What to Do When You’re in Extreme Tax Debt

Tax season is a dreadful time of each year, and the stress of paying what you owe can be detrimental to your physical and mental health. Twenty-five percent of US taxpayers expect to go into debt attempting to pay what they owe in taxes in 2024.

Owing money to the IRS is no one’s idea of a good time, but there are tax tips you can use to navigate the situation. Knowing what to do will help you prevent entering into extreme tax debt. With proper guidance, you can repay your debt and resume a healthy and happy life.

The good news is that you’ve arrived at this helpful guide to learn the consequences of tax debt and your options to handle IRS debt. Continue reading to enjoy tax relief and peace of mind today!

Reach an Installment Agreement

The IRS provides paths toward repaying your debt in installments to ensure you can cover your payments without going into debt or losing your home. If you cannot immediately pay what you owe, the IRS will permit you to make monthly payments.

If you pay off the total debt by the required time, you’ll eliminate the risk of penalties and interest. Taxpayers who owe $50,000 or more qualify to make installment payments to cover their debt to the Internal Revenue Service.

You must also file all required returns to qualify for installment agreements with the IRS. You can apply for this option online or by filling out and mailing paperwork to the IRS.

Read all the fine print on the installment agreement before signing. All future tax refunds will go toward what you owe in taxes until you’ve paid off the total. Ensure you’re paying your agreed-upon monthly minimum to prevent penalties and consequences.

Offer in Compromise

Another program to consider when facing extreme tax debt is an offer in compromise. If you’re considering this route for your tax debt, working with an experienced tax specialist is best. The specialist will assess your circumstances and determine if it’s the best path forward.

The process works by reducing your tax debt to the IRS. You can pay in one lump sum or through a monthly installment program. It’s one of the best options if you owe more than you can afford.

The IRS will negotiate a fair amount you’ll pay to ensure you have a smaller tax burden. It’s an option worth exploring if you seek tax relief during tax season.

Currently Not Collectible

The currently not collectible route is not ideal, but it’s worth considering if you’re in extreme tax debt with no prospects of paying what you owe. You must demonstrate that you lack the funds and resources to pay your debts.

The Currently Not Collectible designation will prevent liens on your assets. Consider this option if you know you can’t afford your IRS debt and need assistance moving forward.

File for Bankruptcy

Bankruptcy carries a negative stigma, but it’s a fantastic option if faced with overwhelming or extreme tax debt. You can use Chapter 7 or 13 Bankruptcy to discharge your income tax debts with the IRS.

Chapter 7 Bankruptcy allows all debts to be discharged. It’s an excellent way to seek tax relief when debt levels are staggering.

Chapter 13 Bankruptcy focuses more on establishing a payment plan for the debts you can afford to cover. The IRS discharges the remainder of your debts.

If you can avoid it, it’s best to avoid filing for bankruptcy. While it’s a viable method for tax relief, your bankruptcy will remain on your credit report for up to 10 years. Weigh your options in tax free Florida to find the ideal method to chip away at your tax debt.

Release Wage Garnishments

Wage garnishments are one of the penalties the IRS will enact on your finances when you have extreme tax debt. The government will garnish wages, salary, and federal payments until you’ve paid what you owe in taxes.

If you’re unable to cover your living expenses due to the garnishments, it’s worth negotiating with the IRS. The IRS can release the funds or modify the garnishment to allow you more money to cover your essentials.

Release From Levying Bank Account

Another penalty the IRS uses to encourage you to pay your tax debts is levying your bank account. When the IRS receives a bank levy, they can access your checking and savings accounts. They’ll use the money in those accounts to collect money for unpaid taxes and penalties.

Getting a release from the levy is beneficial because it frees up money you can use to pay your debts or cover basic living expenses. You can use the release to apply for an installment plan for your finances or pay a smaller sum to cover some of the money you owe.

Innocent Spouse Tax Relief

It’s possible to inherit tax debts from your spouse, which can be frustrating and disappointing. The IRS expects you to cover these debts on your spouse’s behalf.

The best way to avoid spending money to cover your spouse’s tax relief is by providing proof that you fit within the guidelines for innocent spouse tax relief.

The IRS will release you from the money your spouse owed and allow you to move on with life. Work with a tax specialist to determine your qualifications for this tax program.

Filing Late Tax Returns

The IRS tax system allows you to collect any deductible fees from your taxes when filed late. You can use it to lower your tax burden when filing late. The same principle applies to deductions you’ve discovered late.

Work with a CPA to file your returns and get the most deductions possible. It’s a tremendous way to reduce your tax debt and find relief.

What Are the Consequences of Extreme Tax Debt?

Now that you know what you can do to find relief from extreme tax debt, it’s vital to understand the consequences you’ll face if you ignore the IRS’s threats. Despite not wanting to pay the IRS, the consequences of neglecting your tax duties are more severe than paying what you owe.

