There are many reasons that you might owe the IRS money. Perhaps you forgot to file, or you filed your return but simply could not pay the amount of tax you owed. Maybe you thought that you were paid in full, and then you underwent an audit and found out that you owe more money than you thought. No matter the reason behind your tax debt, the procedure that occurs when you have federal tax debt is the same.

Interest and Penalty Fees Start Accruing

Starting the day after your tax return and payment are due, you will be charged interest and penalty fees. These can quickly add up. The IRS charges you a percentage of your tax debt following these guidelines:

  • Five percent of your tax debt for late filing, up to 25 percent
  • 0.5 percent of your tax debt for late payment, up to 25 percent
  • A total of 5 percent of your tax debt for both late filing and late payment, up to 47.5 percent (25 percent for your late payment and 22.5 percent for your late filing)
  • In cases where you have filed more than 60 days late, then your minimum penalty fee will be either 100 percent of your unpaid tax or $135, whichever amount is smaller
  • Interest is 3 percent plus the federal short-term rate and is compounded daily

Filing as soon as possible and paying off as much of your tax debt as you can decreases the amount of money you have to pay in interest and penalty fees.

The IRS Files Your Return For You

If you have not filed your tax return, then at some point the IRS will file one for you. This is known as a Substitute for Return. The problem with these forms is that they only take into account the information the IRS receives, such as forms declaring your interest income from your bank and your W2 from your employer. However, it does not take into account any deductions, exemptions, adjustments, or credits for which you might be eligible beyond the standard deduction.

This typically leads to you owing a significantly higher tax debt then you should. In some cases, people face a huge tax bill, but once they file a return, they find out that the IRS actually owes them money in the form of a refund. You have the right to file your return, even if the IRS has submitted one for you, before you pay any of your debt.

You Get a Tax Bill

At some point, the IRS will send you a tax bill. When you receive this bill, you will have 30 days to pay your tax debt in full, apply for a tax relief program, or appeal. If you get an email, phone call, or letter that states you have to pay immediately, it is a scam and not from the IRS. The IRS does not use any threatening language and provides you with time to pay — as well as options for how to pay.

Collective Action Begins, Often with a Lien

If you do not take any action after receiving the tax bill, then you will receive another notice from the IRS. This one initiates collective action, which typically begins with the IRS placing a lien on one or more of your assets. A lien establishes a legal claim on your property, which could affect your ability to sell it. Additionally, the IRS will file a Notice of Federal Tax Lien, which ends up on your credit report, affecting your credit score.

The lien remains until the tax is paid in full, the statute of limitations pass, you have negotiated a tax settlement, or you have successfully appealed the tax debt or lien. The IRS might also decide to release the lien if it will help you to find a way to pay off your taxes in a shorter period of time or if they feel it is in your — and the government’s — best interest to do so.

Then a Levy or Wage Garnishment Occurs

If you continue to not pay your tax debt, then the IRS will implement a levy on your property. This is more serious than a lien and typically comes after it, although in some situations the IRS might go straight to a levy. Basically, a levy is a legal seizure of your assets. This can include property, such as a house, automobile, boat, or artwork. It might also include your bank accounts, wages, social security, or retirement. In these cases, it is often referred to as a garnishment. The IRS might also seize any refunds to which you are eligible in the future until your tax payment is paid in full.

There are certain assets that are protected, and you are legally allowed to retain a certain amount of your wages. What is protected is typically what the IRS deems necessary for living. However, in many cases, you are left with much less than what you would consider as necessary. Once your tax debt is paid in full, including any income or penalty fees, or the statute of limitations is reached, then the IRS will end any collective action.

What to Do

It is not in your best interest to simply wait around for the IRS to progress through the stages of the collective process, hoping that at some point they will forget about you or the statute of limitation will come into effect. Instead, you should act as soon as you know that you have tax debt, whether it is when you calculate your returns or you receive that initial letter in the mail. There are a few programs that can help you pay down your tax debt and avoid collective action:

  • Installment Agreement
  • Penalty Abatement
  • Offer in Compromise
  • Currently Not Collectible
  • Innocent Spouse Relief

It is beneficial to discuss your options with tax professionals so that you can figure out the best course of action for your situation. Some of these programs have very specific criteria, while others, like the Installment Agreement, are typically available for everyone. Call Fidelity Tax Relief today at 877-372-2520 to discuss your situation and find out what options are available to you.

Get Tax Help

Let Fidelity Tax Relief Help

Our experienced agents can help resolve your tax issues.
Get Tax Help