The year 2024 has brought an unprecedented tax crisis to millions of Americans. With the economic recession and job losses, many taxpayers find themselves unable to pay their tax bills on time or in full. The ramifications of unpaid taxes can be severe, including penalties, interest charges, wage garnishments, bank levies, and even criminal prosecution.
To provide much-needed relief, the IRS has introduced special policies like the Fresh Start initiative and flexible payment plans. Additionally, new legislation is being proposed for an emergency tax amnesty program. This article will explore the best strategies and solutions available to taxpayers in 5 key steps:
1. Understand the Implications of Unpaid Taxes
Being unable to pay taxes on time can lead to serious consequences. The IRS charges failure-to-pay penalties of 0.5% of unpaid taxes per month, up to 25% . Interest also accrues on unpaid balances as high as 3% above market rates under the new Taxpayer Bill of Rights .
The IRS can impose additional penalties like the failure-to-file penalty, which applies even if you don’t owe taxes. The penalty amount is 5% per month of unpaid taxes up to 25% .
If penalties and interest accumulate, the IRS can initiate enforced collection actions:
- Wage garnishments: The IRS can legally require employers to withhold a percentage of wages to pay IRS debt .
- Bank levies: Money can be withdrawn directly from bank accounts, including Social Security payments .
- Property liens: The IRS can place a publicly recorded lien on property you own until taxes are paid in full .
Tax evasion charges are also possible in criminal cases. Failing to file returns, filing false returns, or hiding income can lead to fines up to $100,000 and imprisonment up to 5 years .
2. Explore Installment Agreements
One option to become compliant with unpaid taxes is through an installment agreement, which allows you to pay the balance due over time in smaller, more manageable payments .
Installment plans let you pay down IRS debt over 6 years without accruing additional failure-to-pay penalties. Interest still applies but at 50% lower rates. Low-income taxpayers may qualify for reduced interest and waived setup fees .
Short-term payment plans last 120 days or less. You can apply online and avoid setup fees if your balance due is under $50,000 .
For balances above $50,000 or longer 6-year terms, you’ll need to fill out Form 9465 and mail it to the IRS . Setup fees range from $31 to $225 depending on your payment option.
3. Submit an Offer in Compromise
If you owe more in back taxes than you could ever afford to pay in full, submitting an offer in compromise (OIC) to the IRS for settling tax debts may be an option .
An OIC allows you to pay only a portion of what you owe based on your assets, income, expenses, and future earning potential. This negotiated settlement amount must equal or exceed what the IRS calculates to be your reasonable collection potential.
Offers can be processed either as a lump-sum cash payment option or as periodic payments over 5 years or the life of the accepted offer term . You must adhere to filing and payment compliance for the 5 years following acceptance of your offer terms.
4. Strategize With Tax Experts
Seeking help from experienced tax professionals is strongly advised when facing unpaid taxes. Enrolled agents, CPAs, and tax attorneys can help you:
- File past due returns to avoid failure-to-file penalties .
- Negotiate settlements through offers in compromise .
- Establish installment plans with personalized payment terms .
- Dispute penalties and interest from prior tax issues like identity theft .
- Navigate complex IRS rules like those for bankruptcy, insolvency, or expats .
Reputable tax pros know how to work with the IRS within the parameters of their rules while still advocating for your rights as a taxpayer.
5. Leverage IRS Relief Programs
The IRS provides targeted relief programs to struggling taxpayers, including:
IRS Fresh Start Initiative
This program makes it easier to set up installment agreements and settle tax debts. Benefits include :
- Increased eligibility for streamlined installment plans
- Expanded offer in compromise availability
- Additional flexibility on missed payments within 60 days
Currently Not Collectible Status
If you have little to no ability to pay, you may request your account to be deemed currently not collectible (CNC) by the IRS . This prevents enforced collection actions as long as your financial status remains unchanged.
Tax Amnesty Programs
Tax amnesty offers penalty abatement or reduction for taxpayers who voluntarily file late returns and pay owed taxes during the amnesty period . Several states have enacted amnesty programs to raise revenues, and federal tax amnesty legislation is currently being proposed in Congress for 2024 .
In summary, working closely with the IRS by arranging installment payments, negotiating settlements, consulting tax experts, and leveraging relief programs can help taxpayers navigate unpaid taxes. Though the situation seems dire for many, solutions exist to achieve future compliance and financial stability.