To many, tax debt is a bit of an enigma. Unless you’ve spent hours upon hours studying the federal tax code, it’s unlikely you’ll find yourself comfortable and confident when hit with a tax bill from the IRS. For most people, the experience falls on quite the opposite side of the spectrum. They lack the expert knowledge and understanding of tax debt facts, policies, and tax relief overall.
And as you can already guess, this causes problems. Major ones.
Knowledge represents one of the biggest obstacles to most taxpayers’ dealings with the IRS, and we’re determined to eliminate it. After two decades fighting the IRS on behalf of our clients, we’ve truly seen it all. We’ve defended audits, we’ve filed tax returns, and we’ve saved thousands and thousands of clients millions of dollars in tax debt.
As we see it, a lack of knowledge presents a barrier for many of our clients. And we don’t think that’s fair. When you need to take on the IRS, you need every bit of knowledge possible. We’re here to help.
To get you started on your tax knowledge journey, we’re here with 15 tax debt facts you may not already know. Start with these tax debt facts and move on through our blog for more. Then, give us a call to help you across that finish line.
There are plenty of things you’ve never known about tax debt. So let’s just get started with the basics before diving into tax debt facts about debt collection and tax relief
When you owe the IRS taxes, the IRS has a number of avenues they can use to get their hands on it. And what better than your tax refund? When you owe the IRS back taxes for one year and are owed a refund for the next (or prior) year, the IRS can apply your refund to your debt.
How does this work? Well, let’s say you’re typically used to receiving a refund of $500 at tax time. If, one year, you end up with an unexpected tax bill of $100 and neglect to pay it, the IRS will track the appropriate penalties and interest. And if you end up earning a tax refund of $500, the IRS will simply remove the total you owe them from the refund.
The good news: Your tax debt is eliminated. The bad news: You paid far more than you needed to in interest payments and penalties, and you lost a good chunk of your tax refund. In our view, the bad far outweighs the good.
In some instances of spiraling tax debt, a common misconception leads taxpayers much farther down the path than they have any need to be. That misconception: The IRS doesn’t know how much you owe.
While the IRS does typically require your tax return to make an assessment of your tax obligation, it has a number of other ways to estimate your tax bill. For example, you fill out tax forms when you start working for a new employer, and this employer withholds your estimated taxes from your paycheck, sending them quarterly to the IRS. The IRS also may receive information from financial institutions and other organizations required to file.
So while it’s true that you may be able to fly under the IRS’s radar for a period of time, it’s a fool’s errand to think you can avoid the IRS permanently. They—and your tax debt—will almost certainly find you.
When you file a joint tax return with a spouse, your outcomes on that tax return are joined as well. Unfortunately, this can lead to audits, tax debt, and other lingering tax issues when a spouse makes mistakes or hides income on a joint return.
As is the case with many joint filers, one spouse tends to handle much of the finances—or at very least handles the tax filing process. And should they improperly report or omit items on your tax return, you’re held jointly responsible for dealing with them. These issues can continue to haunt you, even if you’re no longer married to and filing jointly with your spouse.
Fortunately, the IRS accounts for this possibility through something called innocent spouse relief. If you qualify, the IRS may relieve you of responsibility to pay tax, interest, and penalties on any improperly reported items from your spouse. If there are issues with any shared reporting or your own individual income, you’re generally still on the hook.
The IRS has many tools to secure delinquent tax debt, and some of them you may not even know about. Although you’ve likely heard about tax liens, wage garnishments, tax levies, and the like, did you know the IRS can restrict your travel?
They can. One of the newest tools in the IRS’s collections toolkit involves your passport. If you owe more than $51,000 in taxes and the IRS has attempted to collect from you already, they can label you as a “seriously delinquent” taxpayer. This means that you’ve not entered into a payment agreement or made any attempts to pay.
With this label, the State Department can restrict your passport. While this may not affect some individuals, for others who enjoy international travel for business or pleasure, this can represent a serious restriction. If you don’t have a passport, your restriction will prevent you from getting one. And until the IRS removes you from the “seriously delinquent” list, you won’t be able to renew your passport.
While this passport restriction represents one of the most restrictive actions the IRS can take to encourage taxpayers to pay up, it’s one of the least well known. But the outcome is the same: If you don’t pay, you’re grounded.
