Unpaid taxes are a significant concern for taxpayers and tax authorities alike. As of recent data, unpaid federal income taxes amount to more than $600 billion annually. This issue affects both individual taxpayers and businesses who may face severe consequences for failing to meet their tax obligations. Understanding the mechanisms behind unpaid taxes and the methods employed by the Internal Revenue Service (IRS) is essential for taxpayers who may be dealing with tax debts.
The IRS employs a variety of approaches to collect unpaid taxes. The collection process may include short-term payment plans, installment agreements, and even enforced collection actions such as bank account levies and wage garnishments. The steps the IRS takes depend on factors such as the amount of money owed, the level of delinquency, and the efforts made by taxpayers to resolve their outstanding tax liabilities. Taxpayers have rights and remedies when confronted with tax debts, including the option to seek professional assistance if needed.
Key Takeaways
- Unpaid taxes can lead to severe consequences, with the IRS employing various methods to collect outstanding debts.
- Taxpayers have rights and solutions to address unpaid taxes, such as short-term payment plans and installment agreements.
- Understanding the IRS collection process and seeking professional assistance can help taxpayers navigate and resolve tax debts.
Understanding Unpaid Taxes
The Nature of Tax Debt
Unpaid taxes, also referred to as tax debt, arise when an individual or business fails to pay their tax liability in full by the due date. This can result from under-reporting income on a tax return, not filing a tax return at all, or simply being unable to pay the balance due. When a tax liability remains outstanding, the Internal Revenue Service (IRS) takes action to collect the unpaid taxes.
The IRS collection process begins when a bill is issued for the amount owed. This process continues until the debt is satisfied or until the IRS can no longer legally collect the tax due to the expiration of the ten-year Collection Statute1. It is important to note that unpaid taxes can result in penalties and interest, which can substantially increase the amount owed to the IRS.
Factors Leading to Unpaid Taxes
There are several factors that can lead to unpaid taxes:
- Failure to file a tax return: Some individuals simply fail to file a tax return for a specific year, either due to oversight, procrastination, or other reasons. This can result in unpaid taxes, as well as penalties for failure to file.
- Under-reporting of income: Inaccurate reporting of income can create a tax liability that the taxpayer is unaware of, leading to unpaid taxes. More than 95 percent of wage income is reported, but unreported income contributes to over $600 billion in unpaid federal income taxes each year2.
- Inability to pay the balance due: In some cases, taxpayers may experience financial hardship and are unable to pay their tax liability, leading to unpaid taxes. The IRS offers various payment plans and options to help taxpayers in such situations.
It is essential to be proactive in addressing unpaid taxes, as ignoring the issue can result in further complications, such as additional penalties, interest, and IRS collection actions like liens, levies, and garnishments. To resolve unpaid tax issues, taxpayers can seek the help of a tax professional or work directly with the IRS to negotiate payment plans or other resolutions.
The IRS Collection Process
Notice of Debt and Initial Steps
The IRS collection process begins when taxpayers do not voluntarily pay their taxes in full and on time. Upon recognizing the outstanding debt, the IRS takes several steps to inform and assist the taxpayer in resolving the issue. The first step involves sending a notice to the taxpayer, detailing the amount owed, including any tax, penalties, and interest. This notice serves as an official notification and allows the taxpayer to review their situation and take appropriate action.
There are multiple options for taxpayers to explore upon receiving a notice of debt, depending on the amount owed and their financial circumstances. One option is a short-term payment plan, which is available for individual taxpayers who owe less than $100,000 in combined tax, penalties, and interest. This payment plan allows for repayment within 180 days. If a taxpayer is unable to pay immediately or within the designated 180-day timeframe, they may qualify for a monthly installment agreement, which would enable them to pay the debt in smaller increments over a more extended period.
Collection Actions and Consequences
If taxpayers fail to address their outstanding debt after receiving an IRS notice, more severe collection actions can be taken. The IRS will attempt to contact the taxpayer and provide them with the opportunity to voluntarily pay the amount they owe. However, if the taxpayer refuses or fails to cooperate, the IRS is legally required to take enforced collection actions. Some of the IRS collection actions include:
- Filing a Notice of Federal Tax Lien: This public document alerts creditors that the government has a legal right to the taxpayer’s property due to unpaid tax debt.
