IRS Tax Problems

3 Things That Can Happen If You Owe the IRS

Alice Stevens
3 Things That Can Happen If You Owe the IRS

Debt never feels good. You accrue interest and may have to pay additional fees for late payments. It can also be overwhelming, especially as what you owe automatically increases over time.

Having a solid plan to pay off your debt is often the best way to pay it down and become debt-free.

But what happens when you owe the government money?

If you don't pay your full tax obligation, you can experience some financial difficulties. While you may owe taxes to your state and local government, we'll focus on the consequences you may face if you fail to pay the IRS. We'll break down what each consequence is and identify ways to avoid and deal with them.

Consequences of IRS Tax Debt

The IRS's actions on tax debt fall into three categories:

  • Interest and late payment penalties
  • Liens
  • Levies

These actions allow the IRS to collect what's owed, and they can jeopardize your financial stability.

Interest and Late Payment Penalties

The debt you owe the IRS will accrue interest until it is paid fully, adding on to the total amount you must pay. Keep in mind that the interest compounds daily, so it's important to pay as much as you can as soon as you can to limit how much interest you'll pay overall.

You may also have additional penalties, including late filing fees and late payment fees. As these fees are added to your debt, they also start accruing interest.

Tax Lien

The IRS issues tax lien notices automatically if you do not pay your full tax liability within 10 days after the first notice. A tax lien from the IRS means that by law the IRS is entitled to receive funds resulting from the sale of your property before anyone else, including you.

For example, if you own a home and are planning to move, you may find yourself unable to pay-off the rest of your mortgage or be unable to make a good down payment. If you own a car, you may need to qualify for a higher loan than you initially planned. 

Anything you own that is valuable can be subject to a lien, including jewelry, land, houses, and cars.

The IRS can also file the lien publicly, which will let your creditors know that the IRS has first claim on any of your funds. If the IRS makes a public filing, the lien will be on your credit report until it is removed, which can also hurt your credit score.

Liens are not removed until you've paid your entire tax liability, accrued interest, any penalties, and recording fees in full.

Tax Levy 

You may also get a notice of a tax levy. A tax levy allows the IRS to seize any assets in addition to property immediately to be used to pay your tax debt.

Your future tax refunds may also be garnished until your tax debt is gone. If you count on your refund every year for covering some expenses, you'll want to pay your tax debt ASAP. If you're unable to fully pay your tax debt before filing for next year, you'll want to keep this in mind as you plan your finances for the year.

You may also start having your wages garnished before you receive your paycheck. These garnishments can affect your ability to provide for yourself.

Solutions for IRS Tax Debt

While these three consequences of owing taxes are unpleasant, they are preventable. Consider the following tips to avoid or mitigate many of these issues:

  • Stay ahead of your taxes
  • Pay what you can and talk to the IRS
  • Seek tax relief

1. Stay ahead of your taxes.

Make sure that you review your tax withholdings every year to verify that you're paying your full tax liability. If needed, make adjustments that will keep you on track and ensure you don't owe the IRS at the end of the year.

Reviewing your income and tax situation with a tax professional can also help you with tax planning. Taking time to craft a plan will help you prevent tax issues down the road.

If you owe taxes in April, pay the balance in full. You'll avoid interest and won't have to worry about other penalties.

2. Pay what you can and talk to the IRS.

If you can't pay the full balance of your tax liability, pay as much as you can afford to right away. Paying a portion immediately will help keep accrued interest as low as possible.

Once you've paid what you can, contact the IRS to learn more about your options. Depending on your situation, you may be able to negotiate an Offer in Compromise or an Installment Agreement.

An Offer in Compromise is a settlement agreement. The IRS accepts these offers if there is a legitimate dispute regarding the amount owed, if the taxpayer owes more than their total income and assets, or if collecting the tax debt would create economic hardship or be unfair for the taxpayer. You'll pay the IRS a lower amount than you owe, and the IRS will forgive the rest of the tax debt.

In some cases, forgiven debt is considered taxable income and will be reported with the current year's taxes.

An Installment Agreement is a payment plan that you and the IRS agree upon. Once the regular payment and term length are set, you'll be able to avoid tax liens and levies as long as you keep up with the payments. However, your balance will still accrue interest and late payment fees.

3. Seek tax relief.

If you've already started to deal with garnishments and penalties that are straining your finances, you can get help from tax professionals —  like enrolled agents — who can represent you before the IRS.

Tax relief professionals specialize in helping people with tax debt by negotiating Offers in Compromise and Installment Agreements and by removing penalties and garnishments. In some cases, you may qualify for innocent spouse relief.

Tax relief companies typically offer a free consultation to review your situation, outline a plan, and give cost and time information. If you're intimidated by the IRS or just want professional help, working with a trusted tax relief company can be beneficial.

Being aware of how the IRS can collect your tax debt and what you can do to prevent levies, liens, and interest will help you maintain control of your finances and stay financially secure for the future.

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Alice Stevens

Alice Stevens

Alice Stevens is a language enthusiast, loves history, and enjoys traveling. She manages content for Best Company specializing in finance, insurance, and car warranty.

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