayers.

The IRS realizes that not all cases are the same when someone can’t pay their taxes. For this reason they have come up with many different alternatives so that no matter what financial and personal situation the taxpayer is in, they will be able to fall into one of the alternatives. The alternatives that the IRS offers range from short term extensions of paying, to allowing the taxpayer to negotiate the taxes owed for a fraction of the total amount. Not just anyone can pick which method they want to use but must prove to the IRS that they meet specific criteria in order to be considered

Below are some common alternatives to paying your IRS taxes in full. Some methods are IRS sponsored and others are not. If you choose to use an IRS sponsored method you must be sure you meet the specific requirements set forth by the IRS. No matter what you do, always make sure you file first, even if you cannot pay your taxes in full.

IRS Sponsored Alternatives to Paying Taxes in Full

  • An Installment Agreement: the IRS offers multiple forms of installment agreements. All the installment agreements are similar in the fact that they allow you to pay off your taxes owed in monthly increments. The main different between them is the period in which you must pay back the taxes and the amount of taxes you owe. Below are the various forms of installment agreements.

Guaranteed Installment Agreement is the easiest form of installment agreement to obtain. It is only for those taxpayers that owe less than $10,000 in taxes and can pay back the entire amount in 3 years or less.

The Streamlined Installment Agreement: this installment agreement is for taxpayers that owe $25,000 or less (now $50,000 with Fresh Start program). With this payment plan the taxpayer has to pay back all the taxes owed (including interest and penalties) in a period of 60 months or less.

The Financially Verified Installment Agreement is what must be used for taxpayers that owe more than $50,000 in taxes. These are trickier to obtain because you must provide detailed financial statements to the IRS to prove you have the means to make the required payments in order pay back the taxes owed.

A partial payment installment agreement is available to those taxpayers that cannot make the required monthly payments required with the other forms of installment agreements. In order to qualify for this type you must prove to the IRS that you cannot pay the minimum and must submit detailed financial statements. If approved you will pay a smaller monthly amount.

Hardship status is when the IRS declares you temporarily not collectible. The IRS has guidelines it follows as to how much individuals need to live (funds to cover basic necessities such as food, clothes, rent, transportation, etc) and if you fall below that amount they can put a temporary hold on your account. In order to qualify for this you must prove to the IRS your financial situation by filling out detailed financial statements for them. Once the IRS reviews your financials and determines that if you were to pay the taxes owed it would create economic hardship on your part, they will put you on hardship status. Once on hardship status they will check back with you every few months to every couple years to see if your financial situation has improved enough in order for you to pay.

An offer in compromise is a tax settlement method created by the IRS that allows taxpayers in very poor financial situations to negotiate the taxes they owe and settle for less. In order to qualify for this you will need to prove to the IRS that the amount of tax assessed was not correct or there is doubt as to your ability to ever be able to pay back the entire tax amount owed. This is a highly sought after tax settlement method and the IRS is very strict with who qualifies. In order to qualify a taxpayer must prove that the amount that they want to settle for is equal to or greater than the amount the IRS would ever expect to collect from them.

Non IRS Sponsored Alternatives to Paying Taxes in Full

Let me know if I can help. Please call me at 817-877-5995 or toll free at 800-651-0528.

  • Borrow From Family & Friends: Having family and friends to help you with your tax problems is one of the last methods you should consider. For many people this can be an easy solution because it gets around having to deal with the IRS but sometimes it is best to just deal with the IRS and work with them on an agreement that works for you financially. There are only a few times where it can be OK to go to family and friends to help. The most common reason is if you expect to have a payment coming in the near future that will cover 100% of your tax liability but you won’t receive that money until after the due date for taxes. If you are unsure of when you will receive that payment it can be best to use a payment plan instead.

No matter what your financial situation you can find some way to pay the IRS. One important note is that no matter how much you owe even if you cannot pay it is always important to file your taxes. Filing your taxes can prevent large penalties from adding up. Not being able to pay is not considered a big deal to the IRS because of all the various options they offer to taxpayers. So if you owe taxes and can’t pay, start working with the IRS right away to get your problem figured out and to prevent unneeded penalties and interest.

Unpaid & Underpayment Tax Penalties: Consequences of Unpaid IRS Taxes

April 15th is the deadline for most individuals to pay and file their taxes. Some individuals may request an extension to file, but there really is no request for an extension to pay. If you request an extension to file you must pay 90% or more of the taxes that you owe in order to prevent the failure to pay penalty. Interest and penalties on unpaid taxes start being charged on April 15th. Penalties and interest are the same for unpaid amounts vs underpaid tax amounts. Below are the penalties and interest on these amounts.

Failure to Pay

  • Penalty: Underpayment and unpaid tax penalties are calculated from the due date of taxes (typically April 15th). This penalty is .5% of the tax owed for each month, or part of a month. The maximum this penalty can be is 25% of the total tax owed. This penalty will be increased to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. This rate will drop for individuals to a quarter percent for any month in which an installment agreement is in effect.
  • Interest: The interest rate you are charged on unpaid and underpaid tax amounts changes every three months. It is determined by the federal short-term rate plus 3% and interest is compounded daily. This interest rate is typically about 4% per year. Interest will continue to add up as long as taxes are owed, there is no maximum amount to interest owed.

