Understanding What’s Next if You Owe the IRS $20,000

Owing $20,000 (or more) to the IRS is a substantial financial problem that’s likely causing you a lot of stress and uncertainty. As insurmountable as these back taxes might seem, it’s important not to give up. No matter your financial situation, you have options. There are also tax obligations you need to keep up with to prevent this tax problem from getting worse.

To find out more about what you can do, contact Nashville Tax Solutions by calling 1-855-NASHTAX or using our online contact form. In the meantime, read on to discover how you can improve your standing with the IRS and settle your outstanding tax balance.

Key Takeaways

• Greater IRS scrutiny – The bigger your tax debt, the more aggressive the IRS will be in trying to collect it.
• Penalties and interest – As soon as a tax bill goes unpaid, interest and penalties begin to accrue, which can quickly increase the size of the tax debt.
• Tax collection enforcement – If a tax debt goes unresolved, the IRS will start sending collection notices and letters, but will soon escalate tax enforcement activities to include liens and levies.
• Tax resolution options – Popular tax settlement options include an offer in compromise, Currently Not Collectible status, payment plans, installment agreements, penalty abatement, and innocent spouse relief.
• File missing tax returns – Having one or more unfiled tax returns can make a $20,000 tax debt even worse due to greater penalties and being ineligible for some tax relief solutions.

Short-Term Problems: Penalties and Interest

Thanks to compounding, a large tax debt can quickly become even larger and more difficult to manage. There are two main things that increase unpaid tax balances the longer they go unpaid: penalties and interest.

Penalties

The primary penalty that applies to most unpaid tax debts is the failure-to-pay penalty. This is equal to 0.5% of the outstanding tax balance each month and increases to 1% after a certain period of delinquency. However, this penalty won’t exceed 25%.

So if your $20,000 tax debt goes unpaid for one month, the penalty is $100, but after a while, the monthly penalty can increase to $200 (which is 1% of $20,000). Eventually, it can get up to $5000.

The failure-to-file penalty applies if you file your taxes late, and it’s 5% of the balance owed per month. So, if you file two months late, this penalty may be 10% which is $2000 on a $20,000 tax debt.

Interest

The IRS charges interest on the total outstanding tax debt, which applies to not just the unpaid tax itself, but also any penalties. The exact interest rate varies, as the IRS adjusts it each quarter. When you owe $20,000 or more, the interest can be fairly high each month – it also compounds daily, making it even higher.

Long-Term Problems: IRS Collection Actions

As if an ever-increasing tax debt wasn’t problem enough, you also need to worry about the IRS collecting your tax debt. This collection process begins with demands for payment.

IRS Letters and Notices

The exact letters and notices you can expect with an unpaid tax balance depend on several variables. These include the type of unpaid tax you have and how far along the collection process you are.

The first one could be an initial tax bill, such as CP14. If you don’t respond, you can expect more collection notices, such as CP501. These offer warnings about what could happen if you don’t get in touch with the IRS to discuss a way to resolve your tax balance.

If you continue to ignore these IRS notices, then the IRS will step up its collection efforts, possibly by filing a tax lien.

IRS Tax Lien

If you don’t make arrangements to pay your tax balance, the IRS may place a tax lien on your property. The IRS does this by filing a Notice of Federal Tax Lien. This is a public document that tells the general public (especially creditors) about the IRS’s legal interest in your property and using that interest to satisfy your tax debt.

Property Seizure by the IRS

If your tax debt continues to go unpaid, or there’s no payment arrangement established with the IRS, you risk the IRS seizing your assets with a tax levy. This could include the IRS taking money out of your bank account (bank levy) or paycheck (wage garnishment).

One thing to keep in mind is that the bigger your tax debt, the more aggressive the IRS will be when trying to collect it. This is particularly true with tax levies in that it’s a resource-intensive process that could involve a revenue officer. The IRS is far more likely to refer your tax file to a revenue officer if you owe $20,000 as opposed to $800.

Tax Debt Resolution Options

This sounds like a lot of doom and gloom, but the good news is that there are ways to get the IRS off your back without paying your tax debt in full immediately. The IRS understands that most taxpayers with debts that exceed $20,000 don’t have huge chunks of cash or easy access to credit, so they can quickly pay their unpaid taxes.

As a result, the IRS offers several tax settlement options.

Payment Plan or Installment Agreement

A payment plan or installment agreement gives you the opportunity to pay your tax debt over time. You can apply online with a simple payment plan (also known as an installment agreement) if your tax debt is $50,000 or less and you’re caught up with any required tax return filings. A simple payment plan provides up to 10 years to pay off your tax debt.

Offer in Compromise

An offer in compromise (OIC) allows you to settle your tax debt for less than the full amount. The catch is that applying isn’t easy, as it requires extensive financial disclosures, and it can take a long time for the IRS to decide whether to accept your offer. However, all collection actions are generally paused while the IRS reviews your application.

Currently Not Collectible Status

If you’re dealing with severe economic hardship such that any tax collection efforts by the IRS would mean you don’t have enough money to pay for basic living expenses, then Currently Not Collectible (CNC) status is something to consider. If you have CNC status, then the IRS will halt all collection activities until your financial situation improves. During this time, penalties and interest will continue to accrue.

Penalty Abatement

If the IRS assesses tax penalties against you for reasons outside your control, you may be eligible to have part of the penalty portion of your tax debt forgiven by the IRS. Depending on the penalty you’re trying to have removed, reasons for penalty abatement can include:

• Statutory exception
• Reasonable cause
• First-time penalty abatement
• Administrative waiver

Innocent Spouse Relief

If some or all of your tax debt is the result of your spouse’s tax mistakes or omissions, then you could be eligible for innocent spouse relief. If your spouse underreported taxes on a joint return (and you didn’t know about the underreporting), innocent spouse relief means you aren’t liable for the taxes stemming from your spouse’s income.

Even if you aren’t eligible for innocent spouse relief, there are other similar forms of tax relief, such as separation of liability relief and equitable relief.

The Importance of Filing Your Tax Returns

The only thing worse than owing the IRS $20,000 is owing the IRS $20,000 plus one or more unfiled tax returns. There are several reasons for this.

First, there’s the failure-to-file penalty, which is 5% per month of any unpaid tax that’s due, up to a maximum of 25%. This means that if you owe the IRS $20,000 and also have a missing

tax return, that tax bill could rise to $21,000 (not including interest) after just one month.

If you file five months or more late, the penalty on a $20,000 liability will be maxed out at $5,000, and that stacks on top of the failure to pay penalty, bringing the potential total up to $10,000.

Second, knowingly failing to file a required tax return could potentially constitute a criminal offense resulting in jail time.

Third, if you want to be eligible for certain tax resolution options, such as an installment agreement or OIC, you can’t have any unfiled tax returns. Typically, you need to file the last five years to apply for any IRS relief option.

Nashville Tax Solutions Has Solutions for your $20,000 Tax Debt.

If you hire Nashville Tax Solutions to help with your unpaid taxes, our experienced tax pros will conduct a careful review of your financial situation to determine the best tax relief option. From there, we’ll help you carry out that plan. This includes not just helping with the forms and paperwork, but also communicating with the IRS to negotiate a tax settlement with the best terms possible. To get started, use our online contact form or call 1-855-NASHTAX today.