When you owe IRS back taxes, it can be overwhelming. The best thing to do is to start taking steps to resolve your tax debt. When taxpayers owe the IRS and ignore their back taxes, they are likely to face many IRS tax debt issues.
Here is a list of 10 common tax debt issues for individuals with back taxes.
1. IRS Charges Penalties
Individuals who fail to file a tax return (FTF penalty) or pay what they owe the IRS (FTP penalty) will be charged a penalty. Read more: “What is First Time Penalty Abatement And How Do I Qualify?”
In addition to these tax penalties, there are many others, like penalties for inaccurate tax returns and underpayment of estimated taxes.
IRS penalty amounts vary by type of penalty. For example:
- Failure to File your tax return on time: 5% of tax due each month until filed (caps at 25% of tax due)
- Failure to Pay tax due on time: 0.5% of tax due each month until paid (caps at 25% of tax due)
- Failure to Prepare an Accurate Return: 20% of underpayment of tax due
2. IRS Charges Interest
In addition to tax penalties, the IRS charges interest on back taxes from the original due date until paid in full.
The IRS sets the interest rate quarterly as the federal short-term rate plus 3%. Your interest on unpaid taxes compounds daily.
3. IRS Takes Refunds
The IRS will also take your tax refund when you owe back taxes. Additionally, the agency can seize your tax refund if you are late paying child support or have student loan debts.
If some of your tax refund is left after your back taxes and other debts are offset, you will receive the remaining amount from the IRS by check or direct deposit.
4. IRS Files Federal Tax Lien
If you ignore or fail to pay back taxes, the IRS can file a federal tax lien. A federal tax lien is the IRS claim to an individual’s property when they owe back taxes.
This tax lien ensures the IRS financial interest in tax you owe is secured by your property, from real estate to personal assets. In some cases, an IRS lien can lower your chances to get credit, and liens can continue even if you file for bankruptcy.
The IRS releases federal tax liens usually within 30 days after you settle your tax debt.
5. IRS Levies Paycheck Wages, 401k Pension, Social Security Benefits, and Other Property
An IRS levy allows the seizure of your property to settle tax debt. The IRS issues levies when you owe back taxes, taking money from your paycheck (wage garnishment), retirement funds, and social security benefits to pay your taxes.
You will need to pay your back taxes in full or prove economic hardship to have an IRS levy released.
Read more: “Can The IRS Garnish My Pension or Retirement Accounts for Back Taxes?”
6. IRS Back Taxes Make It Harder to Buy and/or Sell a House
IRS back taxes make it challenging to buy new property or sell your current property. If you have not settled your tax debt, your chances of getting approved for a mortgage are greatly reduced. If applying for a Fannie Mae mortgage, you cannot have a federal tax lien. FHA mortgages are possible if the IRS issues a certificate of subordination.
Read more: “Can You Sell a House with a Federal Tax Lien?”
You can list your house for sale if you have a federal tax lien but closing the house sale depends on whether the home’s equity is enough to pay off your tax lien.
7. IRS adds taxpayer to Automated Collection System (ACS)
One way the IRS collects back taxes is adding a delinquent account to the Automated Collection System (ACS). ACS is a call center-based IRS collections department that contacts delinquent taxpayers, issues balance due notices, and reviews unresolved cases to settle tax debt.
Most often, the IRS assigns back taxes less than $100,000 to the Automated Collection System.
8. IRS Tax Debt Collection Enforced by an IRS Revenue Officer
If back taxes are not paid, the law requires IRS revenue officers to enforce collection. A revenue officer is an IRS civil enforcement employee who works on tax debt cases.
Usually, the IRS sends a revenue officer when it cannot collect back taxes via balance due notices, automated collections phone calls, lien, or levy. IRS revenue officers can take and sell assets to offset back taxes.
Read more: “What You Need to Know About IRS Revenue Officers”
9. IRS Authorizes State Department to Deny Passport or Revoke Passport
The IRS may ask the State Department to deny or revoke your passport when you have “seriously delinquent” tax debt. Individuals who owe the IRS more than $55,000 in back taxes, penalties, and interest are certified as seriously delinquent by the IRS.
Read more: “Can the IRS Deny or Revoke a Passport for Tax Debt?”
Certification allows the State Department to impose travel restrictions by denying or revoking passports. To reverse certification, you will need to settle your tax debt in full or make payment arrangements with the IRS.
10. IRS Assigns Tax Debt to a Private Collection Agency (PCA)
If the IRS has been unable to locate you, you have not been in contact with the IRS, or your back taxes are more than two years old and are still unpaid, tax law permits the IRS to assign a private collection agency to collect back taxes.
As of 9/23/2021, the IRS works with three PCA’s that can contact you on behalf of the government: CBE Group Inc., Coastal Professional Inc., and ConServe.
When your tax debt is assigned to a private collection agency you will receive a CP40 notice from the IRS and a separate letter from the PCA.
Read more: “Can the IRS Assign Your Tax Debt Case to a Private Collection Agency?”
How Can Wiztax Help?
Owing the IRS a substantial amount of tax debt can be a huge burden. The worst thing you can do is ignore back taxes. Our tax resolution services help resolve back taxes so you can avoid the IRS tax debt issues mentioned here.
Start by taking our free online evaluation or schedule a free phone consultation and we will tell you exactly how we can help.
6 Simple Questions. Free Evaluation.
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