Further Consequences of Unpaid Taxes

Once the IRS realizes that taxes are owed they will begin their automated collection system (ACS). When the ACS starts they will begin by assessing taxes owed and will add up penalties and interest and send various notices to the owing taxpayer as noted above. This process will keep moving along its set path until the taxpayer has paid their taxes or taxes have been resolved in some other way. Below are the basic steps the ACS follows although it sometimes may be different depending upon the IRS’s perception of what actions they think you will take.

  • Receive CP Letters: CP Letters are computer paragraph notices. Each notice is noted by a CP number on the top of the letter. The first letter you receive will assess you with a tax amount owed and will demand payment of that amount. These notices will continue for a period of 2-6 months depending upon how much is owed in tax. Each letter will get a bit more demanding and threatening. The IRS does not take any collection action when these notices are being sent out but they do continue to notify you of your additional penalties and interest you are being charged.
  • Notice of Federal Tax Lien: if no action is taken when CP notices are received the IRS may choose to place a lien on the taxpayers assets. A tax lien is placed in order to secure payment of taxes. A tax lien is the government’s claim to your assets. This means if you try to sell that asset the IRS will be able to take its cut of the funds before you do.

A Tax Levy is the last step the IRS will take if no actions are taken to settle or pay the taxes owed. A tax levy is the legal seizure of property by the IRS in order to satisfy unpaid taxes. Collections only get to this point if the taxpayer continues to ignore requests of the IRS and takes no action to work with them on another resolution. Depending upon your financial situation the IRS may implement any of

  1. The Wage Garnishment: the IRS will contact your employer and demands that they take out a portion of your paycheck and send it over to the IRS.
  2. Bank Levy:The IRS will contact your bank and your bank will immediately freeze your account so you cannot take any money out. The IRS will then require the bank to send over funds from the account in order to satisfy the unpaid taxes.
  3. The IRS can seize assets such as cars, homes, boats, and anything else they think they can sell in order to gain funds to satisfy unpaid taxes.

It is important to know that the IRS has many great programs available for individuals that have unpaid taxes. If you work with the IRS it is very likely that you will be able to eliminate or limit penalties, interest and other consequences that unpaid taxes may have. If you are unsure of the best way to handle your unpaid taxes it is a good idea to consult with a tax professional to find the best solution.

IRS Underpayment Penalties & Interest: Failure to Pay Tax Penalty

Not paying your taxes or underpaying your taxes can lead to a whole slew of problems, but first off you will be charged with penalties and interest that relate to these unpaid taxes. Many times when taxpayers cannot pay their taxes they will file their tax return and then not work with the IRS to solve their unpaid or underpaid tax problem because they are scared as to what will happen. Actually, the IRS prefers to have people work with them if they cannot pay and those people that work out an agreement will typically be charged half of the failure to pay penalty.

When the Failure to Pay Penalty is Charged

Each year the payment date for individuals to pay their taxes is April 15th, even if an extension has been filed. A request for a tax extension only extends the tax filing date, not the tax payment date. If you enter into an installment agreement, which allows you to pay taxes back over a period of time, you will still be charged a failure to pay penalty starting the day after taxes are due, but this penalty will only be half of the normal failure to pay penalty.

Failure To Pay Penalty Explained Details

The failure to pay penalty is a monthly penalty between .25% to 1% of the unpaid or outstanding tax amount owed. The normal failure to pay penalty is .5% a month that is calculated starting April 16th. This penalty will continue to add up monthly as long as there is a tax amount that is not paid or some other arrangement has been made to pay back the taxes owed. The maximum that this penalty can reach is 25% of the original tax amount owed. If you enter into an installment agreement the failure to pay penalty will be reduce to .25% a month opposed to the .5% that is normally charged. This penalty can be increased to 1% if the IRS issues an Intent to Levy and the tax balance remains unpaid for 10 days.

If you have also failed to file your taxes, you will be charged with the failure to file penalty as well. When both the failure to file and failure to pay penalties are charged at the same time, it is a maximum of 5% a month that can be charged. This is called the combined penalty. Normally the failure to file penalty is 5% and the failure to pay penalty is .5%, but the IRS reduces the failure to file penalty by .5% when these two are charged together. The maximum the combined penalty can be is 47.5% of the tax amount owed, as long as no tax fraud is involved.

Interest on Unpaid or Underpaid Taxes

The interest that the IRS changes will change every 3 months because it is based off of the federal short-term rate. It is calculated by taking the federal short-term rate and adding another 3% to it. The typical annual interest is between 4% and 10%. The interest that is charged is based off of the total tax amount owed plus prior interest and penalties. The IRS charges interest because they consider not paying taxes the same as borrowing from them, so they require you to pay interest on these outstanding balances.