The IRS works with private collection agencies to collect overdue tax bills. In some instances, you may find yourself no longer hearing from the IRS, but a private collection agency. And if you’ve ever dealt with any kind of debt before, you know how annoying, stressful, and downright intrusive some of these agencies can be.
As the IRS lays out on its website, it may assign your account to a private collection agency for a few reasons. First, the IRS may not have had the resources to adequately collect the debt or they simply couldn’t locate you. Next, you or a third-party representative hasn’t interacted with the IRS on your account. Finally, more than two years have passed since your tax assessment and the account wasn’t yet assigned for collection. If you’ve met any of these criteria, the IRS may pass your account over to a private collection agency.
The IRS won’t assign your account to a private collection agency if you’re under 18 years of age, deceased, receive supplemental security income or social security disability insurance, and a number of other reasons. Check them out on the IRS website here.
Despite the hard work we do on our blog and in our work, misconceptions about tax debt collection persist. Here are a few things you may not have known about it.
Some of our clients wonder: Does tax debt expire? And the answer is yes! However, there are many caveats and exceptions that make reaching this 10-year expiration all but impossible.
The timer starts running after an “assessment” of your tax liability, which occurs when you file a tax return. If you file two years late, the assessment will occur then.
We don’t encourage clients to attempt to run out the clock for a few reasons. First, the IRS can employ severe penalties, like tax liens or wage garnishments. Second, common tax-debt related events can extend the 10-year timeline. These include offers in compromise, filing for bankruptcy, or collection due process filings.
Basically, whether you’re fighting the debt or looking to pay, any of these actions can extend the window. As painful as it may be, it’s best just to face the tax debt head on.
Most common tax issues fall into civil courts, not criminal ones. For example, if an audit reveals you owe the IRS money, a civil judgment will order the collection. And if you don’t have money to pay your taxes, you can get slapped with penalties and interest, but the IRS won’t lock you in jail over it.
Generally speaking, the tax issues that can land you in prison include tax evasion and tax fraud, failure to file a return, and helping someone commit tax evasion. While failing to file your return can result in criminal charges, it’s not the most likely case. Typically, failure to file will result in a 5% penalty on the balance you owe, each month, up to 25%.
Tax debt can affect your life in key ways, and tax debt collection can impact you in ways you may not even expect. Case in point: Your job.
When you have neglected to square away your unpaid taxes, one of the ways the IRS can get its hands on the tax debt is through wage garnishment. In a wage garnishment, the IRS contacts your employer directly and siphons off a portion of your wages to pay off your bill.
By law, your employer may not terminate you simply because of a single wage garnishment. However, wage garnishments are pretty severe, and often spur action from taxpayers looking to find a more favorable repayment plan. Should you fail again to pay, the IRS may ultimately issue another wage garnishment—and this time, your employer has the option to terminate you should they desire.
From what you read in the newspaper and see on TV, the IRS seems to be hard at work chasing after hardworking average Joes and Janes with tax penalties and audits. But you only hear about tax evasion, a criminal charge, every so often. Think of Mike ‘The Situation’ Sorrentino or Martha Stewart.
In reality, tax evasion is a big problem—just not how you may imagine it. While we don’t love the IRS, the reality is that as an organization, it’s actually fairly underfunded. Which is why it tends to go after middle and lower class folks rather than much higher net worth individuals. It’s just more expensive, requires more people, and can take much longer to litigate. So, rich people and large corporations have many more opportunities to hide their income or obscure their financial situation.
Not all of the tactics they employ legally fall under “tax evasion,” but others do. And as things currently stand, the evasion will likely continue.
Now that you’ve learned a bit about tax debt and tax debt collection, it’s time to learn some facts about tax debt relief you may not have known.
Often on your search for tax debt relief, you’ll run across lofty promises that a tax relief company can fully wipe away your tax debt. All you have to do is sign. Unfortunately, this claim is false, however nice that sounds.
In reality, tax debt relief often involves many moving parts—and often doesn’t fully eliminate your tax bill. Tax debt relief often serves a couple of purposes: Getting the IRS off your back, and lowering your tax bill as much as possible. Tax companies like StopIRSDebt.com will employ several tactics to do so, which may include filing back tax returns, negotiating repayment plans, submitting an offer in compromise, and so on.
