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the consequences of owing back taxes

Owing the IRS can be a scary and confusing time, especially if you don’t know what to expect. The IRS has protocols to collect past due balances. This article will review the consequences of owing taxes.

Interest and Penalties

The IRS adds interest to your tax liability daily until you pay it in full. The maximum penalty is 25% of your unpaid tax. The current interest rates are:

  • 8% for overpayments for individuals
  • 7% for overpayments for corporations
  • 5.5% for the portion of a corporate overpayment exceeding $10,000
  • 8% for underpayments for individuals
  • 10% for overpayments for corporations

Penalties include:

  • Failure to file – If you don’t file your return or an extension, and owe, the IRS will penalize you. The penalty is currently 5% of the unpaid taxes for each month or partial month that a tax return is late, up to 25% of your total unpaid tax bill.
  • Failure to pay – If you don’t pay your taxes, the IRS will penalize you at 0.5% for each month or partial month your tax balance goes unpaid, up to 25% of your total tax bill. 
  • Accuracy-related – You may be given the IRS negligence penalty for errors. This can up to 20% of the portion of the underpayment of tax resulting from negligence..

IRS Wage Garnishment

The IRS has the ability to garnish your wages when you have an unpaid balance. This means that the IRS can seize your income and apply it to your tax liability. They can also garnish your paychecks, commissions, and bonuses. By paying the balance in full, or setting up a payment plan, you can stop garnishments.

IRS Levy

You would receive a notice prior to the IRS levying the balance. This consequence is for delinquent taxpayers and involves the IRS legally seizing your bank accounts, wages, or property to settle the tax debt. To stop a levy, contact the IRS directly. If you can prove that you’re in hardship, they may release the levy. You can also pay the balance in full to release a levy sooner.

IRS Lien

Liens are placed on physical assets, such as homes or vehicles, to satisfy tax debt. This means that the IRS takes possession of your assets, or collects a portion of what you make for selling them. You can avoid a lien by paying your balance in full, on time, or by contacting the IRS for a payment plan.

IRS Passport Denial

Major tax debt can result in the denial of acquiring a passport. State Departments can also revoke an existing passport if you’re delinquent. The IRS is allowed to deny citizens the right to travel internationally. If you receive a notice while overseas, you may receive a temporary passport to return to the US.

You can reverse passport denial by changing your status (no longer seriously delinquent), if the debt becomes legally unenforceable, or by satisfying the tax debt.

Unaffordable Tax Debt

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