- Levying bank accounts: The IRS can seize funds from the taxpayer’s bank accounts to resolve the outstanding debt.
- Garnishing wages: The IRS can take a portion of the taxpayer’s wages to satisfy the tax debt.
- Seizing property: The IRS can confiscate and sell a taxpayer’s property, such as vehicles, real estate, and other valuable items, to collect outstanding tax liability.
These collection actions carry significant consequences for taxpayers, affecting their creditworthiness and financial future. It is crucial for taxpayers to address IRS notices promptly and explore available options to resolve their tax-related issues to avoid more severe measures.
Taxpayer Rights and Remedies
When it comes to unpaid taxes, taxpayers have certain rights and remedies to ensure fair treatment. This section will discuss two important aspects of these rights and remedies: Collection Due Process Hearing and Innocent Spouse Relief.
Collection Due Process Hearing
A Collection Due Process (CDP) Hearing is an opportunity for taxpayers to raise concerns and objections about an Internal Revenue Service (IRS) collection action. The IRS must provide written notice of a CDP Hearing when initiating a levy or filing a federal tax lien. In the hearing, taxpayers can dispute the tax liability or request alternative collection methods, such as an installment agreement.
To request a Collection Due Process Hearing, taxpayers must submit Form 12153 within 30 days after receiving the lien or levy notice. It is essential to provide a clear explanation of the issues at hand and any requested resolution. Once the IRS receives the request, they will suspend collection activities until the hearing is complete.
Innocent Spouse Relief
In some cases, individuals may be held responsible for the tax liabilities of their spouse or former spouse. This can result from a joint tax return where the other spouse made errors or underreported income. Innocent Spouse Relief provides a way for taxpayers to request separation from the liability.
To apply for Innocent Spouse Relief, taxpayers must submit Form 8857 with the required documentation detailing their case. The IRS will evaluate the situation and consider factors such as:
- Knowledge of the understated tax amount
- Financial situation and ability to pay
- Involvement in the household’s financial decision-making
It is important to note that filing for Innocent Spouse Relief does not guarantee relief from the tax liability. The IRS will make a determination based on the information provided in the application.
In conclusion, understanding and utilizing available taxpayer rights and remedies can help in situations of unpaid taxes. Collection Due Process Hearings and Innocent Spouse Relief give taxpayers the opportunity to challenge IRS actions and seek relief from unjust tax liabilities.
Payment Solutions and Agreements
When individuals or businesses owe taxes to the IRS, there are several payment solutions and agreements available to ease the financial burden. In this section, we will cover some of the most common options: Installment Agreements, Offer in Compromise, and the Fresh Start Program.
Installment Agreements
An Installment Agreement is a common payment plan option for taxpayers who cannot afford to pay their entire tax balance at once. Taxpayers can apply for an Installment Agreement if they owe $50,000 or less, which allows them to pay their tax debt in monthly installments over an extended period. There are two types of Installment Agreements based on the tax liability:
- Streamlined Installment Agreement for tax liability assessed less than $25,000 (including all assessed tax, penalty, and interest).
- Tax liability between $25,001 and $50,000 (including all assessed tax, penalty, and interest).
The IRS charges a fee for setting up the agreement, which can be reduced if the taxpayer opts for Direct Debit payments from their checking account.
Offer in Compromise
An Offer in Compromise is another option for taxpayers who are struggling to pay their tax debt. This program allows taxpayers to settle their tax debt for less than the full amount owed, based on their financial circumstances. To be eligible for an Offer in Compromise, the taxpayer must demonstrate that they are unable to pay the full amount or that doing so would cause financial hardship. The IRS evaluates each case individually, considering factors such as income, assets, expenses, and the ability to pay. It is important to note that not all taxpayers will qualify for this program, and the acceptance rate can vary.
