It is a misconception that tax debt doesn’t increase if you don’t pay it. In reality, the longer you take to pay your tax debt, the more you have to pay. The IRS charges additional fees on the total tax debt each month it remains unpaid. The penalty limit starts from 0.5 percent and can reach as high as 25 percent. In most cases, however, the penalty charged is 0.5 percent.
In addition to penalties, the IRS also charges interest on the total debt each month. If you combine penalties and interest, the amount owed increases considerably.
Facts of Tax Debt Increase
It is important to remember that your tax debt will grow quickly over a short amount of time. This happens because the penalties and interest are charged on the total tax debt each month. Penalties can be as much as 25% of the unpaid balance every month or part of a month the debt remains unpaid.
If a tax debt remains unpaid for months or years, the total increases substantially, sometimes making it difficult for the taxpayer to catch up. The only method to avoid paying more in tax debt is to resolve it as soon as possible, preferably within the first few months of owing it.
Tax Debt Resolution Options
Whatever your financial situation, you can resolve your tax debt. Even if you cannot pay any amount you owe, you can still get it temporarily resolved by obtaining the status of Currently Not Collectible (CNC). If you can only afford to pay a partial amount of the back taxes you owe, you can attempt a resolution with a tax debt reduction plan.
Those who can pay the full debt amount but would prefer to pay over time may use an installment agreement as a formal resolution. They can pay a lump sum amount in the beginning and pay the balance in fixed monthly installments.
Simply not addressing a tax debt is never advantageous. Apart from penalties and interest, the IRS collection actions make it the least desirable choice for taxpayers. In order to avoid paying more in back taxes, individuals should resolve their tax debt as soon as possible.