IRS Policies on Tax Debt

Posted on May 15, 2023

IRS Policies on Tax Debt

Any amount of taxes that remains unpaid after the filing deadline is treated as tax debt by the IRS. This is irrespective of whether you have filed your tax return or are making payments to fulfill the tax debt under a payment plan.

How the IRS Estimates Tax Debt

If a taxpayer does not file a tax return, the IRS will try to determine the amount of tax owed by preparing and filing a substitute tax return. This tax return is filed on behalf of the taxpayer, but does not include any deductions that the taxpayer may qualify for. The purpose of the filing of a substitute tax return is only to know the approximate amount of taxes owed so that collection action can be initiated.

The amount of tax debt included in the early notices taxpayers receive is an estimation. To claim deductions that you qualify for, you will need to file your tax return. The IRS will, after receiving your tax return, correct the amount of tax debt owed.

IRS Tax Debt Payment Plans

The IRS has various tax debt payment plans for those taxpayers that cannot or do not want to pay their tax debt in a lump sum. When applying for a payment plan, it is important to remember that each plan has strict qualifying factors based on the financial strength of taxpayers. To determine the financial capacity of taxpayers, the IRS asks for the sharing of financial information, including all income and assets. Applying for a tax debt reduction plan, for example, when a taxpayer can easily pay the entire tax debt can attract penalty.

All payment plans have certain requirements, all of which must be fulfilled to resolve the tax debt. Therefore, ensure that you can pay the decided tax debt amount within the time limit established under the agreement. Defaulting on an agreement may attract penalty and makes the case complicated.

IRS Penalties and Interest on Tax Debt

On any amount of back taxes that remain to be paid, the IRS charges penalty and interest each month. The amount of penalty is usually 0.5% per month, but may reach a maximum of 25% per month. Along with the penalty, the IRS also charges interest on the tax debt amount each month. Combined, penalties and interest can substantially increase the total tax debt, especially if the tax debt amount is large.

Even if you have incurred IRS tax debt, making early efforts at resolution can help you in avoiding penalties, interest, and collection actions by the IRS. If you are looking to hire a tax service, consider our ratings and reviews of the top tax resolution services to help you to reach a competent tax service.