Fresh Start Program
The Fresh Start Program is an initiative by the IRS aimed at helping taxpayers with overdue tax debt. This program offers taxpayers various options to avoid severe collection efforts, such as liens and levies. Some features of the Fresh Start Program include:
- Installment Agreements for taxpayers owing $50,000 or less, which allows them to pay their debt over six years.
- Penalty relief for unemployed individuals who qualify.
- An increased lien-filing threshold, which can help prevent the IRS from filing a tax lien against a taxpayer’s assets.
Taxpayers who participate in the Fresh Start Program must remain compliant with all tax filing requirements and make timely payments to avoid jeopardizing their standing in the program.
By exploring these payment solutions and agreements, taxpayers experiencing financial difficulties may find suitable options to address their tax obligations and meet the requirements set by the IRS.
Impacts of Non-Payment
Not paying your taxes can lead to various consequences, some of which involve the imposition of federal tax liens and levies on your assets or income. These measures are taken by the Internal Revenue Service (IRS) to recover the unpaid tax debt. In this section, we will discuss the impact of non-payment on individuals and businesses by explaining the process of federal tax liens and levies.
Federal Tax Liens
A federal tax lien is a legal claim that the government places on a taxpayer’s property when they neglect or refuse to pay their taxes. The IRS files a public document called a Notice of Federal Tax Lien which alerts creditors that the government has a legal right to the taxpayer’s property. This lien affects the taxpayer’s ability to sell or transfer their property, and it also hampers their credit rating.
Properties subject to a tax lien include:
- Real estate
- Personal property (e.g., cars, boats)
- Financial assets (e.g., bank accounts, investments)
It is important to note that a tax lien does not seize the taxpayer’s property outright; rather, it serves as a claim on the property for the amount owed in taxes.
Levy and Garnishment
If a tax debt remains unpaid despite the filing of a tax lien, the IRS might resort to more severe measures, such as a levy or wage garnishment. A levy is the legal seizure of a taxpayer’s property to satisfy tax debt, while wage garnishment refers to the deduction of a portion of the taxpayer’s income by their employer to repay the debt.
A levy might target various assets, such as:
- Bank accounts
- Wages (wage garnishment)
- Social security benefits
- Retirement accounts
- Rental income
In the case of wage garnishment, the IRS usually sends a Notice of Levy to the taxpayer’s employer, directing them to withhold a certain percentage of the employee’s wages to satisfy the tax debt. The employer is then obligated by law to comply with the notice.
In conclusion, the non-payment of taxes can result in serious financial consequences for taxpayers. Federal tax liens and levies are just some of the measures taken by the IRS to collect unpaid taxes, which can affect a taxpayer’s finances, credit, and property.
Statute of Limitations on Collection
Understanding the CSED
The Collection Statute Expiration Date (CSED) is a crucial factor when discussing the statute of limitations on tax collection. The Internal Revenue Service (IRS) generally has a 10-year period to collect unpaid taxes from the date of assessment. The CSED is the last day the IRS can legally pursue collection activities for a specific tax period.
It is important to note that the 10-year statute of limitations applies to most, but not all, tax debts. Certain tax liabilities, such as those arising from fraudulent returns or willful evasion, may not have a statute of limitations.
Extension and Tolling Events
While the standard limitations period for tax collection is 10 years, certain actions or events may extend or suspend the CSED. These are known as tolling events and can potentially lengthen the time the IRS has to collect unpaid taxes.
Some common tolling events include:
- Filing bankruptcy: The CSED is suspended while the automatic stay in a bankruptcy proceeding is in effect, plus an additional six months after the stay is lifted.
- Applying for an Offer in Compromise: The CSED is put on hold while the IRS is considering the offer, and for an additional 30 days after the decision is made.
- Requesting a Collection Due Process hearing: The CSED is paused during the time the taxpayer’s case is under consideration.
- Living outside the United States: If a taxpayer lives outside the country for a continuous period of at least six months, the CSED is extended by the duration of their absence.