Removing the Failure to Pay Penalty

The IRS does realize that there are times that taxpayers cannot always stay in full compliance with their taxes and they do allow people that have “reasonable cause” to remove their penalties. About 33% of all tax penalties that are charged by the IRS are later removed. It is possible that this number would be higher if most individuals knew about the penalty abatement provision that is offered by the IRS. In order to receive penalty abatement, you must prove to the IRS that you have a legitimate excuse for not paying your taxes on time. The IRS has accepted a wide range of excuses and they handle each on a case by case basis.

IRS Statute of Limitations For Collection of Tax Debt

Individuals or businesses who have unpaid taxes to the IRS may wonder how long the government can continue to collect on this debt. The length of time allowed by law to file legal proceedings against a person is known as the Statute of Limitations (SOL). While this definition applies to all types of legal proceedings, in the case of back taxes and the IRS it refers to Collection Statute Expiration Date (CSED) or the length of time the IRS can legally collect outstanding tax balances. The SOL varies for different types of debt and may also vary based on the state in which you live. Here we look at the CSED for tax liabilities owed to the IRS.

IRS Collections

As a general rule, the IRS is restricted by a 10 year Collection Statute of Limitations. This means individuals or businesses who owe back taxes that are ten years or older may not legally be sued in a court of law for those tax obligations. It is important for all taxpayers to understand how the statute of limitations works in order to properly understand and assert their rights.

Exceptions and Extensions

The ten year rule for IRS collections is not one that is set in stone. There are several circumstances or situations which may result in a longer period of time in which the IRS can legally go after a taxpayer who owes back taxes. The ten year CSED begins when the tax liabilities have been assessed. This is a very important part of the CSED to understand as many people assume the CSED begins the year the taxes are filed. If an individual files a tax return for 2007 in 2010 and the outstanding tax balance is not assessed until 2011- the CSED begins in 2011. Under this rule, the SOL for tax liabilities owed for 2007 does not expire until 2021. Other scenarios which may result in the extension of the CSED is the filing of an Offer in Compromise or bankruptcy (for taxes not discharged). In both cases, the IRS may extend the CSED effectively increasing the amount of time in which they can legally collect tax debt. Additional causes of an extension include: military deferment, leaving the country for at least 6 months, certain collection due process hearings, filing for Innocent Spouse Relief, requesting a taxpayer assistance order and other reasons.

Considerations regarding the CSED

Taxpayers who have filed a fraudulent or false tax return with the intent to avoid paying taxes are not protected by the 10 year CSED. Some filers are under the false impression that the SOL effectively erases your debt. If the IRS has placed a lien on your assets and the SOL passes, they may choose to erase your debt or reduce the lien to judgment and continue collection for an extended period of time. As with all other debt collections, the expiration of the Statue of Limitations does not mean you no longer owe the money. It simply means if a lawsuit is brought against you to collect that debt, you may use the expiration of the SOL as a defense. This generally results in the dismissal of the case. Finally, tax debt may continue to appear on your credit report after the CSED has expired, therefore affecting your credit for a longer period of time.

Unpaid Taxes Frequently Asked Questions (FAQs)

Q: What if I can’t pay my taxes in full when they are due?

A: If you can’t pay your taxes in full you have many different options. If you want to pay your taxes back over time you can enter into an installment agreement with the IRS. If you can’t meet the requirements for an installment agreement you may be able to settle your taxes owed through an offer in compromise or you may be able to get declared uncollectible until your financial situation improves enough to allow you to pay back your taxes.

Q: What are the penalties for unpaid taxes?

A: Penalties for unpaid taxes are typically a half of a percent of the taxes owed for each month. This penalty can grow to a maximum of 25% of the total taxes owed. This penalty will increase to 1% if the tax remains unpaid 10 days after the IRS issues an intent to levy. The penalty will decrease to a quarter of a percent for any month in which an installment agreement is in effect.

Q: What interest will I be charged on unpaid or an underpayment of taxes owed?

Q: Is the IRS going to levy my assets for having unpaid taxes?

A: The IRS can levy your assets for having unpaid taxes. It may take several months for the IRS to get to that point and it will not be a surprise if they do. The IRS will typically send a series of letter demanding payment and if all of those are ignored the the last letter the IRS will send before they levy is called the Notice of Intent to Levy. This notice will give you 30 days notice prior to them beginning to levy. If taxes are not paid or settled in some other way during this time then the IRS will levy.

Q: Can I settle my unpaid taxes for less?

A: Yes you can settle unpaid taxes for less than the total amount owed. The two most common ways to do this are through either an offer in compromise OR a partial payment settlement agreement. There are strict requirements for each and you will have to give the IRS detailed financial information about yourself in order to prove that you meet the qualifications for either of these.

Q: If I can’t pay my taxes should I still file my return?

A: YES!! Not filing a tax return has much harsher consequences than not paying. The penalty on unpaid taxes owed when no tax return is filed is 5% a month but the penalty for not paying taxes taxes when a return is filed is only .5%, so you can see the penalties will add up much faster if you did not file a return. Not paying is not that big of a deal to the IRS as long as you are willing to work with them on a resolution. The IRS has many payment and resolution alternatives.

Get Dale. Call 817-877-5995 or toll free at 800-651-0528.

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