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What Is Tax Delinquency and How Can It Affect You?

Do you owe the IRS money? One way of finding out is by going through any old mail they might have sent you. If you missed it the first time, a second look would help you find any notices and letters sent by the IRS explaining that you owe them money. If you haven’t received anything from the IRS besides a text message or a strange email, you probably don’t owe taxes and may be getting phished.

But on the off chance that your notice was lost or the IRS doesn’t have your current address because you’ve just moved and are in the process of updating all of your relevant documents, then the IRS will have sent mail to your last known address, meaning you may not have received the notice that was meant for you. In this case, if you suspect you’ve reached the point of tax delinquency, you should call an IRS hotline and visit the IRS’ official .gov website, securely log into your taxpayer account, and assess your tax balance there. The website explains how to navigate tax delinquency relating to your unique situation.

Understanding Tax Delinquency

US taxpayers owe the IRS billions in back taxes every year. The IRS does its best to collect on that debt with mediocre results. The tax gap will be never fully close. But don’t underestimate the agency’s ability to make your life substantially more complicated if you refuse to cooperate, from penaltiesliens, and levies, to criminal charges for willful evasion. If you do owe the IRS, you must figure out how much and how soon you can start paying off your debt. Tax delinquency usually happens for one of four significant reasons:

  1. You generated a tax debt by making a mistake on your return.
  2. You failed to make estimated monthly payments (for quite some time).
  3. You haven’t reported a significant source of income (that the IRS discovered).
  4. You are seriously behind on your filing deadline for your income tax return.

In any of these cases, the IRS will tally your debt on your next tax assessment date and send you a notice of deficiency. This notice explains that you owe them money, including how much. The assessment date is essential as well. Once a tax debt is assessed, it expires in precisely ten years. This is the statute of limitations on tax debt collection. However, there are tolling periods to expend this timeframe, and the IRS can go after you for trying to dodge your responsibilities as a taxpayer. It’s one thing to be in a tight spot because you forgot to pay or file a return or made a few mistakes – it’s another to recognize that you owe money and refuse payment.

Missed Filing Deadlines?

Keeping your tax returns updated is just as important as paying your taxes. The IRS has separate penalties for missing your filing deadline. The IRS needs that information to keep track of your tax liability and estimate your due tax for the following year. Inaccurate information can result in a generalized tax liability that the IRS builds from data collected by similar taxpayers and your oldest valid return, creating substitute returns. These do not account for any of the deductions or efficiencies you might have calculated in your old returns, which can significantly inflate your tax liability.

Even if the IRS does file these substitute returns for you, it will still tally your delay on the proper tax return – for every month past the filing deadline, which is usually in April of every year (Tax Day), you will owe 5 percent of your tax liability as a penalty, plus accrued interest when paying. The interest rate is variable and adjusted every quarter, as per the IRS News Room. The 5 percent penalty for late return caps at 25 percent after five months.

Missed Payment Deadlines?

If you owe the IRS money, it will start penalizing you for every month you continue to owe, at a rate of 0.5 percent per month, for a maximum of 25 percent after fifty months. This stacks with the 5 percent penalty on tax returns with a minor deduction – meaning, if you both owe the IRS money for fifty months and fail to file your return in less than five months, your penalty will cap out at a total of 47.5 percent of your tax liability. This is still a massive chunk!

Again, interest shouldn’t be forgotten. Failing to pay off your debt means it grows at a significant rate. However, your first priority should always be filing your late tax returns. Even if you still owe the IRS money and cannot afford to pay, filing a corrected return is essentially free – you need to print out a few forms and mail them – and it is a prerequisite for any payment plan. In other words, the IRS won’t let you pay back your debt if your tax returns are not up-to-date. Don’t forget this!

Paying Off Your Debt – Don’t Get Scammed!

Once you’re ready to deal with your tax delinquency, it’s time to talk to the IRS. First things first – if you have been approached by anyone pretending to be the IRS asking for money directly, whether over the phone or online, be wary. The IRS will only accept digital money through the Electronic Federal Tax Payment System (EFTPS).

Even debt collection agencies hired by the IRS – which are few and far between – are only allowed to redirect tardy taxpayers towards the EFTPS and can never directly demand money on behalf of the government. Don’t get scammed! Call the IRS directly via a hotline to figure out your next steps for a payment plan, or log into your taxpayer account on the secured .gov website and get started on a payment plan there.

Understanding Liens and Levies

If you fail to pay for long enough, the IRS will publicly notice a federal tax lien. This is a legal claim on all your accounts and property until your debt is paid off or other conditions are met to justify the lien’s release. Liens effectively bar you from seeking financing by prioritizing the IRS as a top creditor and keeping you from liquifying any assets without first paying off your debt. If the lien is ignored long enough, or you still owe money and aren’t in a payment plan, the IRS can resort to levies.

Levies are physical claims of assets or property or a portion of every paycheck (withheld through a levy agreement by your employer). At this point, the IRS can continue to levy your belongings until you are close to financial distress, at which point they must stop. The IRS cannot continue to draw blood from a stone and cannot force taxpayers in financial trouble to satisfy a tax debt with money they do not have. If your situation is dire, the IRS may flag you as non-collectible until it improves.

If you cannot afford a conventional payment plan but are still capable of generating income, you might want to consider an offer in compromise. Do not approach this idea lightly – the IRS only considers offers in compromise in cases where taxpayers cannot fully pay off their debt with their current earnings, even in 72 monthly installments. Always consult a tax professional before engaging with the IRS, especially if you intend to start a payment plan or seek a compromise.

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