Tax Debt Relief: This Is the Ultimate Guide You Need

Paying taxes is among the duties of being a citizen of the United States. However, many unintentionally fall behind on this obligation. Fortunately, the IRS offers various debt relief programs to help struggling taxpayers resolve their tax debt.

In 2020, Americans owed the government over $114 billion in back taxes, penalties, and interest. The Treasury Department also found that the wealthiest 1% of Americans evade taxes the most, failing to pay up to $163 billion in owed taxes per year.

But, getting out of tax debt as soon as possible is critical in controlling your finances. Unpaid taxes won’t simply go away. On the contrary, they will compound until you’ve got a bigger tax bill and heavier financial problems. 

Here’s a look at why delinquent taxes are such a big deal and how to get out of tax debt once and for all.

Failing to Settle Your Taxes: What are the Consequences?

The Internal Revenue Service (IRS) doesn’t hold back when notifying taxpayers about their obligations. The longer you ignore your tax bill, the bigger your financial obligations will be. Be ready to face the consequences should you fail to pay your taxes.

1. The IRS will put you in automated collection

Delinquent accounts are often assigned to the IRS Automated Collection System (ACS), a group that spearheads the collection process by reviewing delinquent cases and contacting concerned taxpayers. It also sends IRS notices, such as a notice of levy, to those who fail to settle their back taxes.

If you do not take action to pay your taxes despite these notices from the IRS, you can expect to be put in automated collection.

2. Interest will build up on your balance

If you have unpaid taxes, interest will accrue until you settle your tax bill. As of May 2022, the interest rate for individual underpayment is 5%. The short-term rate may change after three months as the IRS determines new interest rates quarterly.

3. Penalties will accrue on your pending tax liability

If you filed a return but did not pay the taxes owed, the IRS will collect a failure-to-pay penalty from you. This is equivalent to one-half of 1% of your tax liability for each month your bill remains unpaid.

4. A federal tax lien may be filed against your assets

A federal tax lien will be enforced against your assets if you refuse to pay your taxes despite demand from the IRS. Here, the agency will file a Notice of Federal Tax Lien to inform and alert your creditors that the government has a legal right to your property. 

This may negatively affect your credit rating by limiting your ability to obtain a loan. Also, it may be difficult for you to sell your property since buyers often prefer a property with a clean title. Hence, before you can sell the property, you must first pay off the debt associated with the lien.

The lien will be attached to your properties until you have paid your tax liability, including your home and other financial assets. 

5. The IRS could take your refund

Another consequence of non-payment of taxes is that the IRS could keep some or all of your tax refunds to satisfy your tax debt. The government could also seize your Social Security or Social Security Disability Insurance benefits to offset your tax liability.

6. The IRS may seize your wages or bank accounts

The IRS will issue a Notice of Intent to Levy if your taxes remain unpaid despite several reminders from the agency.  When a levy is in effect, the IRS can seize your wages or bank account, restricting your access to your finances. The IRS can also sell your vehicle and other properties to satisfy your tax debt. 

7. The State Department may withhold your passport

If you have back taxes, the IRS can alert the State Department to deny your passport application or revoke your current passport. If your account has been tagged as delinquent and you’re already abroad, the State Department can approve your return to the U.S. with a limited validity passport.

8. You could be charged with tax evasion and face jail time

If the IRS finds that you intentionally and fraudulently under-declared your taxes to avoid paying the complete amount, they might charge you with tax evasion. This felony is punishable by up to $100,000 or imprisonment of up to five years, or both.

Six IRS Tax Debt Relief Programs to Get You Out of Your Tax Debt

Resolving a tax problem can get overwhelming. Fortunately, the IRS offers various tax debt relief programs to help taxpayers settle their tax debts under lenient terms. 

1. IRS installment agreements

If you can’t immediately pay your tax liability in full, you can opt for either a short-term IRS payment plan or a monthly installment agreement.

Under the short-term payment plan, the IRS grants you 180 days to settle your back taxes. However, interest and penalties will still be charged against your balance until the full amount is paid. You may apply for a short-term payment plan online through the IRS’ Online Payment Agreement platform. Alternatively, you may call the IRS at 800-829-1040.

You can also choose from various types of IRS installment agreements to settle your back taxes. Each type has its own set of eligibility criteria. Once approved for an installment agreement, you may need to pay additional costs such as set-up and revision fees.

2. Fresh Start Initiative

If it’s your first time failing to pay your taxes, you may be eligible for the IRS Fresh Start Program. This debt relief program allows you to pay off your tax debts for a span of up to five years. You will be required to pay a monthly amount, which is calculated based on your liquid asset value and how much you currently earn.

3. Offer-in-compromise

An offer-in-compromise allows you to settle your tax liability for less than what you fully owe. This is one of the various repayment options under the Fresh Start Program. 

You must prove that the worth of your assets and income are less than the amount of your tax liability to qualify for this arrangement. Alternatively, you may show proof that paying the full amount will cause you economic hardship.

4. “Currently not collectible” status

The IRS can put your account in “currently not collectible” status if you can prove that you can’t pay your tax debt on time. Here, the agency will delay collecting your tax payments until your financial condition improves. You will need to fill out a Collection Information Statement form and provide proof of your financial status such as information about your assets, monthly income, and expenses.

However, penalties and interest will apply until you have fully settled your back taxes. The IRS can also attach a federal tax lien on your assets during the delay period.

5. Innocent spouse relief

The innocent spouse relief is granted to taxpayers who jointly filed tax returns with their former or deceased spouses. In that case, both parties are responsible for any tax liability arising from the returns even if they later divorce. 

If you are in the same situation, you can request this type of debt relief to save on penalties and interest that accrued from your former spouse’s failure to properly report items on your tax return. You could qualify for this relief if you establish that you were not aware of the error.

6. Release of wage garnishments
The IRS can release a levy on your wages if you can prove that it’s preventing you from meeting your basic living expenses. However, a levy lift doesn’t exempt you from paying your back taxes. The IRS will work with you to help you pay off your tax debt such as arranging a payment plan. You just need to provide the financial information to support your claim.

Settle Your Tax Obligations with a Trusted Expert

Failing to pay your taxes can lead to grave financial consequences you may not quickly recover from. This is why it’s best to always settle your tax obligations on time.

If you are facing a tax problem, you can engage the tax negotiation services of Peace of Mind Tax Help. Our team comprises leading experts in tax negotiation and mediation who can help minimize your tax liability. Contact us today to resolve your tax problems!