IRS Tax Relief - Unpaid Taxes

Having unpaid taxes or back taxes can lead to a variety of IRS tax problems including significant tax penalties. The IRS offers a variety of methods that will limit IRS collection actions to financially distressed taxpayers that have unpaid taxes. Below are the various consequences and solutions to having unpaid taxes.

We Work To Eliminate Tax Debt

Unpaid Taxes - The Consequences

The consequences of unpaid taxes vary significantly depending on the situation of the taxpayer. One of the biggest consideration factors is whether your tax debt has been filed. The tax penalties for having unfiled and unpaid taxes is 10 times greater than having unpaid taxes alone. If a tax debt remains unpaid, the IRS will follow collection enforcement for most taxpayers that often ends with federal tax liens and IRS levies. Below are details on tax penalties and other possible IRS enforcement actions to collect unpaid taxes.

Unpaid Taxes and Unfiled Tax Penalties

When tax returns have not been filed by the due date and taxes are owed, this will lead the IRS to charge some of the steepest tax penalties. The IRS penalty that the IRS charges for unfiled taxes with a balance due are called the failure-to-file tax penalty. The failure to file penalty is usually charged at a rate of 5% of the tax amount owed each month with a maximum penalty of 25% of the total tax amount owed. If the tax return is filed 60 days or more after the due date (or extended due date), the minimum penalty that is due is the smaller of $135 or 100% of the tax liability amount.
If taxes remain unfiled, the IRS and will file a substitute for return on the behalf of the taxpayer in order to assess tax liability and tax penalties. In most situations, the amount assessed will be greater with a substitute for return than if the taxpayer filed themselves because deductions and credits will be limited. The higher the assessed tax liability, the greater the tax penalties will be.

Unpaid Taxes Penalty (If tax return was filed by due date)

The tax penalty for owing taxes but filing on time is significantly less than owing taxes with unfiled tax returns. The IRS penalty for having unpaid taxes is called the failure-to-pay penalty which is charged at a rate of 1/2 of 1% of the tax liability each month (or part of the month) that the taxes remain unpaid. The maximum amount of this penalty is 25% of the unpaid taxes.

If you filed an extension to file taxes then the failure-to-pay penalty will not be charged if 90%of the taxes owed are paid by the original due date and the remaining balance is paid by the due date of the extension.

Other Possible Consequences or Implications for Unpaid Taxes

The collection process starts by sending a letter demanding payment and assessing additional penalties and interest. Normally after multiple letters and taxpayer inaction, harsh collection tactics begin. Below are a few of the methods that may be used by the taxing authorities to collect unpaid taxes:
  • Federal Tax Lien: A federal tax lien is the government’s claim on the taxpayer’s property. The existence of a federal tax lien ensures that they get first rights to your property over other creditors.
  • IRS Wage Garnishment: The IRS will contact your employer and demand they withhold a certain percentage of your pay to cover unpaid taxes.
  • IRS Bank Levy: The IRS will contact your bank and demand a hold be put on the funds that are in the account and then seize the funds to cover the unpaid tax liability.
  • IRS Property Seizure: The IRS may seize assets such as your car, boat, house or another asset of value that can be sold to cover the unpaid tax liability.
  • Jail time: Incarceration is possible but very unlikely. Depending on the circumstances, the IRS can have a taxpayer arrested and put in jail.
Resolving Unpaid Taxes

Most taxpayers have unpaid taxes because unforeseen events arise that do not allow them to pay what is owed in full. The taxation authorities realize that these situations do arise and are willing to work with the taxpayer to figure out an arrangement. The large penalties that are charged are done to pressure the taxpayer to work with the IRS as soon as possible. Once an arrangement is agreed upon, the penalties and interest will cease or get charged at a much lower rate. Below are some of the common methods used to resolve unpaid taxes that cannot be paid in full.

  • Offer in Compromise (OIC): This is a program that is offered to taxpayers that have a high likelihood of not being able to pay their taxes off before the statute of limitations on the tax debt expires. With this program, taxpayers can settle their taxes for less than the total amount owed.
  • Currently Not Collectible (CNC): Getting declared uncollectible puts a hold on collection activities on the taxpayer until their financial situation improves enough to allow them to pay money towards the debt without causing financial hardship. In many cases, the statute of limitations expires before the debt is collected and the taxpayer no longer owes the tax debt. Be aware that certain taxpayer actions can extend the CSED. Therefore, working with a tax professional here is a taxpayer’s best interests.
  • Penalty Abatement: This option is typically used in conjunction with other methods mentioned above. If the taxpayer has a good enough reason for not being in compliance with tax laws, also known as reasonable cause, then penalties could be removed or reduced.
It is important to keep in mind that for every IRS problem, there is a tax relief resolution. Generally, the IRS will not want to cause financial hardship on the taxpayer. Mainly the only time the IRS will cause financial hardship is because the IRS is unaware that they are causing this hardship.

Getting Help With Unpaid Taxes

No matter what your financial situation is, our tax relief team will be able to analyze your tax and financial situation to determine the best tax relief strategy to get you the best outcome for you.