What Is Tax Debt and How Does It Impact You

What Is Tax Debt?

Tax debt occurs when you fail to pay the taxes you owe by the filing deadline, which is usually on April 15. If you have a job, your employers will automatically withhold a portion of your income for taxes. If you set up your paycheck to withhold enough, you won't be surprised by a big tax bill when you file your return.   

However, if you’re self-employed, you’ll need to file taxes and pay what you owe before the tax filing deadline. If you don’t pay it in full before the deadline, you’ll owe tax debt to the Internal Revenue Service (IRS).

Not paying your taxes can have serious consequences. Read on to learn more about the possible reasons for and repercussions of tax debt.

Common Causes of Tax Debt

There are many reasons people fall behind on their taxes. However, neglecting your debt can have a high price. Here are some common reasons why you may carry IRS tax debt: 

Failing to File Tax Returns

This is one of the most common mistakes taxpayers make. If you live in the U.S. and earn $14,600 or more in a year as a single individual under the age of 65, you must file your federal tax return. Individuals over 65 who file individually and make $16,550 or more must also file taxes.

If you don’t file your taxes when you fall into one of the required categories, this can lead to tax debt. 

Not Withholding Enough for Taxes

By law, employers are required to withhold taxes from your paycheck. However, the amount that's withheld may not be enough to cover what you owe, depending on what you elect on your W-4. This could require you to pay more than expected when you file your tax return with the IRS.

To fix this situation, reexamine the amount your employer withholds from each paycheck. Consider increasing your withholdings to avoid this error during the next tax year, which could even lead to a tax refund.   

Not Paying Estimated Taxes

If you’re self-employed, you’re responsible for paying your own taxes quarterly. If you don’t pay estimated taxes throughout the year, you may have a large tax liability at the end of the financial year.

As a business owner, it’s best to work with a tax professional to ensure you’re filing your taxes correctly. Paying estimated taxes and checking your withholdings is also important for gig workers or freelancers. 

Other Mistakes

Additional reasons, such as medical emergencies, natural disasters or financial distress can prevent you from filing your tax returns and paying taxes on time. Some taxpayers, especially when they’re filing taxes on their own, may make mistakes or claim deductions or exemptions they’re not qualified for.

The IRS offers an array of resources to guide taxpayers, including its extensive website and dedicated phone lines. If you're unsure how to file your taxes, think you made a mistake, or missed a deadline to submit your documents, start by contacting the IRS or using the online help center to avoid tax debt. 

8 Consequences of Not Paying Taxes

While it’s not uncommon to forget to pay your taxes before the IRS deadline, ignoring the issue can result in serious penalties. 

Here are eight possible consequences of not paying your tax debt:

1. IRS Notices
   The IRS will send you notices to inform you about your tax bill before taking any collection action. While these notices and letters can be stressful, ignoring them can result in more severe collection actions.
   
2. Failure To Pay Penalty
   The IRS charges a failure to pay penalty of up to 25% of your unpaid taxes if you don't pay what you owe for any reason. You can also accrue interest on unpaid taxes for each month you remain delinquent.
   
3. Interest Charges
   The IRS charges interest on the amount you owe. Interest starts accruing from the date of the filing deadline, increasing your tax debt the longer you remain delinquent.
   
4. Withholding Tax Refunds
   If you owe tax debt from a previous year and are due to receive a refund in a later year, the IRS will likely withhold it and apply the refund amount to your tax bill.
   
5. Wage Garnishment
   If you ignore the notice that the IRS sends you, they can issue wage garnishments. This means the IRS can collect your earnings directly from your employer if you fail to pay tax debts.
   Wage garnishment is a type of levy that can make it difficult to pay for your expenses since you lose income, leading you further into debt.
   
6. Liens
   The IRS can also file a federal tax lien to protect its interest if you try to borrow against or sell your property. A lien on a house can impact your ability to sell your property and access credit.
   
7. Additional Levies
   The IRS can seize your money and assets if you fail to pay your tax debt. Other common types of levies (besides wage garnishment) are bank levies and accounts receivable levies.
   For businesses, levies can disrupt cash flow, making it difficult to purchase inventory and pay employees.
   
8. Restriction of Passports
   If you’re seriously delinquent and haven’t agreed to any payment options, the IRS can restrict your passport. This means you won’t be able to renew your passport unless you repay your tax debt. If you don’t have a passport, you won’t be able to apply for one under IRS restrictions.
   

What Should You Do If You Owe Tax Debt?

Owing tax debt to the IRS can be stressful, but the best course of action is to explore your tax debt relief options. You can set up several payment plans with the IRS, depending on the severity of your tax debt.

Consider the following options if you owe money to the IRS:

Installment Agreement

IRS payment plans allow you to pay off your debt over time. Qualifying taxpayers can apply online to set up monthly installments. 

Short-term plans last 180 days or less and don't require any setup costs. However, you'll still pay the IRS any accrued interest or fees.

Long-term plans are available as a direct withdrawal with a $22 setup fee or an electronic payment plan with a $69 fee.

You'll also pay any accrued interest and fees with either of these plans. 

Offer in Compromise

Taxpayers can negotiate a tax settlement, known as an Offer in Compromise (OIC), with the IRS. Offers in compromise allow you to pay less than what you owe by making a lump sum payment. 

Eligibility for an OIC depends on your income, level of financial hardship, assets, and expenses. Use the prequalifier tool to find out if you meet the requirements for an Offer in Compromise. 

Currently Not Collectible

If you're unable to pay anything toward your tax debt due to financial hardship, you can ask the IRS to temporarily delay collection. If the IRS determines that you legitimately can't afford to pay, the organization may give you a reprieve by deferring payments until your financial situation improves.

To qualify, you'll have to fill out a form and prove your financial status. However, even if you delay collection, you'll still accrue interest and fees that you'll owe once you resume payments.

TurboDebt® Can Help With Other Debts

If you owe taxes to the IRS, it's best to take action as soon as possible. Failing to make your tax payments can result in wage garnishment, levies, penalties, and interest, ultimately leading to an increase in debt.

If you're struggling to repay more than your taxes, consider debt relief services from a trusted organization like TurboDebt®.

With over 20,000 positive reviews across Trustpilot and Google, we've helped consumers across the U.S. find relief from thousands of dollars in unsecured debt balances. 

It only takes a few minutes to find out if you qualify for one of our customized debt relief programs. Contact the experts at TurboDebt today!