Tax debt

Tax debt is particularly dangerous because of the government’s broad collection powers and the rapid accumulation of penalties and interest.

But with prompt action—filing returns, negotiating payment options, and seeking professional guidance—you can avoid the harshest consequences and get back on track financially.

Tax Debt – Unpaid Obligations to Federal or State Governments

What it is and why it’s dangerous:

Tax debt refers to unpaid taxes owed to the IRS or state tax authorities. This can result from underreporting income, miscalculating owed taxes, failing to file returns, or simply not having enough money to pay the balance when due. It can involve income tax, self-employment tax, payroll tax (for business owners), or other types of levies.

What makes tax debt especially dangerous is the government’s power to enforce collection without a court order. Unlike other creditors, the IRS and state tax agencies can garnish your wages, levy your bank accounts, place liens on your property, and seize assets. These actions can severely impact both your financial stability and credit standing.

Moreover, tax debt accrues penalties and interest quickly. The IRS typically charges a failure-to-pay penalty of 0.5% per month (up to 25% of the total debt), plus interest that compounds daily. If you didn’t file your return, you may also face a failure-to-file penalty of 5% per month. These charges can make a relatively small tax bill grow substantially over time.

For self-employed individuals or small business owners, unpaid payroll taxes are particularly serious. The IRS can hold business owners personally liable for unpaid payroll taxes through the Trust Fund Recovery Penalty, which can lead to personal asset seizures.

How to pay it off fast:

 

  1. File Your Tax Returns Immediately
    Even if you can’t pay the full amount, always file your tax returns on time. Filing stops the failure-to-file penalty and shows good faith to the IRS. Late filing only compounds the problem.

  2. Pay What You Can Upfront
    Make a partial payment, even if it’s small. This reduces your principal balance and slows the accumulation of penalties and interest. Paying something is better than paying nothing.

  3. Set Up an IRS Payment Plan
    The IRS offers installment agreements for taxpayers who can’t pay in full. Short-term plans (for debts under $100,000) give you up to 180 days to pay, while long-term plans allow monthly payments over several years. Interest still accrues, but enforcement actions like garnishments are paused as long as you're compliant.

  4. Request an Offer in Compromise (OIC)
    If you can prove that paying the full tax bill would cause extreme financial hardship, you may qualify for an Offer in Compromise, where the IRS settles for less than you owe. It’s a strict process with low approval rates, but it’s an option for those in serious distress.

  5. Apply for Currently Not Collectible (CNC) Status
    If your financial situation is dire, the IRS may place your account in CNC status, pausing collection efforts. While interest still accrues, this provides breathing room until your situation improves.

  6. Avoid Future Tax Debt
    Adjust your withholdings or make estimated quarterly payments if you're self-employed. Preventing new tax liabilities is essential while you're working on existing debt.

  7. Consult a Tax Professional
    Navigating IRS procedures can be complex. A CPA, enrolled agent, or tax attorney can help you identify the best resolution strategy, ensure compliance, and communicate with the IRS on your behalf.