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What Are Delinquent Taxes and How Can They Affect You?

Taxes are not due every year – tax returns are, but when and how you pay your taxes depends on your employment and filing status. Some people pay taxes with every paycheck through their employer’s tax withholding. Some people pay taxes quarterly or monthly through estimated tax payments. Missing these payments can result in penalties and accrued interest. However, most tax debt is not generated due to missed payments.

In many cases, the IRS identifies unpaid tax debt when double-checking incoming tax returns and finding unreported income and other unpaid taxes per related information returns (financial information relayed to the IRS through various institutions, companies, and banks). Delinquent taxes are essentially taxes owed to the IRS that you have not paid. The longer a tax debt goes unpaid past its deadline, the more that debt grows.


When Should I Worry About Delinquent Taxes?

The urgency with which you should address your tax debt differs with how large it is, but as a general rule of thumb, deal with it immediately. The IRS is not a kind creditor, and its penalties and interest rates are less than ideal. You are often better off seeking a short-term loan to repay the government than letting your tax debt grow.

Primarily because, as time goes on, the IRS is more likely to resort to collection actions to pressure you to pay up. Ironically, these collection actions limit your ability to comfortably pay off your debt, as the IRS’s first collection action is to restrict your access to outside financing. It should be mentioned that tax debt does expire.

But the IRS is naturally incentivized to collect on your debt before it does, and it has myriad options for doing so, including threatening jail time. While the IRS cannot imprison you for being too impoverished to pay your debt to the government, it can issue criminal charges for willfully avoiding tax debt repayment. The IRS rarely does this. Instead, they utilize collection actions such as liens and levies to coerce payment.


Will the IRS Come for My Home?

We’ve heard horror stories about the IRS cleaning out bank accounts, snatching paychecks, and even liquidating homes. These are true to an extent. The IRS can take your home. But a lot must happen before it gets to this point. If you fail to pay your taxes when they are due, the IRS will begin the collections process. This starts with a bill for the amount that is past due. Next, the IRS will follow up with a notice of your delinquent taxes and issue a public federal tax lien.

Ample notice is given to taxpayers before a lien is posted, which becomes public information. This lien is the government’s claim on your assets, meaning you are limited in your economic mobility. You cannot liquidate assets nor negotiate a secured debt without first dealing with the IRS, either by repaying your debt or asking for an exception to the lien (via lien discharge or lien subordination).

In this sense, a legal claim is not the same as a physical one – the IRS is enforcing its claim on your property by preventing you from addressing other debts first. However, this can lead to dire consequences if not addressed quickly. For example, if you are in the process of repaying a mortgage on your home, and the IRS slaps you with a lien, you may not be able to continue to pay off your mortgage without first addressing your tax debt.

This means you are in danger of losing your home if you do not contact the IRS immediately and work to make an exception (or negotiate a payment plan directly and avoid the lien). If you are somehow unbothered by the effects of a lien, the IRS can resort to the more drastic of its two primary methods: the levy. Levies are claims on assets, accounts, and paychecks. If the IRS decides to issue a levy on one of your assets, you will be given ample time via a notice, much like with a lien.

Under certain circumstances, a conventional commercial creditor can also issue a levy on a debtor. Given the IRS’ government reach, their claims usually take precedence. If that notice goes ignored, the IRS will claim an asset or property, as outlined in their notice. It might be an investment property, a bank account, or something else entirely. If selling or liquidating that asset or account satisfies your debt to the government, the remainder will be sent back to you. If it does not, the IRS may issue another levy.


What If I Don’t Own Any Major Assets?

If you do not own anything the IRS can claim, the IRS will claim your paycheck – or at least, a portion of it. How much the IRS will take from each paycheck depends on the number of dependents you have in your name. The more people you must care for, the less money the IRS can take. The IRS cannot issue a levy against you if your finances are dire enough.

You may be eligible for a special status in this case, as currently not collectible. Cases marked currently not collectible will be left alone until a person’s finances improve and they can address their tax debt. However, being currently not collectible does not exempt you from accrued penalties, interest, or an ongoing tax lien.


How Does the IRS Penalize Delinquent Taxes?

Penalties differ depending on what you are guilty of. If you submit an inaccuracy in your tax return, the IRS can penalize you for about 10 percent of the additional tax you owe, or $5,000, whichever is greater. This penalty is not issued on inaccurate tax returns due to a simple math error.

There usually needs to be a substantial understatement of tax or clear signs of intentional omission/negligence for the IRS to penalize inaccuracy. If you owe money every month, your debt goes unpaid, which adds 0.5 percent of the tax owed to the total amount. This maxes out at 25 percent over 50 months.

If you are late with your monthly tax return, your return is missing, which adds 5 percent of the principal debt to your total. This maxes out at 25 percent, as well, after only five months. These account for the majority of the penalties the IRS levies. Still, there are others, such as penalties for missing payroll taxes as a business owner or fines for an erroneous claim for a refund.


Can I Get Tax Debt Forgiveness?

No, but you can seek penalty relief if your circumstances allow it. If this was your first offense with the IRS in the past three years, you might be able to seek first-time penalty abatement, which can drastically reduce the amount you owe by stripping it back to its principal. Tax debt itself is not easily forgiven, even in bankruptcy. If you are in financially dire straits, you may have a better chance of negotiating a partial payment plan or an offer in compromise. These are payment plans that reduce the amount of tax owed.


Final Takeaway on Delinquent Taxes

Convincing the IRS to take less money than they are owed is no easy feat, even if you are strapped for cash. Consider working with a legal professional to navigate your options and formulate a plan before contacting the IRS. Dealing with delinquent taxes intelligently requires prerequisite knowledge of how the IRS works.


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