In some cases, we’ve totally eliminated hundreds of thousands of dollars in tax debt. But for many, tax debt relief results in a sharply reduced tax bill, a manageable payment plan, and the peace of mind that comes with knowing someone is on your side.
Without knowing your tax situation, nobody can make a guarantee to fully eliminate your tax debt. If they do, it’s a good sign you should keep looking elsewhere.
Depending on your financial situation, StopIRSDebt.com and other tax relief companies can negotiate your IRS tax bill down substantially. These options can require some pretty specific qualifications, but the upside is more than worth it.
With an offer in compromise (OIC), you and the IRS essentially agree that you can’t pay your full tax liability. OIC eligibility depends entirely on your financial situation, including your ability to pay, assets, income, and expenses. To apply for an OIC, you also need to be current with your filing and payment requirements.
This is the kind of thing that tax relief experts like StopIRSDebt.com are quite experienced in. By understanding your tax and financial situation, we can make recommendations and gather the necessary information to apply for an OIC on your behalf. We file back tax returns and get a full picture of your financial situation to give you the best shot at IRS approval you can get.
Tax Relief experts like StopIRSDebt.com have other tools at their disposal to help stop the IRS and protect taxpayers from collections. Depending on your financial situation, you may have multiple options on this front.
Initially, you may request CNC, or currently not collectible, status. CNC status halts collection efforts from the IRS temporarily, which can put a stop to various notices or garnishments you may experience. To qualify, you must demonstrate financial hardship to the IRS, indicating that paying your tax debt would make paying your living expenses impossible. A tax relief company can help you request CNC status by filing all prior tax returns on your behalf and filling out the proper forms.
Additionally, you can also request an extension to give yourself more time to pay. The IRS may take into consideration situations in which paying off your debt on time might cause you to experience undue hardship. If granted, you might get an additional six months to pay your tax debt. Again, tax relief companies like StopIRSDebt.com can help you maximize the time you have to pay the IRS. With tax debt, every month counts.
For most taxpayers, the biggest contributing factor to mounting tax debt doesn’t come from their original tax bill. Instead, the interest and penalties from failing to pay or failing to file spiral their tax bill out of control.
Fortunately, in certain instances the IRS may wave those penalties and interest if you meet certain qualifications. First, you didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty. Second, you filed all currently required returns or filed an extension of time to file. Third, you have paid, or arranged to pay, any tax due.
The failure-to-pay penalty continues to accrue until your tax is paid in full. Because of this, you can benefit from waiting until you’ve paid the tax to request penalty relief. While the IRS will remove interest charged on your penalty when it’s removed, any unpaid balance will continue to accrue interest until paid in full.
An expert tax relief team can help guide you through the First Time Penalty Abatement, which can potentially reduce your tax bill by thousands of dollars.
In some instances, the state bodies that collect income tax follow in lockstep with the IRS. So when the IRS extends the tax deadline, often these state tax collection agencies will follow suit and push their own deadlines back.
However, you should not mistake state revenue bodies with the IRS. Because the laws that govern them, assign penalties and interest, and stipulate how you can achieve tax debt relief, may differ from the IRS in important ways. For example, your state may allow for waiver of interest on your tax bill, but not penalties. Or, your state may have the exact opposite rule. One size does not fit all with regards to tax debt,
A good tax relief team will understand the local and state tax laws that apply to your situation, so you don’t need to worry about the consequences of a “one size fits all” approach to tax relief. At StopIRSDebt.com, our expert tax team knows how tax laws vary from state to state. And we apply our knowledge to ensure we reduce not only your state tax debt, but your federal tax debt as well.
Knowledge brings power. When it comes to tax debt, you deserve all the knowledge available. After working with tens of thousands of clients across two decades, we’ve come to understand the importance of information when dealing with the IRS.
We hope you’ve found something new in these tax debt facts and that you feel more comfortable facing your tax debt and taking on the IRS. That’s what we’re here to help with. That’s what we do. The first step is knowledge, and the next is entirely up to you.
Are you struggling with tax debt, a tax lien, IRS wage garnishments, or other serious tax issues? You don’t need to go it alone—we’re here to help. Send us a message today via our free live chat and get the help you and your family deserve.
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