Any amount of tax debt attracts interest and penalty from the IRS. The day after the filing deadline, the IRS treat unpaid taxes as tax debt and begins to charge penalties on it. The penalty on unpaid taxes is a fee charged each month. For failure to pay taxes on time, the IRS charges 0.5% penalty each month until the tax debt is paid in full. The late payment penalty can reach up to 25% of the unpaid taxes. As the amount of penalty charged is percentage based, the lower the amount of tax debt, lower the amount of penalty to be paid on it.
How the IRS Treats Tax Debt
If a tax return is not filed, the IRS estimates the amount of taxes owed by the taxpayer by filing a substitute tax return on behalf of the taxpayer. The information on this tax return is borrowed from previous tax returns filed and other documents that the IRS has access to. The IRS does not include any deductions and credits the taxpayer may qualify for. After the IRS has an approximation of the taxes owed, it sends a notice to the taxpayer that has information about the tax debt amount and payment methods.
For each month that the tax debt remains unpaid, the IRS charges penalties and interest on it. For this reason, it is advantageous for taxpayers that cannot pay their full tax bill to either pay as much as they can before the filing deadline or resolve their tax debt as early as possible. Allowing the entire amount of taxes owed to remain unpaid means paying more to the IRS.
Penalty Abatement for Tax Debt
The penalties charged on tax debt can be reduced or forgiven under certain circumstances. If taxes were not paid on time due to a ‘reasonable cause’, then the IRS might forgive the entire penalty on the tax debt amount. A reasonable cause is an event that was unpredictable and beyond the control of the taxpayer. A natural disaster, death of a family member, divorce, theft and fire are some of the situations where the IRS considers removing the penalties.
Whether the IRS accepts your reason for not paying your taxes depends upon the judgment of the IRS agent considering the request.
Tax Debt Resolution
Many times, taxpayers postpone tax debt resolution because they cannot pay their entire tax bill. It is important to know that even if taxpayers cannot pay their full, partial or any amount of their tax bill, they can still get their tax debt resolved. There are IRS payment plans such as Currently Not Collectible, Offer in Compromise and Partial Payment Installment Agreement that allow resolution of tax debt without full payment or even any payment of tax debt.
Resolving tax debt as early as possible helps to reduce the amount of penalties and interest on the debt and avoid IRS collection actions. Taxpayers can hire professional help to consider the best way to resolve their back taxes. Take a look at our reviews and ratings of the top trusted tax resolution services.