If you have unpaid taxes, before you contact the IRS to resolve your case, you should understand some essential information about how these taxes impact you. Also, you’ll need to understand how the tax debt may affect you in the future, and what type of resolution you should seek.
Back Taxes: Penalties and Interest
Any amount of unpaid tax accrues penalties and interest, regardless of when it was incurred or why. The day after the expiration of the tax fling deadline, the IRS begins to charge penalties and interest on the total amount of tax debt owed each month. These penalties and interest stop accruing once the entire tax debt amount is paid in full. Even if you have qualified for an IRS installment plan and are making payments to relieve yourself from the tax debt, the IRS will charge penalties and interest on the amount that remains to be paid.
As penalties and interest can substantially increase your tax debt over time, you should consider them when choosing to apply for a payment plan. If your tax debt has remained unpaid for years, you may end up giving significantly more to the IRS than what you originally owed.
IRS Collection Actions for Back Taxes Recovery
When you contact the IRS to resolve your tax debt, you may very well not have the ability to pay the entire amount in one lump sum. If this is the case and you’re seeking an installment plan, you’ll want to make sure you can meet the requirements of the agreement you choose. If you default on a plan the IRS has approved, they will resume collection actions to recover the tax debt.
Even though IRS tax debt payment notices may not be damaging, the placement of a lien or levy can affect your ability to sell what you owe or to get credit. Under a lien, the IRS files a public notice to alert creditors that you have unpaid taxes. As this information is openly available, it can damage employment opportunities as well.
Another aggressive IRS collection action is the levy. Under a levy, the IRS seizes a debtor’s property to satisfy the tax debt.
Statute of Limitations
When you are resolving back taxes, you should know that the IRS has 10 years to collect on the debt from the date of assessment. This is called the statute of limitations, or collection statute expiration date (CSED).
If you have no ability to pay your back taxes and 10 years have passed since the IRS assessed the debt, typically, they will forgive the entire amount and close the case. If you have some ability to pay your back taxes, then you may consider applying for a tax debt reduction payment plan.