Credit card debt. Student loan debt. Mortgages. Car loans. Americans, as a whole, frequently take on debt to afford both the necessities and the niceties of life. The average American owes $104,215 in debt, with the largest percentage of that money owed to mortgage lenders.
Credit card debt and tax debt makes up a much smaller percentage of most Americans’ total debt but, because of the interest, penalties, and fees that can incur for late or missed payments, these forms of debt tend to be much more stressful. A U.S. News survey found that 21% of Americans who owe tax debt are “extremely stressed,” while 75% say they are “at least a little stressed.”
What is Tax Debt?
When you file your tax return, one of two things typically happens:
- You owe money to the Internal Revenue Service
- The IRS owes you, and you’ll receive a tax refund
It’s very rare that you pay the exact amount of taxes throughout the year to come out “even-Steven” on April 15, although that would be the most desirable scenario. Paying too much in taxes through the year only to get a large refund is like giving the IRS an interest-free loan. And you can bet if you owe the IRS money, they expect you to pay it back with interest! It’s best to get a tiny refund and invest your money as you see fit throughout the year for a larger return on your investment.
But if you underpay your taxes, you’ll be faced with a large tax bill. If you don’t pay that money on Tax Day when it’s due, that’s called tax debt.
Tax debt equals any tax money owed to the IRS after that year’s filing deadline has passed. If you are past the due date with any amount of owed tax, then you have tax debt and may want to consider tax relief services if the amount owed to the IRS is beyond your financial means to pay. You’ll also want to understand the steps the IRS will take to collect that debt, the action you should take to avoid collections, wage garnishment, liens, or levies, and where you can turn for help. (Hint: The tax professionals at Alleviate Tax are always standing by to help you get relief from state or federal tax debt.)
What Are the Most Common Causes of IRS Tax Debt Issues?
The reality is, there are millions of taxpayers at any given moment that owe IRS tax debt, many of whom don’t even realize it. If any amount of money owed to the IRS isn’t paid by the due date for the tax liability, it’s considered a tax debt.
There are a handful of ways that taxpayers might wind up owing tax debt. If you’re unsure whether or not you actually have IRS tax debt, be sure to check the status by logging into your IRS account.
Unfiled Tax Returns
One of the main ways people wind up in debt with the IRS is unfiled tax returns. When tax returns aren’t filed on time, the IRS can eventually file a substitute return that simply estimates your owed tax, often resulting in a higher tax liability than if you had filed the returns with all deductions accounted for. If you have unfiled tax returns, it’s critical to file them as soon as possible to avoid tax debt. Part of our tax relief services at Alleviate Tax include helping you get your unfiled tax returns filled out properly and correctly submitted to the IRS.
Failure to Pay Estimated Taxes
Having estimated taxes due each quarter increases the likelihood of falling behind on taxes, especially for businesses with seasonal income that may decline when tax payments are due and money is tight. Perhaps you’ve let some of your estimated taxes fall behind this year, and now you’ve found yourself in tax debt. The good news is, there are tax relief programs available to you and Alleviate Tax is here to help.
Adjustments to Your Tax Return
When the IRS adjusts a past-year tax return, you might not know until after receiving a letter from the IRS in the mail. By the time you receive a letter from the IRS about a tax adjustment, you will already have tax debt.
Unplanned Financial Issues
Another common reason for taxpayers accumulating tax debt is unplanned financial issues. Sometimes, there are things that are simply out of a person’s control that can lead to a loss of income or savings, making it impossible for them to pay their tax liabilities in full by the due date. This leads to tax debt that can build and build to an amount that feels insurmountable.
Fortunately, Alleviate Tax provides tax relief services that can help you get set up with one of the many IRS tax relief programs so you can get your financial life back on track. Instead of declaring bankruptcy or ignoring the problem, reach out to one of the tax specialists at Alleviate Tax today.
How Tax Debt Increases
Just like credit card companies, which pile interest charges on top of your original balance each month that you don’t pay your credit card and late fees if you miss a payment, the IRS charges interest and penalties to tax debtors. IRS interest charges vary depending on the Federal Prime short-term rate, and that interest compounds daily each day you haven’t paid your tax bill. Failure-to-pay penalties equal 0.5% of the tax owed each month or partial month you haven’t paid, up to 25%.
Fortunately Alleviate Tax can help you reduce these penalties and fees to reduce your overall tax debt before helping you negotiate a settlement or payment plan.
How Does The IRS Collect Unpaid Taxes?
The IRS uses numerous tactics to attempt to collect on your tax debt. Each method comes with its own set of negative consequences, from preventing you from buying a house to having your bank account cleaned out overnight.
A few actions the IRS may take to collect tax debt from taxpayers include:
- Filing a notice of Federal Tax Lien
- A bank levy that can entirely empty an account
- Reductions in future tax refunds to pay the tax debt
If you have tax debt that the IRS is attempting to collect using the above methods, relief from your tax debt is available. Alleviate Tax specializes in providing tax relief services for people who’ve fallen behind, helping them get back on track.
An array of IRS tax relief programs are available to you as a taxpayer. While you may not qualify for every program, there’s bound to be a way you can alleviate your tax debt burden. Call one of our tax relief specialists today to learn what tax debt help is available to you so you can regain control of your financial future.
FAQs
Can IRS debt be discharged in Chapter 7?
The IRS allows debtors to include state or federal income tax debt in a Chapter 7 bankruptcy. If your tax debt is at least three years old, you may be able to find tax debt relief through bankruptcy, as long as you have filed your tax returns for the past two years prior to your bankruptcy filing and were not involved in tax evasion or tax fraud.
Can IRS debt be discharged in Chapter 13?
The IRS may discharge certain tax debt in a Chapter 13 bankruptcy filing.
Does tax debt expire?
The IRS cannot try to collect unpaid tax debt after the Collection Statute Expiration Date (CSED), which is typically 10 years. However, certain action, including bankruptcy filings, can delay that date.
Is tax debt ever forgiven?
Tax debt can be forgiven and discharged in a bankruptcy case, or negotiated down through an offer-in-compromise. You can also file for currently-not-collectible status, which means the IRS will stall collections actions due to your financial hardship.
How do you know if you owe taxes?
The IRS will send you a series of collections letters if you owe federal taxes. But you can be proactive about your finances and check your tax account balance through the IRS website. You will need to login to your account online or create one at IRS.gov.
What happens if I owe the IRS and can’t pay?
There are options available for taxpayers who owe the IRS back taxes and can’t pay. You may qualify for any number of programs, including a partial pay installment agreement, offer-in-compromise (formerly IRS Fresh Start), or innocent spouse relief.
Can tax debt be discharged?
Tax debt may be discharged, depending on the circumstances and the time frame, in a Chapter 7 or Chapter 13 bankruptcy filing.
