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How to Determine If You Owe Taxes: A Practical Guide

Unpaid taxes are one of the worst types of debt one can ever have. For one, settling them tends to take priority over other financial obligations. Also, dealing with them can be both emotionally and financially exhausting. 

To avoid incurring tax debt, you must regularly check your tax records. By knowing your current standing with the IRS, you can avoid incurring a potentially hefty tax bill or being charged with tax evasion

Read on to learn more about owing taxes, including how to know if you owe taxes, the consequences of failing to settle tax debt, and tips to avoid incurring back taxes.

4 Ways to Know If You Owe Taxes

There are ways to find out if you owe the IRS back taxes. Here are some of them: 

1. Log in to your tax account on the IRS site

When you log into your account on the IRS website, you can access your past and current tax records. You can also check your balance information, which updates every 24 hours. If you are a first-time user, you are required to undergo the secure access process to authenticate your identity.

2. Contact the IRS

If you have questions about your tax balance from the previous filing periods and need to talk to an IRS representative, you can always contact them at 800-829-1040. Be sure to write down your Social Security number and other personal information before calling them for a speedy transaction. 

Also, it’s a good practice to reach out to the IRS ahead of the filing period’s deadline. This is to avoid difficulties in obtaining information or records you may need for the current tax season’s filing requirements. 

3. File a previous year’s tax return

Back taxes are usually related to unfiled returns. To address the issue, you must file a back tax return for the tax period you missed. 

But before you can accomplish the return past due, you may need to first submit Form 4506-T (Request for Transcript of Tax Return) or obtain a wage and income transcript online at the IRS website for the year in question. The transcript contains your wage and income information such as W2s and 1099s.

4. You’ll receive an IRS notice

If you have a tax due, you’ll generally know about it through an IRS notice. The agency issues various kinds of notices depending on the type of the taxpayer’s violation. If you have unpaid taxes, you may receive a CP14 Notice. If you cannot immediately pay the full amount you owe, you can apply online for a payment plan.

What Happens If You Don’t Pay Your Tax Debts? 

Failure to pay your tax debt can result in penalties, interest, and even criminal charges. Here’s how unpaid taxes can affect you.

1. You will incur penalties and fees

The failure-to-file penalty can range from 5% up to a maximum of 25% of your unpaid taxes for each month of late filing of a tax return. If your tax return is more than 60 days late, the minimum penalty is $435 or 100% of the total taxes owed, whichever is lesser. 

Meanwhile, if you failed to pay the amount stated on your tax return, the IRS will charge a failure-to-pay penalty against your account. This is equivalent to 0.5% of the unpaid taxes, which will accrue each month you don’t pay.

2. The federal government may put a lien on your property

If you refuse to pay your taxes despite demand from the IRS, it will issue a notice of lien on your property. This is a legal claim enforced by the government to secure the payment of back taxes. 

When a lien attaches to your property, you may not be able to sell it as buyers typically prefer a property with a clean title. Also, since credit reporting agencies will be notified of the lien, it may be difficult for you to take out a loan or refinance a mortgage.

3. The IRS may issue a levy against your property, wages, or bank accounts

If you ignore all the notices the IRS sends, they will issue a levy on all your financial assets. The levy permits the government to seize your wages, bank accounts, vehicles, and real estate property to satisfy your tax debt. 

Before the IRS takes hold of your property, it will issue a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. If you ignore these letters, the government will proceed to seize your assets.

4. You may miss out on a refund

If the IRS finds that you are due for a refund but owe back taxes, it may offset your refund to cover your tax liability. Besides federal tax, state income tax is also subject to offset.

5. The State Department may not issue or renew your passport or may even revoke it

If you incurred tax debt, the IRS may certify your account as delinquent. With this status, the U.S. Department of State may revoke your passport. Or, if you’re applying for a passport, the department will not likely issue you one. 

If you’re abroad and your account has been tagged as delinquent, the State Department may revoke your passport and limit it to return travel to the U.S. 

Tips to Avoid Incurring Tax Debt

Back taxes can lead to costly consequences, not to mention stress and headache. Fortunately, you can avoid going into tax debt by doing the following:

1. File your returns and pay your taxes on time

The best way to avoid tax debts is to file your returns and pay your taxes on time. You must submit your returns before the tax deadline, even if you can’t pay them in one go. Failure-to-pay penalties are relatively cheaper than the tax penalty that comes with the failure to file a tax return on time. 

2. Be sure to withhold the right tax amount from your paychecks 

If you work as an employee, you are required to fill out the W-4 form when filing your taxes. The form indicates how much taxes are withheld from your paycheck. Be sure to check your withholding tax information to avoid under-withholding taxes. 

You may use the IRS tax estimator to calculate your withholding tax. Even if you haven’t changed jobs, you may want to file W-4 to ensure that you do not owe any taxes or that you receive a refund when you file your return for the tax year.

3. If you have unpaid taxes, settle the issue as soon as possible

One tax fact taxpayers should know is that the IRS offers an installment plan for those who cannot pay their taxes at once. This is a better alternative than letting your tax debts incur higher penalties and interest. Although penalties and interest still apply in an installment plan, they are cheaper than the total amount that accrues if your taxes remain unpaid.

You can always request tax negotiation services to help you negotiate an installment plan that best suits your current financial situation.

Staying on Top of Your Taxes

No one wants to deal with the trouble that comes with settling substantial tax debt or being charged with a tax crime. As such, it’s crucial to be active in settling your tax obligations. 

There may be times when you cannot pay your taxes in full. In this instance, availing of an IRS tax debt relief program is key to staying on top of your taxes.

If you are faced with a tax problem and need a negotiation expert to help you settle the issue, reach out to us at Peace of Mind Tax Help. Our team of tax negotiation and mediation experts can help you minimize your tax liability.

Schedule a consultation with us today.

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