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Tax Debt LifeBack Tax
Unpaid taxes can be compared to other forms of debt in several respects. Like private debt, federal and state tax agencies charge interest on tax debt. Federal tax interest rates are set by the IRS at the start of each calendar quarter, based on the Applicable Federal Rates (APR) calculated each month. Usually, the interest rate on unpaid federal taxes is calculated based on the short-term APR plus 3 percent. For corporations who owe more than $100,000 in taxes, this interest rate may increase to the short-term APR plus 5 percent.
For instance, from July 1, 2018 to September 30, 2018, tax interest rates were based on the federal short-term rate calculated in April, which rounded to 2 percent. Individual and small corporate tax debts accrued interest at a rate of 5 percent during this quarter, while large corporate tax debts accrued interest at a rate of 7 percent. Note that federal tax interest accrues each day after the due date, and is compounded daily.
State tax interest rates are set by state agencies through similar procedures. Florida sets tax interest rates on a semiannual basis, while New York sets tax interest rates quarterly. California compounds tax debt interest daily, while Oregon only charges simple interest on tax debt. Typically, states apply the same interest rates to different types of tax debt. Usually, tax debt interest is charged by law and cannot be waived.
However, federal and state tax debts may also accumulate additional penalties, separately from interest. When a taxpayer does not pay their taxes on time, they are charged a monthly failure-to-pay penalty. The IRS charges late payment penalties at a rate of 0.5 percent of unpaid taxes per month, until the debt is paid in full or the total penalty reaches 25 percent. This penalty may be decreased to 0.25 percent per month for individuals entering an installment agreement. On the other hand, if a taxpayer still owes tax debt ten days after receiving a notice of levy, their penalty increases to 1 percent per month.
Additionally, if a taxpayer did not file their tax return on time, they are charged a failure-to-file penalty. The IRS charges late filing penalties at 5 percent of unpaid taxes for each month after the filing deadline until the taxpayer files their return, up to a total of 25 percent over 5 months. If the taxpayer files their return more than 60 days late, the minimum late-filing penalty is either $205 or 100 percent of unpaid taxes, whichever amount is less. The former amount is adjusted for inflation each year by the IRS.
For state tax debts, failure-to-pay and failure-to-file penalties vary from state to state. Depending on their regulations, federal and state agencies may allow tax penalties to be waived if a taxpayer can prove that their circumstances prevented them from filing a return or paying in full.
The IRS and many states enforce tax debt collection by automatically placing a statutory tax lien on the assets of any taxpayer who owes tax debt. Similarly to a lien for a mortgage, this statutory lien gives the government the right to seize and sell off a taxpayer's property as collateral if the taxpayer, the debtor, fails to pay their obligations. A statutory lien is a secured claim, and the IRS has the authority to levy a taxpayer's assets without taking them to court.
Unlike credit card debts or bank loans, tax debts are not necessarily publicly recorded. However, if your debt is susbstantially high, the IRS may file a public Notice of Federal Tax Lien as an indication of your unpaid tax debt, damaging your credit score and impairing your ability to obtain credit. A notice of tax lien enters public records and may be included on credit reports for up to seven years after the debt is paid.
Taxpayers who are unable to pay their tax debt in full can agree to pay the government in monthly installments. Unlike private lenders, who prefer to be repaid over a longer timeframe , the IRS and many states prefer tax debts to be paid as soon as possible. When a taxpayer applies for an installment agreement, tax collection agencies tend to favor larger installments over a shorter period of time. The IRS does not charge any penalty for paying off tax debts early.
Under certain circumstances, income tax debt may be discharged like most debts by declaring Chapter 7 bankruptcy. Income tax debt can potentially be wiped out in bankruptcy if the debt was due at least 3 years ago, a tax return was filed at least 2 years ago, and the liability was assessed at least 240 days before the taxpayer files for bankruptcy. Other tax debts, such as payroll or sales and use tax, are never dischargable through bankruptcy.
Just like debts from other sources, federal and state tax debts can easily swell into an unmanageable crisis if left unattended. The government can be as unforgiving as any private creditor, and has the power to enforce tax collection through bank levies, wage garnishments, property seizures, and other harsh methods. If you owe tax debt to the government and are struggling to pay, we at LifeBack Tax will be happy to assist.
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