When taxes have not been filed by the due date and taxes are owed, it can lead to the IRS charging some very severe tax penalties.
If taxes remain unfiled will file a Substitute Tax Return ("SFR") on the behalf of the taxpayer in order to assess tax liability and penalties. In most situations, the amount assessed will be greater with a substitute 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 Tax Penalties
The tax penalty for owing taxes but filing on time is significantly less than owing taxes with unfiled tax returns. The 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 for 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.
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.
- Tax Lien: A tax lien is the government’s claim on the taxpayer’s property. The existence of the lien ensures that they get first rights to your property over other creditors.
- Wage Garnishment: The taxing authority will contact your employer and demand they withhold a certain percentage of your pay to cover unpaid taxes.
- Bank Levy: The tax authorities 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.
- Property Seizure: The tax authorities may seize assets such as your car, boat, house or other asset of value that can be sold to cover the unpaid tax liability.
- Jail time: Incarceration is possible. Depending on the circumstances, taxing authorities can have a taxpayer arrested and put in jail.
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 or state taxation authorities 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.
Installment Agreement ("Payment Plan"): An installment agreement allows the taxpayer to make monthly payments towards the taxes that are owed. Once a taxpayer is entered into an installment agreement they are considered to be in good standing with the IRS and most state taxing authorities.
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.
Contact us now so that we may assess your personal situation and work to address your tax lien immediately.