Here’s a closer look at what you can expect if you choose not to pursue relief from extreme tax debt.

IRS Notices

The first measure of punishment you’ll receive from the IRS for late or neglectful tax payments is an IRS notice. The IRS must notify you of the taxes you owe before taking any further measures against you.

They’re not allowed to use enforcement tools to collect money from your savings or checking accounts. The IRS letters and notices are nuisances more than forms of punishment. It’s best to view them as a warning from the tax body.

Despite their lack of severity, it’s wise to acknowledge the letters and notices. They’re the first step that can lead to more significant consequences or actions.

Automated Collection

If you do not take action after receiving letters and notices from the IRS, the next challenge you’ll face is the Automated Collection System. It’s the IRS’s go-to option when collecting back taxes.

The ACS can issue liens on your assets and properties to cover the cost of your taxes. They will also levy your bank accounts to collect the money you owe. Using tax tips for extreme tax debt is the best way to prevent events from escalating to this point.

If you ignore the ACS inquests, the penalties will become more severe. Acknowledge the deadline and find a payment plan to cover what you owe to the IRS.

Rejected Refund

Failure to pay your extreme tax debt will also result in the IRS holding onto your tax refund after filing your annual taxes. The IRS will keep your refund whether you’ve agreed to pay, so it’s best not to be alarmed if this happens when you face IRS debt.

It sounds like a negative outcome, but the IRS will put the tax refund you’re owed toward the tax debt you’ve accrued. The tax refund will lower what you owe and count against the interest building on your outstanding tax debt.

Interest Will Build

Growing interest is another consequence the IRS will impose on you if you’re unwilling to pay what you owe in taxes. The interest will continue growing as the balance of your debt rises. It creates a dangerous situation for your finances when facing the double whammy of rising tax bills and increasing interest, resulting in a hole you’ll struggle to dig yourself out of.

The current interest rate on past-due taxes is five percent. It doesn’t sound like much, but it will cause your debt to grow at an impressive rate. It’s best to find solutions for tax relief before your debt rises further.

Additional Penalties

Penalties are a legitimate threat to your finances when you owe money to the IRS. The interest is bad enough, but the IRS will also hit you with a penalty that adds to the outstanding debt balance if you fail to pay it.

The penalty is 0.5 percent per month, but the rate will double to 1 percent per month if you’ve received several notices to collect your tax debt. The penalties will not rise if you contact the IRS or work with a tax specialist to explore your options to pay the debt.

When you establish a payment plan with the government, the monthly penalty drops to 0.25 percent. Payment plans are an excellent way to prevent your debt from continuing to grow.

Federal Tax Lien

A federal tax lien is a significant jump in severity when facing punishment and penalties from the IRS. The public lean gets sent to creditors and notifies them of the IRS’s interests in your assets. The IRS will receive a notification if you attempt to sell these assets.

A federal tax lien from the IRS will damage your public reputation and credit score. Many taxpayers attempt to find tax relief before a lien occurs.

It’s worth noting that your liens will not disappear when you file for bankruptcy. The IRS will only file a federal lien if your tax debt exceeds $10,000.

Money and Asset Seizure

If you need convincing to work out a tax relief solution, the IRS will begin seizing assets and money. The IRS will use a levy to access your accounts and take the money they’re owed to resolve the debt.

In most cases, the IRS focuses on seizing the money they’re owed instead of resorting to assets. The hassle involved in seizing boats, homes, and other sizable assets is not worth the money they’ll get from them.

Wage garnishments are the most common form of financial seizure used by the IRS. They’ll take some of the money you make from your employer to cover your tax debt. 

Bank levies are another popular option for collecting taxes from people facing debt with the Internal Revenue Service. The IRS will receive permission to access and withdraw money from your bank account.

Limited Travel

As your debt grows, your rights diminish. The IRS will limit your ability to travel until you’ve paid the money you owe. The penalties could include limiting or preventing your right to travel abroad until you’ve paid the money you owe in taxes.

If you owe more than $51,000 and the IRS has attempted to collect money from you in the past, your passport will be rejected, preventing you from leaving the country.

The IRS will label you a “seriously delinquent taxpayer,” and the State Department will freeze your passport. It’s much better to pay what you owe and move on.

Overcome Your Extreme Tax Debt Today

Extreme tax debt puts strain and stress on your mental and physical health, but knowing what you can do to pay what you owe will help you manage the situation. Consider a payment plan through an installment agreement or offer in compromise to limit your debt-failure to pay results in severe consequences, like bank levies and the inability to travel.

Paying taxes is an essential duty as a US citizen, but rising taxes can put you in IRS debt. Check out our Business content for tips to make tax season less stressful today!

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