In summary, although the IRS typically has a 10-year limitations period for collecting unpaid taxes, certain events might extend or suspend the Collection Statute Expiration Date. Taxpayers should be aware of how these events impact their CSED to ensure they fully understand the statute of limitations on their tax liabilities.
Seeking Professional Assistance
When to Hire a Tax Professional
Hiring a tax professional, such as a tax attorney or a certified public accountant (CPA), can be a wise decision when dealing with unpaid taxes. There are several situations that warrant seeking their assistance:
- Complex tax issues: When you have multiple tax filing problems, such as past-due returns or tax debts that have accumulated interest, it’s crucial to consult with a qualified professional.
- Disagreements with the IRS: If you disagree with the Internal Revenue Service (IRS) regarding your tax liability, it’s essential to have a tax pro on your side for negotiation.
- IRS audits: During an IRS audit, having a knowledgeable expert in your corner can facilitate the process and help you avoid pitfalls.
Resolving Complex Tax Issues
Tax professionals can help you navigate the often-complicated world of unpaid taxes and offer solutions tailored to your specific circumstances. Here are some ways they can assist:
- Negotiating a settlement: A tax attorney or CPA can communicate with the IRS on your behalf and negotiate an Offer in Compromise (OIC), which enables you to settle your tax debt for less than the full amount owed.
- Setting up payment plans: Tax pros can help you set up a payment plan, also known as an installment agreement, allowing you to pay off your tax liability over time.
- Requesting penalty abatement: If you can prove that your unpaid taxes were due to a plausible reason, a tax professional may help you request a penalty abatement, reducing or eliminating penalties associated with late payments.
It’s important to remember that a tax attorney is particularly helpful when dealing with legal issues, such as tax liens, court disputes, or criminal tax cases. On the other hand, a certified public accountant is proficient in navigating the tax code and preparing accurate tax returns. Depending on your specific requirements, you may choose to work with one specialist or a combination of both.
In conclusion, seeking professional assistance in resolving unpaid taxes can save you time, money, and unnecessary stress. So, before facing the IRS alone, consider reaching out to a qualified expert to help you address complex tax issues effectively.
Frequently Asked Questions
What are the steps to resolve outstanding tax liabilities with the IRS?
To resolve outstanding tax liabilities with the IRS, first, review your tax situation and determine if you can pay the full amount owed. If unable to pay in full, consider applying for an installment agreement, where you can make monthly payments until the debt is paid off. In certain cases, you may also be eligible for an offer in compromise, which allows you to settle the tax debt for less than the full amount owed.
What actions can the IRS take to collect delinquent taxes?
The IRS can take several actions to collect delinquent taxes, including sending notices and bills, filing a tax lien on your property, levying your wages or bank accounts, and seizing your property or assets. It is essential to respond to IRS notices and work with the agency to resolve the debt to avoid these collection actions.
What should I do if I owe more than $25,000 in taxes to the IRS?
If you owe more than $25,000 in taxes to the IRS, consider hiring a tax professional to help you navigate the resolution process. They can help you explore options such as an installment agreement, offer in compromise, or other arrangements that may be suitable for your financial situation.
Is there a way to negotiate tax debt with the IRS?
Yes, taxpayers can negotiate tax debt with the IRS through an Offer in Compromise (OIC). OIC is an agreement between the taxpayer and the IRS to settle the debt for less than the full amount owed. However, not everyone qualifies for an OIC, and it requires a detailed application and evaluation process. Tax professionals can help you determine if this option is suitable for your situation.
What is the IRS statute of limitations for collecting tax debt?
The IRS has a 10-year statute of limitations for collecting tax debt. After 10 years, the IRS can no longer attempt to collect the unpaid tax debt, and the debt will be removed from their records. However, certain actions, such as filing for bankruptcy, can extend the statute of limitations.
How can I contact the IRS to discuss my unpaid taxes?
To discuss your unpaid taxes with the IRS, you can call their main helpline at 1-800-829-1040 for individual taxpayers or 1-800-829-4933 for businesses. Be prepared with your personal and tax information when calling, including your Social Security number or Employer Identification Number, the tax year of the unpaid taxes, and any notices you have received from the IRS.
