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What Is Delinquent Tax?

Paying taxes is a responsibility for everyone. Sometimes, people miss the deadline to pay their taxes. When this happens, the taxes they owe become delinquent taxes.

In this article, we’ll learn what delinquent taxes are, why they happen, and how to avoid them.

Understanding Delinquent Tax

What Are Delinquent Taxes?

Delinquent taxes are taxes that haven’t been paid by the due date. This can include different types of taxes, such as:

  • Income tax
  • Property tax
  • Payroll tax
  • Sales tax

When you don’t pay these taxes on time, they become unpaid taxes or back taxes. The government considers these as tax debt.

When Do Taxes Become Delinquent?

Taxes become delinquent right after the deadline passes without payment. For example:

  • If you don’t file your tax return by the due date.
  • If you file your return but don’t pay the amount you owe.

Once taxes are late, the Internal Revenue Service (IRS) or your local tax authority may start adding penalties and interest to the amount you owe.

Common Reasons for Delinquent Taxes

People might have delinquent taxes for several reasons:

  • Financial hardship: Not having enough money to pay taxes.
  • Oversight: Forgetting to file or pay taxes.
  • Misunderstanding tax obligations: Not knowing how much to pay or when.
  • Incorrect tax filing: Making mistakes on tax returns.

It’s important to understand these reasons to avoid becoming a delinquent taxpayer.

Consequences of Delinquent Taxes

When taxes are not paid on time, the IRS may take several actions to collect the debt. These actions can have serious effects on your finances and daily life.

Penalties and Interest

  • Failure-to-Pay Penalty: The IRS charges a penalty of 0.5% of the unpaid taxes for each month the payment is late, up to 25% of the total tax owed.
  • Failure-to-File Penalty: If you don’t file your tax return on time, the penalty is 5% of the unpaid taxes for each month the return is late, also up to 25%.
  • Interest Charges: Interest accrues on unpaid taxes from the due date until the balance is paid in full. The interest rate is determined quarterly and is the federal short-term rate plus 3%.

These penalties and interest can significantly increase the total amount you owe over time.

Tax Liens

A tax lien is a legal claim by the government against your property when you neglect or fail to pay a tax debt. It can affect your ability to sell or refinance your home and may appear on your credit report, impacting your credit score.

Wage Garnishment

The IRS can issue a wage garnishment, which means a portion of your paycheck is sent directly to the IRS to cover your tax debt. This continues until the debt is fully paid or other arrangements are made.

Bank Levies

A bank levy allows the IRS to freeze and seize funds directly from your bank account to satisfy unpaid taxes. Once a levy is placed, the bank must hold the funds for 21 days before sending them to the IRS.

Passport Restrictions

If you owe more than $55,000 in back taxes, including penalties and interest, the IRS can certify your debt to the State Department. This certification can lead to the denial or revocation of your passport, restricting international travel.

How to Address Delinquent Taxes

If you owe delinquent taxes, it’s important to take action promptly. The IRS offers several options to help taxpayers resolve unpaid tax debts.

Immediate Steps

  1. Review IRS Notices: Carefully read any letters or notices from the IRS to understand the amount owed and deadlines.
  2. Verify Tax Debt: Confirm the accuracy of the tax debt by reviewing your tax returns and records.
  3. Contact the IRS: Reach out to the IRS to discuss your situation and explore available options.

Payment Plans

The IRS offers payment plans, also known as installment agreements, allowing you to pay your tax debt over time.

  • Short-Term Payment Plan: For debts less than $100,000, you can pay in full within 180 days.
  • Long-Term Payment Plan: For debts less than $50,000, you can make monthly payments for up to 72 months.

To apply for a payment plan, you can use the IRS Online Payment Agreement tool.

Offer in Compromise

An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount owed if you meet certain criteria.

  • Eligibility: You may qualify if you can’t pay your full tax liability or doing so creates financial hardship.
  • Application: Use the Offer in Compromise Calculator to assess eligibility.

For more information, visit the IRS Offer in Compromise page.

Currently Not Collectible Status

If you’re unable to pay any amount due to financial hardship, you can request Currently Not Collectible (CNC) status.

  • Process: The IRS will evaluate your financial situation to determine eligibility.
  • Implications: While in CNC status, the IRS temporarily halts collection activities, but interest and penalties continue to accrue.

For assistance, contact the IRS or consult a tax professional.

Seeking Professional Help

If you’re overwhelmed or unsure about handling delinquent taxes, consider consulting a tax professional.

  • Certified Public Accountants (CPAs): Experts in tax laws and regulations.
  • Enrolled Agents (EAs): Licensed by the IRS to represent taxpayers.
  • Tax Attorneys: Specialize in tax disputes and legal matters.

These professionals can help you navigate the process and negotiate with the IRS on your behalf.

Preventing Future Delinquent Taxes

Avoiding delinquent taxes is essential for maintaining financial stability and peace of mind. By adopting proactive measures, you can ensure timely tax compliance and steer clear of penalties.

1. File and Pay Taxes on Time

  • Know Your Deadlines: Stay informed about tax filing and payment due dates.
  • Set Reminders: Use calendars or apps to set alerts for upcoming tax obligations.
  • File Even If You Can’t Pay: Submitting your tax return on time can help reduce penalties, even if you’re unable to pay the full amount immediately.

2. Keep Accurate Records

  • Organize Documents: Maintain orderly records of income, expenses, and deductions.
  • Use Digital Tools: Consider utilizing bookkeeping software or spreadsheets to track financial information.
  • Retain Records: Keep tax-related documents for at least three years, as recommended by the IRS.

3. Monitor IRS Communications

  • Read Notices Promptly: Address any correspondence from the IRS immediately to avoid escalation.
  • Respond Appropriately: If you receive a notice, follow the instructions provided or seek professional advice.
  • Update Contact Information: Ensure the IRS has your current address and phone number to receive timely notifications.

4. Seek Professional Assistance

  • Consult Tax Professionals: Engage with Certified Public Accountants (CPAs), Enrolled Agents (EAs), or tax attorneys for guidance.
  • Utilize IRS Resources: Take advantage of programs like the Taxpayer Advocate Service for additional support.
  • Stay Informed: Regularly review IRS publications and updates to remain aware of any changes in tax laws or procedures.

Understanding delinquent taxes is crucial for maintaining financial health and avoiding unnecessary stress. We’ve explored what delinquent taxes are, the consequences of not addressing them, and the steps you can take to resolve and prevent them.