Here are some frequently asked questions and answers (FAQ’s) regarding IRS penalties and interest. These questions and answers may help you to better understand what options the IRS has to ensure the collection of a debt, what the penalties are and how you can resolve your tax problem with the IRS.
Q: What can I do when my taxes are due and I can’t pay them in full?
A: There are several actions you can take if you are having trouble paying tax debt in full when they are due. You can set up installment payments including the IRS penalties and interest with the IRS if you want to pay your taxes over a period of time. If you don’t meet the requirements for an installment agreement, you could propose an Offer in Compromise or until your financial situation improves so you can afford to pay back your taxes, you could possibly be declared uncollectible.
Q: Are there penalties for unpaid taxes, and if so what are they?
A: Unfortunately, there are penalties for unpaid tax debt which are commonly a half of a percent of the taxes owed for each month and a maximum of 25% of the total taxes owed. The half of percent can increase to 1% if the liability is left unpaid ten days after the IRS sends an intent to levy. However, if you enter into an installment agreement, the penalty can decrease to 1/4 percent for each month that is under the agreement.
Q: What is the interest rate charged for underpayment or unpaid taxes that are owed?
A: The interest is decided by the federal short-term interest rate plus 3% which is revised every three months. Commonly, the rate is 4% annually for unpaid taxes. As long as you owe back taxes the interest will continue to grow as there is no cap on the amount that can be charged for interest.
Q: Does the IRS levy my assets when there are unpaid taxes owed?
A: If you have unpaid taxes, the IRS does have the right to levy your assets. However, it will not come as a shock as there are a series of letters sent to demand payment and this could take many months. If you chose to ignore all the letters, the last letter sent will be the IRS Notice of Intent to Levy. You now have one last chance to settle or pay your back liability within 30 days or the IRS will levy your assets.
Q: Do I have to pay the full amount, or can I settle to pay less?
A: The answer is YES, and the two most common ways to do that is a partial payment agreement or an Offer in Compromise. Each carries rigid requirements and detailed financial information provided to the IRS to prove you can meet the qualifications.
Q: Should I still file my tax return even though I cannot pay my taxes?
A: That is an absolute YES!!! There are worse consequences for not filing a tax return than for not being able to pay. Remember, the penalty for not paying taxes that are filed are .5%, but the penalty for taxes owed without filing a tax return are 5%. You can clearly see how much faster that will add up. Not being able to pay what you owe is not that big of a deal as long as you filed your return. The IRS will work with you so you can resolve paying tax debt including IRS penalties and interest.If you need help resolving paying tax debt, you can always seek the advice of a tax relief attorney.